Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-K**

 

| **x**                                                                                                                                                                                      | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                       |       |                                                                                                     |
| **For the fiscal year ended:  December 31, 2009**                                                                                                                                     |
|                                                                                                                                                                                       |       |                                                                                                     |
| o                                                                                                                                                                                          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                       |       |                                                                                                     |
| **For the transition period from                to              ** |

 

**Commissionfile number 001-16265**

 

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**LIMEENERGY CO.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**

(State or other  jurisdiction of incorporation or  organization)             | ** ** | **36-4197337**

(I.R.S. Employer  Identification No.) |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|
| ** **                                                                                 | ** ** | ** **                                            |
| **1280  Landmeier Road, Elk Grove Village, IL**

(Address of  principal executive offices) | ** ** | **60007-2410**

(Zip Code)                            |

 

Registrant’s telephone number, including area code**(847) 437-1666**

 

**Securities registered under Section 12(b) ofthe Exchange Act:**

 

| **Title  of each class**            | ** ** | **Name  of each exchange on which registered** |
|-------------------------------------|------------|------------------------------------------------|
| **Common  Stock $0.0001 par value** | ** ** | **The  NASDAQ Stock Market LLC**               |

 

Securities registered under Section 12(g) of the ExchangeAct:  **None**

 

Indicate by checkmarkif the registrant is a well-know seasoned issuer, as defined in Rule 405of the Securities Act. Yes o  No x

 

Indicate by checkmarkif the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o  No x

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x    No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o    No o

 

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by checkmarkwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company (as defined in Rule 12b-2of the Act).

 

| Large Accelerated Filer o |   | Accelerated Filer o    |
|--------------------------------|--------|-----------------------------|
|                           |   |                        |
| Non-Accelerated Filer o        |   | Smaller reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).  Yes o  No  x

 

The aggregate marketvalue of the registrant’s common stock held by non-affiliates was $42,183,710based on the reported last sale price of common stock on June 30, 2009, whichwas the last business day of the registrant’s most recently completed secondfiscal quarter.  For purposes of thiscomputation, all executive officers, directors and 10% stockholders were deemedaffiliates. Such a determination should not be construed as an admission thatsuch executive officers, directors or 10% stockholders are affiliates.

 

Asof March 19, 2010, there were 23,597,591 shares of common stock, $0.0001par value, of the registrant issued and outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

Portionsof the registrant’s definitive proxy statement relating to its 2010 AnnualMeeting of Stockholders, to be filed within 120 days after registrant’sfiscal year end of December 31, 2009, are incorporated by reference into Part IIIof this Annual Report on Form 10-K where indicated.

 

 

 

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**TABLE OFCONTENTS**

 
| **Cautionary  Statement On Forward-Looking Information** | **1**                                                                                                               |
|----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|                                                     |                                                                                                                |   |
| **Part I**                                          |                                                                                                                | **2** |
|                                                     |                                                                                                                |   |
| Item  1.                                                 | Business                                                                                                            | 2 |
|                                                     |                                                                                                                |   |
| Item 1a.                                                 | Risk Factors                                                                                                        | 8 |
|                                                     |                                                                                                                |   |
| Item 1b.                                                 | Unresolved  Staff Comments                                                                                          | 16 |
|                                                     |                                                                                                                |   |
| Item 2.                                                  | Properties                                                                                                          | 17 |
|                                                     |                                                                                                                |   |
| Item 3.                                                  | Legal Proceedings                                                                                                   | 18 |
|                                                     |                                                                                                                |   |
| **Part II**                                         |                                                                                                                | **18** |
|                                                     |                                                                                                                |   |
| Item 5.                                                  | Market For  Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases  Of Equity Securities | 18 |
|                                                     |                                                                                                                |   |
| Item 7.                                                  | Management’s  Discussion And Analysis Of Financial Condition And Results Of Operations                         | 19 |
|                                                     |                                                                                                                |   |
| Item 7a.                                                 | Quantitative  And Qualitative Disclosures About Market Risk                                                         | 42 |
|                                                     |                                                                                                                |   |
| Item 8.                                                  | Financial  Statements And Supplementary Data                                                                        | 43 |
|                                                     |                                                                                                                |   |
| Item 9.                                                  | Change In  And Disagreements With Accountants On Accounting And Financial Disclosure                                | 43 |
|                                                     |                                                                                                                |   |
| Item 9a.                                                 | Controls And  Procedures                                                                                            | 43 |
|                                                     |                                                                                                                |   |
| Item 9b.                                                 | Other Information                                                                                                   | 43 |
|                                                     |                                                                                                                |   |
| **Part III**                                        |                                                                                                                | **44** |
|                                                     |                                                                                                                |   |
| Item 10.                                                 | Directors,  Executive Officers And Corporate Governance                                                             | 44 |
|                                                     |                                                                                                                |   |
| Item 11.                                                 | Executive  Compensation                                                                                             | 44 |
|                                                     |                                                                                                                |   |
| Item 12.                                                 | Security  Ownership Of Certain Beneficial Owners And Management And Related Stockholder  Matters                    | 44 |
|                                                     |                                                                                                                |   |
| Item 13.                                                 | Certain  Relationships And Related Transactions, And Director Independence                                          | 45 |
|                                                     |                                                                                                                |   |
| Item 14.                                                 | Principal  Accountant Fees And Services                                                                             | 45 |
|                                                     |                                                                                                                |   |
| **Part IV**                                         |                                                                                                                | **46** |
|                                                     |                                                                                                                |   |
| Item 15.                                                 | Exhibits And  Financial Statement Schedules                                                                         | 46 |
|                                                     |                                                                                                                |   |
| **Signatures**                                           | ** **                                                                                                          | **51** |

 

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# **CautionaryStatement on Forward-Looking Information**

# ** **

*This annual report contains “forward-looking” information within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended, adopted pursuant to thePrivate Securities Litigation Reform Act of 1995 which reflect our currentviews with respect to, among other things, future events.  Statements that are not purely historical maybe forward-looking. You can identify these forward-looking statements by theuse of words such as “anticipate,” “believe,” “estimate,” “expect,” “hope,” “intend,”“may,” “project,” “plan,”  “should,” “outlook,”“potential,” continues,” “future” and similar expressions, including when usedin the negative.*

 

*Forward-looking statements are subject to various risks anduncertainties. Accordingly, there are or will be important factors that couldcause actual results to differ materially from those indicated in thesestatements, including but not limited to those described under “Risk Factors,”as well as, among others, the following:*

 

·*             **implementationof our operating and growth strategy;*

·*             **theloss, or renewal on less favorable terms, of management contracts;*

·*             **developmentof new, competitive energy efficiency services;*

·*             **changesin federal and state regulations including those affecting energy efficiencytax credits and the energy efficiency industry;*

·*             **asignificant decrease in the cost of energy leading to a decrease in the demandfor energy efficiency services;*

·*             **ourability to consummate transactions and integrate newly acquired contracts intoour operations; and*

·*             **availability,terms and employment of capital.*

 

*Although we believe that the expectations reflected in theseforward-looking statements are reasonable and achievable, such statementsinvolve risks and uncertainties and no assurance can be given that the actualresults will be consistent with these forward-looking statements. Our actualresults could differ materially from those anticipated in forward-lookingstatements as a result of various factors, including matters described in thisannual report, including the sections titled “Risk Factors,” “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour financial statements and notes thereto.*

 

*Except as otherwise required by federal securities laws, we do notundertake any obligation to publicly update, review or revise anyforward-looking statements, whether as a result of new information, futureevents, changed circumstances or any other reason.*

 

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# **PART I**

# ** **

## **Item1.**   Business.

## ** **

##### **Overview**

##### ** **

We are a leading provider of integrated energy engineering, consultingand implementation solutions specializing in improving the energy efficiency ofour clients’ facilities, thereby reducing their operating costs and carbonemissions.  We focus on two specificmarkets: the commercial and industrial market, and the public sector market,working primarily with energy service companies (“ESCOs”).  Our clients include commercial and industrialbusinesses, property owners and managers, utilities, and ESCOs serving U.S.government and educational institutions. We focus on deploying solutions to reduce the energy-related expendituresof our clients’ facilities and the impact of their energy use on theenvironment, including energy efficient lighting upgrades, energy efficiencymechanical and electrical retrofit and upgrade services, water conservation,weatherization and renewable project development and implementation.  We provide energy efficiency solutions acrossall of our clients’ facilities, ranging from high-rise office buildings tomanufacturing plants, retail sites, mixed use complexes and large, governmentsites to small, local facilities.

 

Webelieve the following factors continue to drive demand for energy efficiencyservices by facility owners in both the U.S. commercial and industrial andpublic sector markets:

 

·      the potential for immediate return on investment anddemonstrable long-term cost savings resulting from the installation of energyefficient solutions;

 

·      concerns regarding the substantial and volatile costof energy, the adverse implication of global climate change and the desire forenergy independence;

 

·      increasing pressure on corporations to establish andattain sustainability goals;

 

·      increasing regulatory pressures on utilities toinclude energy efficiency and renewable energy in their resource plans;

 

·      the availability of rebates and tax incentives bothat a federal and state level for organizations that reduce their energyconsumption;

 

·      existing and prospective government mandates toimprove the efficiency of federal facilities;

 

·      the allocation of funds under the American Recoveryand Reinvestment Act of 2009 (“ARRA”) to promote energy efficiency andalternative energy projects in federal, state and local municipal facilities;and

 

·      the migration towards a low-carbon economy whichwill potentially place a price or tax on the carbon emissions of our clients.

 

Weoffer our clients a full range of services to address the energy efficiencyneeds of their facilities based on our ability to identify and deliversignificant return on our clients’ investments, improve the quality of theirphysical workspaces, maximize their operational savings and reduce theirmaintenance costs.  Our turnkey servicesinclude**:**

 

**·**      *EnergyEngineering and Consulting*:  Weapply our engineering expertise to analyze each client’s energy consumption andoperational needs and develop customized energy efficiency and renewable energysolutions.  Our energy engineering andconsulting services include sustainability consulting, energy master planning,project development services, design engineering and facilitye-commissioning.  We also provide designreview and analysis of new

 

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**constructionprojects to maximize energy efficiency and sustainability, project managementof energy-related construction, and processing and procurement of incentive andrebate applications.**

** **

**·**      *Implementation:*  We provide complete turnkey implementationservices for a range of energy efficiency and renewable energy projects,including energy efficient lighting upgrades, energy efficiency mechanical andelectrical retrofit and upgrade services, water conservation, weatherizationand renewable project development and implementation, including solar, biomassand geothermal.  We consider factors suchas current facility infrastructure, best available technologies, buildingenvironmental conditions, hours of operation, energy costs, available utilityrebates and tax incentives, and installation, operation and maintenance costsof various efficiency alternatives.  Ourprofessionals’ extensive knowledge in energy efficiency solutions enables us toapply the most appropriate, effective and proven technologies available in themarketplace.

** **

Weserve a wide range of commercial and industrial and public sector clients. ** **Ourcommercial and industrial clients include many Fortune 500 companies for whichwe provide our energy efficiency solutions directly, as well as utilities forwhich we manage energy efficiency portfolio projects. Our public sector clientsinclude government agencies and educational institutions, which we serve boththrough our relationships with ESCOs and directly.  ESCOs are awarded project contracts with thepublic sector as prime contractors, and we provide energy efficiency expertiseto develop and implement tailored solutions under these contracts.

 

##### **Historyand Business Development**

##### ** **

OnDecember 5, 1997, we were formed as Electric City LLC, a Delaware limitedliability company, for the purpose of marketing a line of lighting controllers(which we marketed under the EnergySaver name). On June 5, 1998, we changed from a limited liability company into acorporation by merging Electric City LLC into Electric City Corp., a Delawarecorporation. Trading in our common stock commenced on August 14, 1998 onthe OTC Bulletin Board.

 

**In June 2006we established our Energy Efficiency Services business through the acquisitionof**Parke P.A.N.D.A.Corporation (“Parke”).  Parke is anenergy services provider specializing in the design, engineering andinstallation of energy efficient lighting upgrades for commercial andindustrial users.  We expanded thisbusiness through the acquisition of Kapadia Consulting, Inc. in September 2006.  Kapadia is an engineering firm thatspecializes in energy management consulting and energy efficient lightingupgrades for commercial and industrial users.  During 2007 we added to this segment throughtwo small acquisitions and the opening of additional offices.

** **

On September 13, 2006 we changed our name to Lime Energy Co. toreflect our new Energy Efficiency Services focus.

 

In December 2006 wediscontinued the active marketing of our original product, EnergySaver, due tochanges in lighting technology, which in our view limited the future market forthe product.

 

OnFebruary 25, 2008, our stock began trading on the NASDAQ Capital Marketunder the trading symbol “LIME.”

 

InJune 2008, we acquired Applied Energy Management, Inc. (“AEM”).  AEM provides energy engineering andconsulting services and energy efficiency services similar to our existingenergy efficiency lighting solutions.  Inaddition, it provides mechanical and electrical conservation services, waterconservation services, building envelope weatherization and renewable energysolutions primarily for government and municipal facilities through its ESCOpartners.

 

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InAugust 2009, we sold the assets of Maximum Performance Group, Inc. (“MPG”)which comprised our Energy Technology business.

 

**Products and Services**

** **

***Energy Consultingand Technical Services***

** **

**The EnergyConsulting and Technical Services business unit provides consulting,engineering and program management services for clients in the areas of energyefficiency, renewable energy and sustainability.  We utilize our technical expertise to helpLime’s clients meet their goals for energy use reduction, energy cost savingsand carbon management.  Our clients arein a wide variety of sectors, including commercial, industrial, utilities,institutional and governmental.  Ourservices include:**

** **

**·**      *EnergyProject Development* — our team of engineers are the first linein the development of turnkey design-build energy efficiency projects.  They conduct building energy audits, analysisof energy consumption data, and financial analysis of various energyconservation measures.

** **

**·**      *EnergyEngineering* — we perform energy audits of clients’ facilitiesincluding building modeling, alternative analysis and preliminary design.  Our deliverables include preliminaryassessments, detailed audits and investment grade audits.

** **

**·**      *Consulting* — we provideall of the planning and technical execution for our clients building portfolio,including solutions for energy procurement, energy usage, on-site generationand accessing incentives and grants for energy projects.  Services include retro-commissioning and LEEDconsulting.

** **

**·**      *EnergyMaster Planning* — we are a single source solution to themyriad issues that our clients face in the areas of energy andsustainability.  Among other things, ourenergy master plans consider energy efficiency, renewable energy, energyprocurement, carbon management, incentives, rebates and grants.  We help our clients to make sense of thesediverse areas and develop a clear path for the low-carbon economy.

** **

**·**      *UtilityProgram Management* — we provide utilities with a single pointsolution for delivering energy efficiency resources.  Our wide range of services include programdesign, program management, marketing & customer recruitment, auditingand installation of energy conservation measures.

** **

***Implementation***

** **

**We providein-house, turnkey implementation services to deliver our energy efficiencysolutions to our clients. Historically, most of our engineering and consultingservices work has resulted in repeat revenue from the same client in the formof implementation of multiple energy efficiency solutions, additionalengineering work or expansion of the work to additional client facilities.  Our comprehensive suite of energy efficiencyimplementation services includes:**

** **

·      *LightingUpgrade Services.*Our designs incorporate occupancy sensors, lightharvesting, time clock controllers and IP addressable systems that facilitatecontrol of individual fixtures for maximum energy savings.  As part of our services, we seek to determinethe best lighting solutions for our clients or, in the case where our client isan energy service company, for their client to achieve targeted financialreturn metrics and technical specifications. These lighting solutions take intoconsideration factors such as light and heat level requirements, buildingenvironmental conditions, hours of operation, energy costs, available utilityand tax incentives, as well as installation, operating and maintenance costs ofvarious lighting. Based on these factors,

 

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weupgrade the existing lighting system with a new system, custom configured withcomponents from third-party manufacturers.

 

·      *Mechanicaland Electrical Conservation Services. *Our mechanicaland electrical conservation services include the development, design, analysis,implementation and commissioning of mechanical and electrical efficiencyprojects at our client’s facilities. Mechanical projects utilize technology toincrease the efficiency of HVAC systems. Heating technologies decrease energyconsumption through the use of steel and sectional boilers, and more efficientburners with dual fuel technologies to take advantage of fuel switchingopportunities and economizers to reduce exhaust gas temperatures.  Cooling technologies provide more efficientwater or air cooled chillers, air handling equipment, roof top units, splitsystems and packaged equipment.  Othermechanical projects include heat recovery, air compressor staging andupgrades.  Electrical projects involvemotor replacements, variable frequency drives, automated control systems andpower factor correction and require regional installation and technicalsupport.

 

·      *WaterConservation Services.*Our water conservation services include thedevelopment, analysis, specification and installation of water reductiontechnologies into a client’s facility. Technologies include dual flush toilets, waterless urinals, low flow aeratorsfor sinks and shower heads and water reclamation.  In addition to reduced water costs, otherbenefits include lower sewer costs, domestic hot water expenses and carbonemissions from reduced water heating costs. Additionally, less waste reducessewage treatment costs and environmental impact.

 

·      *WeatherizationServices.*Our weatherization services optimize energyefficiency and reduce consumption by protecting the exterior and interior offacilities from sunlight, precipitation and wind.   Specific services we offer include sealingbypasses (cracks, gaps, holes), installing insulation, protecting pipes fromcorrosion and freezing, installing storm doors and windows and replacing olddrafty doors and windows with low-energy, double-glazed windows.

 

·      *RenewableProject Development and Implementation*.  We have extensive in-house renewableexpertise, including development of a biomass gasification plant.  We have also installed a new solar domestichot water and photovoltaic system consisting of parabolic solar dishes, heatexchangers and a computerized solar dish tracking system, and we have recentlycompleted a closed loop water/glycol geothermal heat pump system for a publichousing development.  In each case we haveworked closely with ESCOs to review the proposed technologies, analyze proposedsystem performance, design custom solutions and build to budget.

 

Webelieve we have a national presence in all the key states which have institutedmandates and initiatives to support facility energy efficiency projects.  We have approximately 400 employees in 22offices across 13 states.  Our officesare staffed with professionals who have significant expertise in facilityenergy efficiency engineering and consulting and the implementation of a widerange of related technologies for both the commercial and industrial and thepublic sector markets.  We are able tomaintain a highly scalable and leveragable platform by deploying ourprofessional employees to work on projects in either market based on our workrequirements and local end client needs.

 

**Sales and Marketing**

** **

*Commercial and Industrial*

 

As of December 31,2009, we employed a sales force comprisedof 47 sales personnel operating out of 22 offices across the country.  Our sales force is organized into teams andis compensated based on the revenues generated by each team in addition to abase salary.  We actively pursue newtalent and have been successful in hiring sales personnel with highly-relevantindustry expertise as well as training sales personnel who are new to theindustry.  Our sales force hasexperienced low turnover and we believe is positioned to handle our expectedgrowth.

 

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We expect to continue tohave significant new business opportunities with our existing clients and togenerate business from new clients through a combination of referrals, tradeshows and cold calls.  We employ a sophisticatedproposal system combining proposal-generation software and a proprietarydatabase based on our many years of experience in the energy efficiencybusiness.

 

The extensive training andeducation of our sales force is a key to our success.  Our sales force attends national and regionalmeetings each year where they review our sales model and our senior engineeringteam provides details on the latest technologies available in the energyefficiency solutions market.  Our salesforce receives regular updates on our expanded service offerings, the latestavailable rebate incentive projects and, where available, finance packages.

 

We have established aclearly defined sales approach designed to shorten sales cycles, increaseclosing rates and help forecast future sales.

 

Inaddition to our sales group, we employ three full-time and two part-timemarketing personnel focusing on vertical market segments directly targeting ourpotential clients’ industries.

 

*Public Sector*

 

We work on public sector energy efficiency projects throughour ESCO relationships.  Our sales anddevelopment efforts to the public sector are primarily focused on supportingand building relationships with the ESCOs. We have positioned ourselves in the supply chain of most of the majorESCOs participating in public sector energy efficiency projects offering acomprehensive set of products and services to these companies.  The combination of energy engineering andconsulting expertise and regional implementation capabilities has contributedto our recent growth in this sector.  Webelieve there are few competitors that can provide a comparable depth of energyefficiency solutions over the range of geographies required for public sectorfacilities.

 

*NationalSales*

 

Wehave a dedicated national accounts team focused solely on developingrelationships with our largest and most important current and prospectivecommercial and industrial and ESCO relationships.  This senior client relationship team ensuresthat existing projects are overseen appropriately and that opportunities withour current clients or with other prospective clients are identified anddeveloped.

 

**Clients**

 

During2009, Honeywell International, Inc. and Johnson Controls, Inc., bothESCOs, each accounted for approximately 15% of our consolidated 2009 revenue,while Honeywell and URS Corporation accounted for approximately 14% and 10% ofour consolidated 2008 revenue, respectively.

 

**Competition**

 

*Commercial and Industrial*

 

The market for energyefficiency solutions is highly fragmented. We face competition mainly from companies only offering a sub-set of ourofferings, such as lighting or mechanical and electrical conservationservices.  Most of these competitors arelocal businesses which are only able to offer services in the immediate area orhave a limited specific vertical product expertise, such as lighting andlighting fixture manufacturers, lighting fixture distributors and providers ofenergy efficiency upgrades and maintenance. We believe we are the only national provider of a full range of energyefficiency services consisting of energy engineering, consulting andimplementation services.  Our extensive

 

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experience and track record,national scale, leadership in providing comprehensive best-of-breedtechnologies and services and our established base of clients createssignificant barriers to entry, providing us with a significant advantage whencompeting for commercial and industrial clients.

 

***Public Sector***

** **

**The market forenergy efficiency services for public sector facilities is primarily served byESCOs, who enter into energy efficiency service contracts with public sectorentities.  Once ESCOs have securedcontracts, they often hire energy efficiency service providers to act as asubcontractor to help them design and/or implement specific services inrelation to a given project.  We competewith other energy efficiency services providers to be the chosen partner forthese ESCOs projects.  We believe thatwhile historically ESCOs often considered small, local providers, increasinglyESCOs are looking to consolidate their relationships with a smaller group ofpreferred providers to act for them on a national scale across the full rangeof energy efficiency services.  Webelieve the competing energy efficiency partners who target ESCO work areprimarily small, private players that lack our reputation, technical capabilitiesand national scale.**

** **

**During 2009 weentered into our first direct contract with a government agency when we assumedthe rights under a contract with the U.S. Army Corps of Engineers to act as oneof three qualified contractors under its Facilities Repair and Renewal program(“FRR”).  Under this program we will bidas a design build general contractor to the Corps of Engineers.  Subsequent to this, we were awarded severalcontracts with the U.S. Post Office to perform energy efficiency upgrades on postalfacilities on the east coast and in the southeast.  We believe that there will be otheropportunities in the future to contract directly with the government andquasi-government agencies where the agency does not require the services of oneof our ESCO partners.**

** **

**Compliance with EnvironmentalLaws**

** **

**Our sale of products and services** generally doesnot require compliance with federal, state or local environmental laws.  Our implementation services use licenseddisposal firms to dispose of old lamps, lighting ballasts or other productsthat may contain heavy metals or other potential environmental hazards.

** **

**Intellectual Property**

** **

**As of December 31, 2009, wehad three registered trademarks or service marks.**

** **

**Employees**

** **

**As of March 15, 2010, we had249 full time employees and 121 part time employees, of which 70 weremanagement and corporate staff, 10 were engineers, 68 were engaged in sales andmarketing and 222 were engaged in project management, product installation,customer support and field service.**

 

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## **Item 1A**.            Risk Factors.

## ** **

**RisksRelated to our Business**

 

***We have a limited operating history under our current business model ina rapidly evolving market, which may make it difficult to evaluate our businessand prospects, and may expose us to increased risks and uncertainties.***

** **

Ourbusiness has evolved substantially over time through organic growth andstrategic acquisitions.  Our currentbusiness model has only been in operation since June 2006, when welaunched our Energy Efficiency Services business. Accordingly, we have only alimited history of generating revenues under our current business model, andthe future revenue potential of our current business model in the rapidlyevolving energy efficiency solutions market is uncertain. As a result of ourshort operating history under our current business model, we have limitedfinancial data that can be used to evaluate our business, strategies,performance and prospects or an investment in our common stock. Any evaluationof our business and our prospects must be considered in light of our limitedoperating history under our current business model and the risks anduncertainties encountered by companies with new business models. To addressthese risks and uncertainties, among other things, we must do the following:

 

·      maintainand expand our current relationships and develop new relationships with commercial andindustrial businesses, property owners and managers, utilities, governmentagencies and energy service companies, or “ESCOs,” serving government andeducational institutions;

·      maintainand enhance our existing energy efficiency solutions;

·      executeour business and marketing strategies successfully;

·      respondto competitive developments; and

·      attract,integrate, retain and motivate qualified personnel.

 

We may be unable to accomplish one or more of theseobjectives, which could cause our business to suffer and could have a materialadverse effect on our business, results of operations and financial condition. In addition, accomplishing many of these goalsmight be very expensive, which could adversely impact our operating results andfinancial condition. Additionally, any predictions about our future operatingresults may not be as accurate as they could be if we had a longer operatinghistory under our current business model.

 

***We have incurred significant operating losses since inception and maynot achieve or sustain profitability in the future.***

*** ***

**We have experienced lossesand negative cash flow from operations since our inception and we currentlyhave an accumulated deficit. We must increase sales while maintaining orimproving our margins to operate profitably and sustain positive operating cashflows. We may be required to reduce the prices of our services in order toincrease sales. If we reduce prices, we may not be able to reduce costssufficiently to achieve acceptable profit margins. As we strive to grow ourbusiness, we have spent and expect to continue to spend significant funds for: (i) generalcorporate purposes, including working capital, marketing, recruiting and hiringadditional personnel; and (ii) acquisitions. To the extent that ourrevenues do not increase as quickly as these costs and expenditures, ourresults of operations and liquidity will be adversely affected. If weexperience slower than anticipated revenue growth or if the gross**margins we earn on our sales are lower thanexpected or our operating expenses exceed our expectations, we may not achieveprofitability in the future or if we achieve profitability in the future, wemay not be able to sustain it.  As wegrow, our working capital requirements are likely to increase.  We may need additional funds in the form of abank working capital line to support this increased working capital.  If in

 

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**the future we cannot obtain bankfinancing it could limit our ability to grow our business to the point that itis profitable on a consistent basis.**

** **

In addition, because of ournegative cash flow, we have funded our operations through the issuance ofcommon and preferred stock and debt. Our ability to continue to operate untilour cash flow turns positive may depend on our ability to continue to raiseadditional funds through the issuance of equity or debt. If we are notsuccessful in raising any needed additional funds, we might have tosignificantly scale back or delay our growth plans, or sell or shut down someof our businesses. Any reduction or delay in our growth plans could materiallyadversely affect our ability to compete in the marketplace, take advantage ofbusiness opportunities and develop or enhance our services and technologies,which could have a material adverse effect on our business, results of operationsand financial condition.

 

***The current widespreadeconomic downturn and uncertainty and turmoil in the equity and credit marketscould adversely impact our clients, diminish the demand for our services andproducts, and harm our operations and financial performance.***

** **

The energy efficiencysolutions marketplace has experienced rapid evolution and growth, but thecurrent economic recession has increased the reluctance of some of ourcommercial and industrial customers to invest in energy efficiency projects,even those that offer strong ROIs.  Weare not sure if conditions in this market will worsen or improve during comingmonths or how customers will react as the economy begins to recover. Therecession also may cause reductions or elimination of utility or governmentenergy efficiency incentive programs used to partially fund the costs ofcustomer projects. In addition, increased competition during the recession mayresult in lower sales, reduced likelihood of profitability, and diminished cashflow to us.

 

Further, the sales of ourenergy efficiency solutions are made on the basis of contracts that permit ourcustomers to terminate the engagement prior to completion rather than long-termpurchase commitments and consequently our clients may cancel, delay orotherwise modify their purchase commitments in response to economic pressureswith little or no consequence to them and with little or no notice to us.Whether in response to an economic downturn affecting an industry or a client’sspecific business including its bankruptcy or insolvency, any cancellation,delay or other modification in our clients’ orders could significantly reduceour revenue, impact our working capital, cause our operating results tofluctuate from period to period and make it more difficult for us to predictour revenue.

 

***It is difficult for us to estimate our future quarterly operatingresults.***

 

**A significant portion of ourrevenue is seasonal. Historically, this seasonality has caused our revenue,operating income, net income and cash flow from operating activities to belower in the first two quarters and higher in the last two quarters of eachyear. The concentration of earnings and cash flow in the fourth quarter isprimarily due to our clients’ budget cycles. Further, many of our clients purchase our energy efficiency solutions onthe basis of cancellable short-term agreements for projects that can becompleted in a matter of weeks rather than long-term purchase commitments.  Consequently, we do not have a constant andpredictable stream of revenue from those clients.  Additionally, because a few large projectsare often responsible for a significant portion of our revenue from publicsector clients, the level of activity, initial project delays or gaps betweenprojects have historically led to significant fluctuations of revenue on anirregular basis throughout the fiscal year. As a result, we may be unable to forecast our revenue accurately, and afailure to meet our revenue or expense forecasts could have an immediate and negativeimpact on the market price of our common stock.**

 

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***We operate in a highlycompetitive industry and if we are unable to compete successfully our revenueand profitability will be adversely affected.***

** **

**The energy efficiency solutionsmarket is highly competitive, and we expect competition to increase andintensify as the energy efficiency solutions market continues to evolve. Weface strong competition primarily from lighting and lighting fixturemanufacturers, lighting fixture distributors, providers of energy efficiencylighting upgrades and maintenance, small regional providers of energyefficiency solutions and local electrical and mechanical contractors.  As we extend energy efficiency offerings thatare currently available to our public sector clients to our commercial andindustrial clients, we expect to face additional competition from providers ofthose services in the commercial and industrial market. We compete primarily onthe basis of client service and support, quality and scope of services andproducts, cost of services and products, ability to service clients on anational level, name recognition and financial resources and performance trackrecord for services provided.**

** **

**In addition to our existingcompetitors, new competitors such as large national or multinationalengineering and/or construction companies could enter our markets.  Many of these current and potentialcompetitors are better capitalized than we are, have longer operating historiesand strong existing client relationships, greater name recognition, and moreextensive engineering and sales and marketing capabilities. Competitors couldfocus their substantial resources on developing a competing business model orenergy efficiency solutions that may be potentially more attractive to clientsthan our products or services. In addition, we may face competition from otherproducts or technologies that reduce demand for electricity. Our competitorsmay also offer energy efficiency solutions at reduced prices in order toimprove their competitive positions. If our ESCO clients internally developsufficient capabilities to perform their own work they may no longer outsourcework to us.  Any of these competitivefactors could make it more difficult for us to attract and retain clients,require us to lower our prices in order to remain competitive, and reduce ourrevenue and profitability, any of which could have a material adverse effect onour results of operations and financial condition.**

** **

***We may be unable toobtain sufficient bonding capacity to support certain service offerings.***

 

Asignificant number of our public sector contracts require surety bonds toguarantee our performance and payment to our suppliers and subcontractors.Bonding capacity for construction projects has become increasingly difficult toobtain, and bonding companies are denying or restricting coverage to anincreasing number of contractors.  Somesureties have required us to post collateral, guarantees, agreements ofindemnity and letters of credit to secure the performance and suretybonds.  Our available collateral may beinsufficient to support our increasing need for surety bonds, which couldpreclude us from being able to bid for certain contracts and successfullycontract with certain customers. If we are unable to obtain surety bonds, ourbusiness, results of operations and financial condition could be materiallyadversely affected.

 

***Our success is largely dependentupon the skills, experience and efforts of our senior management******andour ability to attract and retain highly qualified engineers and other skilledpersonnel******, and the loss oftheir services or our inability to attract and retain such personnel could havea material adverse effect on our ability to expand our business or to maintainprofitable operations.***

 

**Our future success will dependlargely on the skills, efforts, and motivation of our executive officers andother senior managers.  The loss of theservice of executive officers and other senior managers or our inability toattract or retain other qualified personnel could have a material adverseeffect on our ability to expand our business, implement our strategy ormaintain profitable operations.**

** **

**In addition, to execute ourgrowth strategy and maintain our margins, we must attract and retain highlyqualified engineers, other skilled personnel and an effective sales force thatcan accurately price our clients’ energy efficiency solution contracts.Competition for hiring these individuals is intense, especially with regard toengineers specializing in the energy efficiency solutions market. If we fail to**

 

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** **

**attract and retain highly qualified engineers andother skilled personnel, our business and growth prospects could be materiallyadversely affected.**

** **

***We depend upon a limited number of clients in any given period togenerate a substantial portion of our revenue.***

 

Historically, we did not have long-term contracts with our clients, andour dependence on individual key clients varied from period to period as aresult of the significant size of some of our retrofit and multi-facilityprojects.  During 2009 two clientsaccounted for approximately 30% of our consolidated revenue, while in 2008, twoclients accounted for approximately 25% of our consolidated revenue.  We expect utility program management andlarge retrofit projects to become a greater component of our total revenue inthe near term. As a result, we may experience more client concentration in anygiven future period. The loss of, or substantial reduction in sales to, any ofour significant clients could have a material adverse effect on our business,results of operations and financial condition in any given future period.

 

***Our public sector businessdepends on a limited number of ESCOs under contract by government and otherpublic end-users.***

** **

**A significant portion of ourpublic sector business revenue is generated through our relationship with alimited number of ESCOs that provide energy efficiency services to governmentand other public end-users.  If for anyreason government spending on energy efficiency services is reduced orpostponed or government and other public end-users shift contracts to ESCOswith whom we do not have established relationships, this may have a significantnegative impact on our business, results of operations and financialcondition.  Further, our public sectorprojects typically have long payment cycles that may impact our liquidity andwhich could have a material adverse effect on our results of operations in anygiven future period.**

** **

***Failure of oursubcontractors to properly and effectively perform their services in a timelymanner could cause delays in the delivery of our energy efficiency solutions.***

** **

**Oursuccess depends on our ability to provide quality, reliable energy efficiencysolutions in a timely manner, which in part requires the proper removal andinstallation of lighting, mechanical and electrical systems and other productsby our contractors and subcontractors upon which we depend.   A significant portion of our energy efficiencysolutions are installed by contractors or subcontractors.  Any delays, malfunctions, inefficiencies orinterruptions in our energy efficiency solutions caused by improperinstallation could cause us to have difficulty retaining current clients and attractingnew clients.  Such delays could alsoresult in additional costs that could affect the profit margin of ourprojects.  In addition, our brand,reputation and growth could be negatively impacted.**

** **

***If our information technology systems fail, or if we experienceoperation interruptions, then our business, results of operations and financialcondition could be materially adversely affected.***

 

**The efficient operation of ourbusiness is dependent on our information technology systems. We rely on thosesystems generally to manage the day-to-day operation of our business, managerelationships with our clients and maintain our financial and accountingrecords. The failure of our information technology systems, our inability tosuccessfully maintain and enhance our information technology systems, or anycompromise of the integrity or security of the data we generate from ourinformation technology systems, could have a material adverse effect on ourresults of operations, disrupt our business and make us unable, or severelylimit our ability, to respond to client demands. In addition, our informationtechnology systems are vulnerable to damage or interruption from:**

 

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**·**                  earthquake, fire, flood and other naturaldisasters;

**·**                  employee or other theft;

**·**                  attacks by computer viruses or hackers;

**·**                  power outages; and

**·**                  computer systems, Internet,telecommunications or data network failure.

** **

Anyinterruption of our information technology systems could result in decreasedrevenue, increased expenses, increased capital expenditures, clientdissatisfaction and potential lawsuits, any of which could have a materialadverse effect on our results of operations or financial condition.

 

***Product liability and personal injury claims could have a materialadverse effect on our business, results of operations and financial condition.***

*** ***

**We face exposure to productliability and personal injury claims in the event that our energy efficiencysolutions fail to perform as expected or cause bodily injury or propertydamage.  Since the majority of ourproducts use electricity, it is possible that the products we sell could resultin injury, whether by product malfunctions, defects, improper installation orother causes. Particularly because the products we sell often incorporate newtechnologies or designs, we cannot predict whether or not product liabilityclaims will be brought against us in the future or result in negative publicityabout our business or materially adversely affect our client relations.Further, we face exposure to personal injury claims in the event that anindividual is injured as a result of our negligence.   Moreover, we may not have adequate resourcesin the event of a successful claim against us. A successful product liabilityor personal injury claim against us that is not covered by insurance or is inexcess of our available insurance limits could require us to make significantpayments of damages which could materially adversely affect our results ofoperations and financial condition.**

** **

***Our retrofitting processfrequently involves responsibility for the removal and disposal of componentscontaining hazardous materials and at times requires that our contractors orsubcontractors work in hazardous conditions, either of which could give rise toa claim against us.***

 

When we retrofit a client’s facility, we typically assumeresponsibility for removing and disposing of its existing lighting fixtures.Certain components of these fixtures typically contain trace amounts of mercuryand other hazardous materials. Older components may also contain trace amountsof polychlorinated biphenyls, or PCBs. We utilize licensed and insuredhazardous wastes disposal companies to dispose of such components. Failure toproperly handle, remove or dispose of the components containing these hazardousmaterials in a safe, effective and lawful manner could give rise to liabilityfor us, or could expose our workers or other persons to these hazardous materials,which could result in claims against us. Further, our workers are sometimes required to work in hazardousenvironments that present a risk of serious personal injury which could resultin claims against us.  A successfulpersonal injury claim against us that is not covered by insurance or is inexcess of our available insurance limits could require us to make significantpayments of damages and could materially adversely affect our results ofoperations and financial condition.

 

***If we are unable to manageour anticipated revenue growth effectively, our operations and profitabilitycould be adversely affected.***

*** ***

***We intend to undertake a number ofstrategies in an effort to grow our revenue. If we are successful, our revenuegrowth may place significant strain on our limited resources. To properlymanage any future revenue growth, we must continue to improve our management,operational, administrative, accounting and financial reporting systems andexpand, train and manage our employee base, which may involve significantexpenditures and increased operating costs. Due to our limited resources andexperience, we may not be able to effectively manage the expansion of ouroperations or recruit and***

 

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***adequately train additional qualifiedpersonnel. If we are unable to manage our anticipated revenue growtheffectively, the quality of our client care may suffer, we may experienceclient dissatisfaction, reduced future revenue or increased warranty claims,and our expenses could substantially and disproportionately increase. Any ofthese circumstances could adversely affect our business, results of operationsand financial condition.***

*** ***

***Our growth may be impaired and our current business may suffer if we donot successfully address risks associated with any future acquisitions that wemay make.***

*** ***

***Our future growthmay depend, in part, upon our ability to successfully identify, acquire andoperate other complementary businesses.***  Any acquisitioncontemplated or completed by us may result in adverse short term effects on ourreported results of operation; divert management’s attention; introduce risksassociated with unanticipated problems or legal liabilities; cause theincurrence of additional debt; cause the issuance of additional equity; orintroduce contingent liabilities and amortization expenses related tointangible assets, some or all of which could harm our business, results ofoperations and financial condition.

*** ***

In addition, often an acquired company’sperformance is largely dependent on a few key people, particularly in smallercompanies.  If these key people leave thecompany, become less focused on the business or less motivated to make thebusiness successful after the acquisition, the performance of the acquiredcompany and our combined business may suffer.

 

***Our ability to use our netoperating loss carry forwards will be subject to additional limitation, whichcould potentially result in increased future tax liability.***

 

**Generally, a change of more than50% in the ownership of a company’s stock, by value, over a three-year periodconstitutes an ownership change for U.S. federal income tax purposes. Anownership change may limit a company’s ability to use its net operating losscarry forwards attributable to the period prior to such change. We have sold orotherwise issued shares of our common stock in various transactions sufficientto constitute an ownership change, including our recently completed publicoffering and the conversion of our outstanding preferred stock and theconversion of all of our outstanding convertible notes.  As a result, if we earn net taxable income,our ability to use our pre-change net operating loss carry forwards, whichamounted to $88 million as of December 31, 2009, to offset U.S. federaltaxable income will be subject to limitations, which will likely result inincreased future tax liability.  Inaddition, future shifts in our ownership, including transactions in which wemay engage, may cause additional ownership changes, which could have the effectof imposing additional limitations on our ability to use our pre-change netoperating loss carry forwards.**

 

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**RisksRelated to Ownership of our Common Stock**

 

***The future trading market for our common stock may not be active on aconsistent basis and the market price of our common stock could be subject tosignificant fluctuations.***

*** ***

**Trading in our common stock hasbeen limited and, at times, volatile since our shares were listed on The NASDAQCapital Market in February 2008. The trading volume of our common stock in the future depends in part onour ability to increase our revenue and reduce or eliminate our operatinglosses.  If we are unable to achievethese goals, the trading market for our common stock may be negativelyaffected, which may make it difficult for you to sell your shares.  An active trading market for our common stockmay not develop or, if developed, be sustained, and the trading price of ourcommon stock may fluctuate substantially.**

** **

**The price of our common stock mayalso fluctuate as a result of:**

** **

**·**                  variations in our operating results;

**·**                  announcements by us, our competitors orothers of significant business developments, changes in client relationships,acquisitions or expansion plans;

**·**                  analysts’ earnings estimates, ratings andresearch reports;

**·**                  the depth and liquidity of the market for ourcommon stock;

**·**                  speculation in the press;

**·**                  strategic actions by us or our competitors,such as sales promotions or acquisitions;

**·**                  actions by institutional and otherstockholders;

**·**                  recruitment or departure of key personnel; or

**·**                  domestic and international economic factorsand trends, some of which may be unrelated to our performance.

** **

**The stock markets, in general,periodically experience volatility that is sometimes unrelated to the operatingperformance of particular companies. These broad market fluctuations may cause the trading price of ourcommon stock to decline; in particular, you may not be able to resell yourshares at or above the public offering price.**

** **

**In the past, following a periodof volatility in the market price of a company’s securities, securities classaction litigation has often been brought against a company.  Because of the potential volatility of ourcommon stock price, we may become the target of securities litigation in thefuture.  Securities litigation couldresult in substantial costs and divert management’s attention and resourcesfrom our business.**

** **

***Due to the concentration of holdings of our stock, a limited number of investorsmay be able to control matters requiring common stockholder approval or couldcause our stock price to decline through future sales because they beneficiallyown a large percentage of our common stock.***

** **

**There were 23,597,591 shares ofour common stock outstanding as of March 19, 2010, of which a total of 14investors beneficially own in the aggregate approximately 68%.   As a result of their significant ownership,these investors may have the ability to exercise a controlling influence overour business and corporate actions requiring stockholder approval, includingthe election of our directors, a sale of substantially all of our assets, amerger between us and another entity or an amendment to our certificate ofincorporation. This concentration of ownership could delay, defer or prevent achange of control and could adversely affect the price investors might bewilling to pay in the future for shares of our common stock. Also, in the eventof a sale of our business, these investors could be able to seek to receive acontrol premium to the exclusion of other common stockholders.**

 

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**A significant percentage of theoutstanding shares of our common stock, including the shares beneficially ownedby these holders, can be sold in the public market from time to time, subjectto limitations imposed by federal securities laws. The market price of ourcommon stock could decline as a result of sales of a large number of our presentlyoutstanding shares of common stock by these investors or other stockholders inthe public market or due to the perception that these sales could occur. Thiscould also make it more difficult for us to raise funds through futureofferings of our equity securities or for you to sell your shares if you chooseto do so.**

** **

**The large concentration of ourshares held by this small group of stockholders could result in increasedvolatility in our stock price due to the limited number of shares available inthe market.**

** **

***Raising additional capital or consummation of additional acquisitionsthrough the issuance of equity or equity-linked securities could dilute yourownership interest.***

*** ***

**We may find it necessary to raisecapital again sometime in the future or to consummate additional acquisitionsthrough the issuance of equity or equity-linked securities.  If we raise additional funds in the futurethrough the issuance of equity securities or convertible debt securities, ourexisting stockholders will likely experience dilution of their present equityownership position and voting rights. Depending on the number of shares issuedand the terms and conditions of the issuance, new equity securities could haverights, preferences, or privileges senior to those of our common stock.  Depending on the terms, common stock holdersmay not have approval rights with respect to such issuances.**

** **

***Provisions of our charter and by-laws, in particular our “blank check”preferred stock, and in the Delaware General Corporation Law may prevent ordiscourage an acquisition of our Company that would benefit our stockholders.***

*** ***

**Provisionsof our charter and by-laws may make it more difficult for a third party toacquire control of our Company, even if a change-in-control would benefit ourstockholders. In particular, shares of our preferred stock may be issued in thefuture without further stockholder approval and upon those terms andconditions, and having those rights, privileges and preferences, as our Boardof Directors may determine. In the past, we have issued preferred stock withdividend and liquidation preferences over our common stock, and with certainapproval rights not accorded to our common stock, and which was convertibleinto shares of our common stock at a price lower than the market price of ourcommon stock.  The rights of the holdersof our common stock will be subject to, and may be adversely affected by, therights of the holders of any preferred stock we may issue in the future. The issuanceof our preferred stock, while providing desirable flexibility in pursuingpossible additional equity financings and other corporate purposes, could havethe effect of making it more difficult for a third party to acquire control ofus. This could limit the price that certain investors might be willing to payin the future for shares of our common stock and discourage these investorsfrom acquiring a majority of our common stock.**In addition, the price that future investors may bewilling to pay for our common stock may be lower due to the conversion priceand exercise price granted to investors in any such private financing.

** **

**In addition, as a Delawarecorporation, we are subject to certain Delaware anti-takeover provisions,including the application of Section 203 of the Delaware General CorporationLaw, which generally restricts our ability to engage in a business combinationwith any holder of 15% or more of our capital stock.  Our Board of Directors could rely on Delawarelaw to prevent or delay an acquisition of us.**

** **

***Compliance with changing regulation of corporate governance and publicdisclosure may result in additional expenses.***

*** ***

**Changing laws, regulations andstandards relating to corporate governance and public disclosure, including theSarbanes-Oxley Act of 2002 and rules subsequently implemented by theSecurities and Exchange Commission, or SEC, and The NASDAQ Stock Market, haveimposed substantial requirements**

 

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**on public companies, including with respect topublic disclosure, internal control, corporate governance practices and othermatters. Our management and other personnel are devoting substantial amounts oftime and resources to comply with these evolving laws, regulations andstandards.  Moreover, these laws,regulations and standards have significantly increased our legal and financialcompliance costs and have made some activities more time-consuming andcostly.  In addition, we could incursignificant costs to remediate any material weaknesses we identify throughthese efforts.  We currently areevaluating and monitoring development with respect to these evolving laws,regulations and standards, and cannot predict or estimate the amount ofadditional costs we may incur or the timing of such costs.  These new regulatory requirements may resultin increased general and administrative expenses and a diversion of management’stime and attention from revenue generating activities to compliance activities,which could harm our business prospects and could have a negative effect on thetrading price of our common stock.**

** **

***We expect our quarterly revenue and operating results to fluctuate. Ifwe fail to meet the expectations of market analysts or investors, the marketprice of our common stock could decline substantially, and we could becomesubject to securities litigation.***

*** ***

Our business is seasonal andcan be affected by cyclical factors outside of our control.  In addition, we recognize revenue on many ofour contracts once the project is substantially complete, resulting inintermittent periods of fluctuating revenue. Our quarterly revenue and operating results have fluctuated in the pastand are likely to continue to vary from quarter to quarter in the future. Youshould not rely upon the results of one quarter as an indication of our futureperformance. Our revenue and operating results may fall below the expectationsof market analysts or investors in some future quarter or quarters. Our failureto meet these expectations could have an adverse effect on the market price ofour common stock.  In addition, thesefluctuations may result in volatility in our results of operations and/or havean adverse effect on the market price of our common stock. If the price of ourcommon stock falls significantly we may be the target of securities litigation.If we become involved in this type of litigation, regardless of the outcome, wecould incur substantial legal costs, management’s attention could be divertedfrom the operation of our business, and our reputation could be damaged, whichcould have a material adverse effect on our business, results of operationsand/or financial condition.

 

***If securities analysts do not publish research or reports about ourbusiness or if they downgrade their evaluations of our stock, the price of ourstock could decline.***

*** ***

**Thetrading market for our common stock depends in part on the research and reportsthat industry or financial analysts publish about us or our business.  If one or more of the analysts covering usdowngrade their estimates or evaluations of our stock, the price of our stockcould decline.  If one or more of theseanalysts cease coverage of our Company, we could lose visibility in the marketfor our stock, which in turn could cause our stock price to decline.**

 

## **Item 1B.  UnresolvedStaff Comments.**

## ** **

**Not applicable.**

 

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## **Item2.    Properties.**

## ** **

Ourheadquarters are located at 1280 Landmeier Road in Elk Grove Village, Illinois.This facility is approximately 13,000 square feet and houses the corporateheadquarters and a warehouse. We acquired this facility in August 1998.There is a mortgage on the building that matures in July 2011.

 

Other properties that areused for sales and administration include:

 

| **Location:**      | ** ** | **Square  Feet** | ** ** | **Lease  Expiration** |
|--------------------|------------|------------------|------------|-----------------------|
| ** **         | ** ** | ** **       | ** ** | ** **            |
| Aiea, HI           |       | 2,512            |       | December 2010    |
|               |       |             |       |                  |
| Austin, TX         |       | 4,000            |       | June 2011        |
|               |       |             |       |                  |
| Bethlehem, PA      |       | 8,666            |       | December 2016    |
|               |       |             |       |                  |
| Bronx, NY          |       | 2,500            |       | Month-to-month        |
|               |       |             |       |                  |
| Dallas, TX         |       | 600              |       | January 2010     |
|               |       |             |       |                  |
| Depew, NY          |       | 6,835            |       | February 2012    |
|               |       |             |       |                  |
| Emeryville, CA     |       | 1,590            |       | Month to Month        |
|               |       |             |       |                  |
| Glendora, CA       |       | 15,600           |       | December 2012    |
|               |       |             |       |                  |
| Greensboro, NC     |       | 3,000            |       | March 2011       |
|               |       |             |       |                  |
| Huntersville, NC   |       | 6,560            |       | March 2013       |
|               |       |             |       |                  |
| Lee, MA            |       | 7,600            |       | April 2010       |
|               |       |             |       |                  |
| Locust, NC         |       | 4,000            |       | March 2011       |
|               |       |             |       |                  |
| New York, NY       |       | 2,800            |       | September 2010   |
|               |       |             |       |                  |
| N. Miami Beach, FL |       | 5,510            |       | May 2010         |
|               |       |             |       |                  |
| San Diego, CA      |       | 8,200            |       | September 2012   |
|               |       |             |       |                  |
| Bellevue, WA       |       | 2,000            |       | December 2010    |
|               |       |             |       |                  |
| Ventura, CA        |       | 1,776            |       | November 2010    |
|               |       |             |       |                  |
| Woodbridge, NJ     |       | 11,500           |       | January 2017     |

 

**We believe that the space andlocation of our current facilities in combination with the current and plannedoutsourcing of our manufacturing will be sufficient for the level of sales andproduction projected for the current year.**

 

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## **Item3.    Legal Proceedings.**

 

From time to time, we have been a party to pending orthreatened legal proceedings and arbitrations that are routine and incidentalto our business. Based upon information presently available, and in light oflegal and other defenses available to us, except as described in the followingparagraph, management does not consider the liability from any threatened orpending litigation to be material.

 

In February 2009,a complaint captioned *ByronGonzales v. Lime Energy Co. and Parke Industries, LLC* was filedagainst us in San Francisco Superior Court.  The complaint, as amended in March 2009,alleges that we failed to pay regular and overtime wages and to reimburse fornecessary business expenditures such as tools. These claims are asserted on behalf of Mr. Gonzales and a putativeclass of electrical installers and foreman employed by us inCalifornia.  We considered the litigationto be immaterial because of the scope of the claims and the defenses availableto us.  During litigation in March 2010,plaintiffs indicated an intent to allege additional claims pertaining to apurported denial of meal periods.  Whilewe vigorously deny the allegations, rather than engage in protracted litigationand incur substantial legal expenses and management time, we have agreed withthe plaintiff to settle all class claims for $300,000, from which will be paidclass counsel’s fees and costs. The settlement is subject to court approvaland, if granted, expiration of the appeal period for objections.

 

# **PART II**

# ** **

## **Item5.    Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities.**

## ** **

SinceFebruary 25, 2008, our stock has traded on the NASDAQ Capital Market underthe trading symbol “LIME.”   From September 22,2006 until January 28, 2008, our common stock was traded under the symbol “LMEC”on the OTC Bulletin Board.  Trades on theOTC Bulletin Board reflect inter-dealer prices, without retail mark-up,mark-down or commission and may not necessarily represent actualtransactions.  Following a 1-for-7reverse stock split on January 28, 2008, our trading symbol on the OTCBulletin Board was “LMEG” until February 25, 2008 when our stock begantrading on the NASDAQ Capital Market under its current trading symbol.

 

Thefollowing table sets forth the quarterly high and low selling prices for ourcommon stock as reported on the Bulletin Board and NASDAQ since January 1,2008, adjusted for our 1-for-15 reverse stock split effected on January 25,2007, and our 1-for-7 reverse stock split effected on January 28, 2008.

** **
| ** **                                     | ** ** | **Common Stock** | ** ** |
|------------------------------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **High**         | ** ** | **Low** | ** ** |
|                                           |       |             |       |   |   |
| **Fiscal Year Ended  December 31, 2008:** | ** ** | ** **       | ** ** | ** ** | ** ** |
| Fiscal Quarter Ended March 31, 2008       |       | $                | 12.00      |   | $ | 6.30 |   |
| Fiscal Quarter Ended June 30, 2008        |       | $                | 10.50      |   | $ | 5.70 |   |
| Fiscal Quarter Ended September 30, 2008   |       | $                | 7.25       |   | $ | 5.00 |   |
| Fiscal Quarter Ended December 31, 2008    |       | $                | 6.31       |   | $ | 3.26 |   |
|                                           |       |             |       |   |   |
| **Fiscal Year Ended  December 31, 2009:** | ** ** | ** **       | ** ** | ** ** | ** ** |
| Fiscal Quarter Ended March 31, 2009       |       | $                | 5.00       |   | $ | 3.01 |   |
| Fiscal Quarter Ended June 30, 2009        |       | $                | 5.29       |   | $ | 3.29 |   |
| Fiscal Quarter Ended September 30, 2009   |       | $                | 8.94       |   | $ | 4.89 |   |
| Fiscal Quarter Ended December 31, 2009    |       | $                | 6.99       |   | $ | 3.85 |   |

 

**Holders**

 

Asof March 19, 2010 we had approximately 558 holders of record,approximately 4,400 beneficial owners of our common stock and 23,597,591 sharesof common stock outstanding.

 

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**Dividends**

 

Nodividends were declared or paid during the three month period ended December 31,2009.

 

Wehave never declared or paid any cash dividends on our common stock and we donot anticipate paying any cash dividends in the foreseeable future.

 

**Recent Sales of Unregistered Securities**

 

During the fourth quarter of 2009, we issued a consultant a warrantwith a term of four years to purchase 5,000 shares of our common stock at $4.50per share as partial consideration for services provided to us.

 

Also during the fourth quarter of 2009, we issued 12,566 shares ofstock upon the exercise of options held by two individuals.

 

Thesales and issuances of unregistered securities listed above were made by us inreliance upon the exemptions from registration provided under Sections 4(2) ofthe Securities Act of 1933, as amended.

 

Allother sales of unregistered securities in 2009 were previously disclosed in ourQuarterly Reports on Form 10-Q or Current Reports on Form 8-K.

 

## **Item 7.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

## ** **

***Management’s Discussion andAnalysis of Financial Condition and Results of Operations contains forward-lookingstatements that are based on management’s current expectation, estimates, andprojections about our business and operations. Our actual results may differmaterially from those currently anticipated and expressed in suchforward-looking statements as a result of numerous factors, including those wediscuss under “Risk Factors” and elsewhere in this report.***

** **

***We have included a discussion ofour acquisition of AEM in June 2008 in certain portions of the followingdiscussion and analysis section in order to provide some detail on the impactthat this transaction has had and that we expect that this transaction willhave on our results of operations and liquidity and capital resourcerequirements. The unaudited pro forma financial and operational informationincluded herein for the twelve months ended December 31, 2008 have beenpresented as if the AEM acquisition occurred on January 1, 2008. Suchunaudited pro forma information is presented for illustrative purposes only andis not necessarily indicative of what our actual financial or operationalresults would have been had the AEM acquisition been consummated on such date.***

** **

**Overview**

 

***General***

 

We are a provider ofintegrated energy engineering, consulting and implementation solutionsspecializing in improving the energy efficiency of our clients’ facilities,reducing their operating costs and carbon emissions.  We perform energy efficiency engineering andconsulting as well as the development and implementation of energy efficientlighting, mechanical, electrical, water, weatherization, and renewable energysolutions.

 

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Weserve a wide range of commercial and industrial and public sector clients.  Our commercial and industrial clients includemany Fortune 500 companies for which we provide our energy efficiency solutionsdirectly, as well as utilities for which we manage energy efficiency portfolioprojects. Our public sector clients include government agencies and educationalinstitutions, which we serve both through our relationships with ESCOs anddirectly.  ESCOs are awarded projectcontracts with the public sector as prime contractors, and we provide energyefficiency expertise to develop and implement tailored solutions under thesecontracts.

 

Ourrevenue increased by $15.8 million, or 29%, to $70.8 million during 2009 from$55.0 million during 2008.  We haveinvested significant capital and resources to build our business infrastructureto provide us with the operational platform to support continued future growth.

 

Theservices we provide include:

 

·                  *Engineeringand Consulting*: We apply our engineering expertise to analyze eachclient’s energy consumption and operational needs and develop customized energyefficiency solutions. Our energy engineering and consulting services includeproject development services, energy management planning, energy bill analysis,building energy audits and e-commissioning. We also provide design review andanalysis of new construction projects to maximize energy efficiency andsustainability, project management of energy-related construction, andprocessing and procurement of incentive and rebate applications.

 

·                  *Implementation*:**We provide arange of energy efficiency and conservation services, including energyefficient lighting upgrade services, mechanical and electrical conservationservices, water conservation services, building envelope weatherization servicesand renewable energy solutions. Our objective is to improve the quality of ourclients’ physical space, maximize their operational savings, capitalize onrebates available to them and reduce their maintenance costs.  We take into consideration factors such asinfrastructure requirements, best available technologies, buildingenvironmental conditions, hours of operation, energy costs, available utilityrebates and tax incentives, and installation, operation and maintenance costsof various efficiency alternatives.

 

InAugust 2009, we sold our Energy Technology segment through which weoffered our patented line of HVAC and lighting controllers under the eMAC anduMAC brand names.  The eMAC technologyprovides remote monitoring, management and control of commercial rooftop HVACunits.  In early 2009 we decided to sellthis division, which had incurred significant losses, to allow us to focus onour faster growing Energy Services business. We came to agreement with a buyer in early August 2009 and closedon the sale on August 10, 2009. This segment has been reported as discontinued operations in theaccompanying financial statements.

 

**Revenue and Expense Components**

 

*Revenue*

 

We generate the majority of our revenue from thesale of our services and the products that we purchase and resell to ourclients.

 

Revenue includes charges for our engineering,installation and/or project management services and the materials we purchaseand resell to our customers.  Thesubstantial majority of our revenue is derived from fixed-price contracts,although we occasionally bill on a time-and-materials basis.  Under fixed-price contracts, we bill ourclients for each project once the project is completed or throughout theproject as specified in the contract. Under time-and-materials arrangements, we bill our clients on an hourlybasis with material costs and other reimbursable expenses passed through andrecognized as 

 

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revenue.  Thetime it takes to complete our projects ranges from a couple of days for a smallproject to four to eight months for some of our larger projects.

 

Ourrevenues are somewhat seasonal with the strongest sales occurring in the secondhalf of the year.

 

*RevenueRecognition*

 

Werecognize our revenue when all four of the following criteria are met: (i) persuasiveevidence has been received that an arrangement exists; (ii) delivery ofthe products and/or services has occurred; (iii) the selling price isfixed or determinable; and (iv) collectability is reasonably assured. Inaddition, we follow the provisions of the SEC’s Staff Accounting Bulletin No. 104,*Revenue Recognition*, which sets forthguidelines in the timing of revenue recognition based upon factors such aspassage of title, installation, payments and client acceptance. Any amountsreceived prior to satisfying our revenue recognition criteria are recorded asdeferred revenue.

 

Werecognize revenue under either the completed contract method, for short termcontracts, or the percentage of completion method for multi-monthprojects.  Under the completed contractmethod, revenue is recognized once the project is substantially complete,resulting in some variability in revenue. Under the percentage of completion method we recognize revenuethroughout the term of the project based on the percentage of costsincurred.  Under both methods of revenuerecognition, any anticipated losses on contracts are charged to operations assoon as they are determinable.

 

*RevenueConcentration*

 

During2009, Honeywell International, Inc. and Johnson Controls, Inc., bothESCOs, each accounted for approximately 15% of our consolidated 2009 revenue,while Honeywell and URS Corporation accounted for approximately 14% and 10% ofour consolidated 2008 revenue, respectively. We have relationships with large ESCOs that have historically providedrepeat revenue and have represented a significant percentage of revenue in anygiven period.  We expect large ESCOprojects to continue to be a significant component of our total revenue. Inaddition, in late 2009 we began serving as program managers to someutilities.  We expect these programs andothers like them to be significant contributors to our revenue in futureperiods and one or more may grow to exceed 10% of our total revenue.  As a result, we may experience more clientconcentration in future periods than we have in the past.

 

*Gross Profit*

 

Grossprofit equals our revenue less cost of sales. Our cost of sales consistsprimarily of materials, our internal labor and the cost of subcontracted labor.

 

Grossprofit is a key metric that we use to examine our performance.  Gross profit depends in part on the volumeand mix of products and services that we sell during any given period.  A portion of our cost of sales, such as thecost of certain supervisory personnel, is relatively fixed.  Accordingly, an increase in the volume ofsales will generally result in an increase to our gross profit margins sincethese fixed expenses are not expected to increase proportionately with sales.

 

*Selling,General and Administrative Expense*

 

Selling,general and administrative expense includes the following components:

 

·                  direct labor and commissioncosts related to our employee sales force;

 

·                  expenses related to ournon-production management, supervisory and staff salaries and employeebenefits, including the costs of stock-based compensation;

 

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·                  commission costs related toour independent sales representatives;

 

·                  costs related to insurance,travel and entertainment, office supplies and utilities;

 

·                  costs related to marketingand advertising our products;

 

·                  legal and accountingexpenses; and

 

·                  costs related toadministrative functions that serve to support our existing businesses, as wellas to provide the infrastructure for future growth.

 

*Amortizationof Intangibles*

 

Whenwe acquire other companies we are required to allocate the purchase pricebetween identifiable tangible and intangible assets, with any remaining valueallocated to goodwill.  The valueallocated to intangible assets is amortized over the estimated life of therelated asset.  The acquisitions wecompleted within 2007, 2008 and 2009 resulted in approximately $8.3 million of intangible assets that arebeing amortized over periods ranging from 1 month to 20 years.  Approximately $2.7 million of these assetswere determined to have indefinite lives and were not being amortized.  We determined during 2009 that thisindefinite lived asset, which was comprised of the Parke trade name, wasimpaired due to our decision to operate all of our businesses under the LimeEnergy name.  As a result, we incurred aone-time, $2.7 million non-cash impairment charge during the fourth quarter of2009 when we reduced this intangible asset’s value to $0.  We recorded total amortization expense of$1.2 million, $1.6 million and $1.5 million in each of the years ended December 31,2009, 2008 and 2007, respectively.  Basedon the value of the intangible assets we are currently carrying, we expect torecord amortization expense of $589 thousand during 2010 and $613 thousand during2011.

 

*InterestExpense, Net*

 

Netinterest expense consists of interest expense net of interest income.  Net interest expense represents the interestcosts associated with our subordinated convertible term notes (includingamortization of the related debt discount and issuance costs), our lines ofcredit, the mortgage on our headquarters building, the our term notes andvarious vehicle loans.  All of this debt,with the exception of the mortgage and vehicle loans, was repaid or convertedto common stock upon the completion of our public offering in September 2009.

 

Interestincome includes earnings on our invested cash balances and amortization of thediscount on our long-term receivables.

 

*PreferredStock Dividends*

 

Preferredstock dividends represent the dividend expense associated with our convertiblepreferred stock.  All of the convertiblepreferred stock was converted into common stock in August 2009.

 

**GeneralBusiness Trends and Recent Developments**

 

Thetrends, events, and uncertainties set out in this section have been identifiedas those we believe are reasonably likely to materially affect the comparisonof historical operating results reported in this report to either other pastperiod results or to future operating results. These trends, events anduncertainties include:

 

***Recent Establishment and Expansion of Energy Efficiency ServicesBusiness***

 

In2006 we established our Energy Efficiency Services business through theacquisitions of Parke and Kapadia.  Ouracquisition of AEM in June 2008 as well as additional acquisitions and theopening of new offices have significantly added to this segment.  Our Energy Efficiency Services represented100% 

 

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ofour consolidated revenue in 2008 and 2009. Certain characteristics of thisbusiness, such as seasonality, margins and working capital requirements, arefundamentally different than those of our previous business; therefore, webelieve our historical results will not be indicative of our futureperformance. As an example, in 2007, 2008 and 2009, the Energy EfficiencyServices business was somewhat seasonal with a disproportionate amount ofrevenue recognized in the second half of the year. This seasonality is likelyto result in greater fluctuations in our revenue, earnings and working capitalrequirements throughout the year than we had experienced prior to theestablishment of our Energy Efficiency Services business. Because certain ofour expenses are relatively fixed, fluctuations in our revenues are also likelyto cause fluctuations in our profit.

 

***Sale of Energy Technology Division***

 

InMay 2005 we added the eMAC and uMAC line of HVAC and lighting controllersthrough the acquisition of Maximum Performance Group, Inc. (“MPG”). Thisproduct line never reached the level of sales necessary to achieveprofitability.   In March 2009 wemade the decision to exit the business and retained an investment bank toassist us in locating potential buyers. On August 10, 2009 we sold certain assets of this business,including the rights to the eMAC and uMAC technology.  The results of operations from the EnergyTechnology segment have been reported as discontinued operations in theaccompanying financial statements. During the quarter ended June 30, 2009, in anticipation of thesale, we reduced the carrying value of these assets to their expected fairvalue, incurring an impairment loss of $503,000.

 

***AEM Transaction***

** **

**On June 11, 2008, weacquired AEM.  AEM provides energyengineering and consulting services and energy efficiency services similar toour existing energy efficiency lighting solutions.  In addition, it provides mechanical andelectrical conservation services, water conservation services and renewableenergy solutions primarily for government and municipal facilities, all marketsthat we had not previously participated in. The majority of AEM’s clients are ESCOs and it operates primarily on theEast Coast.**

** **

Becauseof the significance of this acquisition, our historical operating results arenot expected to be indicative of our future operating results. In particular,we expect our revenue and expenses to increase substantially as a result ofthis acquisition. The following table reflects our historical operating resultsfor selected income statement line items for the year ended December 31,2008, and the same line items on a pro forma basis assuming the AEM acquisitionand the related financing transactions occurred effective January 1, 2008:

 

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| ** **                                  | ** ** | **Year Ended December 31, 2008** | ** **        |
|---------------------------------------------|------------|---------------------------------------|-------------------|
| ** **                                  | ** ** | ** **                            | ** **        | **Pro Forma** | ** ** |
| ** **                                  | ** ** | **Actual**                            | ** **        | **(unaudited)** | ** ** |
|                                        |       |                                  |              |   |   |
| Revenue                                     |       | $                                     | 54,975,084        |   | $ | 65,111,756 |   |
| Cost of sales                               |       | 43,281,049                            |              | 51,682,262 |   |
| Gross profit                                |       | 11,694,035                            |              | 13,429,494 |   |
|                                        |       |                                  |              |   |   |
| Selling, general and administrative expense |       | 18,100,309                            |              | 22,306,277 |   |
| Amortization of intangibles                 |       | 1,568,107                             |              | 2,129,504 |   |
| Operating loss                              |       | (7,974,381                            | )                 | (11,006,287 | ) |
|                                        |       |                                  |              |   |   |
| Other expense                               |       | (2,581,336                            | )                 | (3,393,233 | ) |
|                                        |       |                                  |              |   |   |
| Loss from continuing operations             |       | (10,555,717                           | )                 | (14,399,520 | ) |
|                                        |       |                                  |              |   |   |
| Income (loss) from discontinued operations  |       | (2,479,809                            | )                 | (2,479,809 | ) |
|                                        |       |                                  |              |   |   |
| Net loss                                    |       | $                                     |  (13,035,526 | ) | $ |  (16,879,329 | ) |

 

Asa result of our acquisition of AEM, our pro forma revenue and gross profit werehigher than our actual revenue and gross profit.  Also as a result of our acquisition of AEM,our pro forma SG&A expense was higher than our actual SG&Aexpense.  The higher pro forma SG&Aexpense more than offset the higher gross profit, resulting in a pro formaoperating loss that was greater than our actual operating loss.  Due to the interest expense that we incurredin connection with our acquisition of AEM, our pro forma net interest expensewas higher than our actual net interest expense.  As a result of our pro forma operating lossbeing greater than our actual operating loss and our pro forma net interestexpense being higher than our actual net interest expense, our pro forma netloss was greater than our actual net loss.

 

Theacquisition of AEM may reduce the seasonality of our consolidated revenuebecause AEM derives the majority of its revenue from long-term governmentcontracts that are generally not seasonal in nature.   However, because a few large projects areoften responsible for a significant portion of AEM’s annual revenue, the levelof activity, initial project delays or gaps between projects can have asignificant impact on the revenue and earnings of a particular period.

 

Weborrowed $4.5 million on our line of credit to fund the cash portion of the AEMacquisition price and we made a $2.0 million equity infusion into AEMimmediately following the acquisition for working capital requirements.  The additional interest expense associatedwith this use of our line of credit has been included in our pro forma resultsfor 2008.

 

***ADVB Acquisition***

 

OnNovember 18, 2008, we entered into a Stock Purchase Agreement withcontrolling stockholders of Advanced Biotherapy, Inc. (“ADVB”), pursuantto which we agreed to acquire 90.8% of the outstanding capital stock of ADVB at$0.008625 per share in exchange for their shares of our common stock. Through ashort-form merger, we offered the remaining ADVB stockholders the sameconsideration for their common stock.  OnMarch 3, 2009, we completed the merger and acquired ADVB.  ADVB’s assets included approximately $7.4million of cash and an $800,000 note receivable.  ADVB’s assets also included a revolvingcredit note due from us, which had an outstanding balance of approximately$42,000 as of the closing. We have cancelled the revolving credit note.  We did not 

 

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continueto operate ADVB’s prior business and consider the transaction to have been insubstance an equity offering in which we issued shares of our common stock inreturn for approximately $8.2 million in cash and notes receivable.

 

***Public Offering***

 

OnSeptember 25, 2009, we completed an underwritten follow-on public offeringof our common stock, receiving $27,500,000 in gross proceeds less $1,650,000 inunderwriters’ discount and offering costs of $382,000.  On October 2, 2009, the Underwritersexercised their overallotment and purchased an additional 750,000 shares at$5.50 per share, less a discount of 6% for total net proceeds to the Company of$3,877,500.  Proceeds from the offeringwere used to repay a $2 million line of credit and $1.4 million in notespayable.  The balance of the proceedswill be used for other general corporate purposes.

 

**CriticalAccounting Policies and Estimates**

 

**The discussion and analysis ofour financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amount of assets and liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities at the date of ourfinancial statements. Actual results may differ from these estimates underdifferent assumptions or conditions. Critical accounting policies are definedas those that involve significant judgments and uncertainties, and potentiallyresult in materially different results under different assumptions andconditions. We believe that our most critical accounting policies are limitedto those described below. For a detailed discussion on the application of theseand other accounting policies, see Note 3 in the notes to our consolidatedfinancial statements.**

** **

***Use of Estimates***

 

Preparationof the consolidated financial statements in accordance with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions affecting the reported amounts of assets,liabilities, revenues and expenses and related contingent liabilities. On anon-going basis, we evaluate our estimates, including those related to revenues,bad debts, warranty accrual, income taxes and contingencies and litigation. Webase our estimates on historical experience and on various other assumptionsthat we believe are reasonable under the circumstances. Actual results maydiffer from these estimates under different assumptions or conditions.

 

***Revenue and Profit Recognition***

 

Werecognize our revenue when all four of the following criteria are met: (i) persuasiveevidence has been received that an arrangement exists; (ii) delivery ofthe products and/or services has occurred; (iii) the selling price isfixed or determinable; and (iv) collectability is reasonably assured. Inaddition, we follow the provisions of the SEC’s Staff Accounting Bulletin No. 104,*Revenue Recognition*, which sets forthguidelines in the timing of revenue recognition based upon factors such aspassage of title, installation, payments and client acceptance. Any amounts receivedprior to satisfying our revenue recognition criteria are recorded as deferredrevenue.

 

Historically,we have recognized revenue primarily on a completed contract basis. Under thecompleted contract method, revenue is recognized once the project issubstantially complete, resulting in some variability in revenue. This methodworks well with projects that are smaller and shorter in duration. AEM,however, recognizes, and will continue to recognize, all of its revenue on apercentage of completion basis.  AEM’sprojects generally are larger in terms of revenue and longer in duration;therefore, AEM recognizes revenue throughout the term of the project on acompletion method based on 

 

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thepercentage of costs incurred.   As aresult of the acquisition of AEM, we expect that the majority of our revenuewill be recognized on a percentage of completion basis.  Under both methods of revenue recognition,any anticipated losses on contracts are charged to operations as soon as theyare determinable.

 

***Allowance for Doubtful Accounts***

 

Wemaintain an allowance for doubtful accounts for estimated losses resulting fromthe inability of our clients to make required payments. The allowance islargely based upon specific knowledge of clients from whom collection isdetermined to be doubtful and our historical collection experience with suchclients. If the financial condition of our clients or the economic environmentin which they operate were to deteriorate, resulting in an inability to makepayments, or if our estimates of certain clients’ ability to pay are incorrect,additional allowances may be required. During 2009 we increased our allowanceby $304,000 and wrote off receivables of $145,000. As of December 31,2009, our allowance for doubtful accounts was approximately $322,000, or 1.7%of our outstanding accounts receivable.

 

***Amortization of Intangibles***

 

Weaccount for acquisitions of companies in accordance with the ASC 805.  We allocate the purchase price to tangibleassets and intangible assets based on their fair values, with the excess ofpurchase price amount being allocated to goodwill.  The determination of the fair values of theseintangible assets is based on a number of significant assumptions as determinedby us, including evaluations of the future income producing capabilities ofthese assets and related future expected cash flows or replacement cost of the asset.  We also make estimates about the useful livesof the acquired intangible assets. Should different conditions result in the determination that the valueof the acquired intangible assets has been impaired, we could incur write-downsof intangible assets, or changes in the estimation of useful lives of thoseintangible assets.  In accordance withASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized, butis subject to annual impairment testing which is discussed in greater detailbelow.

 

Intangibleassets included acquired technology, customer and contractual relationships,client backlog, non-competition agreements and trade names. Acquired technologywas initially recorded at fair value based on the estimated after tax cost toreplace the asset and is amortized over its estimated useful life on astraight-line basis.  Customer andcontractual relationships represent contractual and separable relationshipsthat we have with certain customers and partners.  These contractual relationships wereinitially recorded at their fair value based on the present value of expectedfuture cash flows and are amortized over their estimated useful life.  Non-competition agreements were initiallyrecorded based on the present value of potential profits that could be lost,should the individual initiate a competing enterprise, and are amortized overthe minimum term of the non-competition agreements.  Trade name intangible assets are initiallyrecorded at fair value based on the present value of the royalty payments thatwould need to be paid for the development and use of a comparable trade nameshould the name be unavailable to us. Trade name intangible assets are deemed to have an indeterminate lifeand are not amortized.

 

***Impairment Loss***

 

Weevaluate all of our long-lived assets, including intangible assets other thangoodwill and fixed assets, periodically for impairment in accordance with ASC360-10-35, Accounting for the Impairment or Disposal of Long-Lived Assets. Werecord impairment losses on long-lived assets used in operations when eventsand circumstances indicate that the assets might be impaired and theundiscounted cash flows estimated to be generated by those assets are less thanthe carrying amount of those items. Our cash flow estimates are based onhistorical results adjusted to reflect our best estimate of future market and 

 

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operatingconditions. The net carrying value of assets not recoverable is reduced to fairvalue. Our estimates of fair value represent our best estimate based onindustry trends and reference to market rates and transactions.  During 2009, we determined that the Parketrade name was impaired as a result of our decision to operate the businessunder the Lime Energy name.  As a resultwe incurred an impairment loss of $1.6 million, net of the tax benefit, duringthe fourth quarter of 2009.

 

***Goodwill***

 

Wehave made acquisitions in the past that included a significant amount ofgoodwill and other intangible assets. In accordance with ASC 350, goodwill issubject to an annual (or under certain circumstances more frequent) impairmenttest based on its estimated fair value. Estimated fair value is less than valuebased on undiscounted operating earnings because fair value estimates include adiscount factor in valuing future cash flows. Many assumptions and estimates underlie the determination of animpairment loss, including economic and competitive conditions, operating costsand efficiencies. Another estimate using different, but still reasonable,assumptions could produce a significantly different result.

 

Duringthe fourth quarter of 2007 we updated our projections for portions of theEnergy Efficiency Services and Energy Technology businesses and estimated thefair value based on the discounted current value of the estimated future cashflows. We then compared the calculated fair values of the reporting units totheir carrying values. The analysis did not identify any impairment for theEnergy Efficiency Services business, but did indicate that the value of theEnergy Technology’s goodwill was impaired. The decline in the fair value of theEnergy Technology segment was primarily the result of lower than expected salesof the eMAC line of HVAC controllers, in large part due to delays in a projectto replace certain obsolete eMAC components. As a result of the decline in thefair value, we recorded an impairment loss of $4.2 million during the fourthquarter of 2007.

 

Duringthe fourth quarters of 2008 we updated our analyses for the Energy EfficiencyServices business and concluded that the implied fair value of the businessesbased on the discounted current value of the estimated future cash flowsexceeded the carrying value, indicating that the goodwill was not impaired.

 

2009was the first period that we tested the goodwill associated with the AEMpurchase for impairment.  For goodwilltesting purposes, we analyzed the goodwill associated with the AEM acquisition andour C&I business separately.  Thegoodwill impairment analysis indicated there was no goodwill impairment as thefair value of the C&I and AEM testing units exceeded their carrying values.  We considered various factors in determiningthe fair value of the testing units, including discounted cash flows fromprojected earnings, values for comparable companies and the market price of ourcommon stock. We will continue to monitor for any impairment indicators such asunderperformance of projected earnings, net book value compared to marketcapitalization, declining stock price and significant adverse economic andindustry trends.  In the event thateither testing unit does not achieve projected results, or, as the result of changesin facts of circumstances, we could incur a goodwill impairment charge in afuture period.

 

***Stock-Based Compensation***

 

Wehave a stock incentive plan that provides for stock-based employeecompensation, including the granting of stock options and shares of restrictedstock, to certain key employees. The plan is more fully described in Note 25 toour consolidated financial statements. Effective January 1, 2006, weadopted ASC 718, Share-Based Payment (SFAS 123(R)), which requires that werecord stock compensation 

 

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expensefor equity-based awards granted, including stock options and restricted stockunit grants, over the service period of the equity-based award based on thefair value of the award at the date of grant. We recognized $1.7 million, $3.8million and $3.7 million of stock compensation related to employee optionsexpense during 2009, 2008 and 2007, respectively.

 

**Results of Operations**

** **

*Revenue*

 

Wegenerate the majority of our revenue from the sale of our services as well asthe sale of our proprietary products and the products that we purchase andresell to our clients. All of our revenue is earned in the United States.

 

Ourrevenue includes charges for our engineering, installation and/or projectmanagement services and the materials we purchase and resell to our clients.The substantial majority of our revenue is derived from fixed-price contracts, althoughwe occasionally bill on a time-and-materials basis. Under fixed-pricecontracts, we bill our clients for each project once the project is completedor throughout the project as specified in the contract. Undertime-and-materials arrangements, we bill our clients on an hourly basis withmaterial costs and other reimbursable expenses passed through and recognized asrevenue. Historically, our projects have typically been completed within one tothree weeks, with the exception of a few multi-month projects. With theaddition of AEM in June 2008, the number of multi-month projects haveincreased significantly as, historically, AEM’s projects have typically takenfour to eight months to complete.

 

*Gross Profit*

 

Grossprofit equals our revenue less costs of sales. The cost of sales consistsprimarily of materials, our internal labor, including engineering, and the costof subcontracted labor.

 

Gross profit is a key metric that we useto examine our performance. Gross profit depends in part on the volume and mixof products and services that we sell during any given period. A portion of ourexpenses, such as the cost of certain salaried project management andengineering personnel, are relatively fixed. Accordingly, an increase in thevolume of sales will generally result in an increase to our margins since thesefixed expenses are not expected to increase proportionately with sales. Ourbusiness is also seasonal, as such, our margins will vary with seasonal changesin our revenue due to the fixed nature of some of our costs.

 

*Selling, General andAdministrative Expenses*

 

Selling,general and administrative expenses (“SG&A”) include the followingcomponents:

 

·                  direct labor and commissioncosts related to our employee sales force;

 

·                  costs of our non-productionmanagement, supervisory and staff salaries and employee benefits, including thecosts of stock-based compensation;

 

·                  costs related to insurance,travel and entertainment, office supplies and utilities;

 

·                  costs related to marketingand advertising our products;

 

·                  legal and accountingexpenses; and

 

·                  costs related toadministrative functions that serve to support our existing businesses, as wellas to provide the infrastructure for future growth.

 

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*Amortization of Intangibles*

 

Weincur expenses related to the amortization of identifiable assets that we havecapitalized in connection with our acquisitions.

 

*Other Expense*

 

Otherexpense consists of interest expense, net of interest earned on ourinvestments. Interest expense represents the interest costs and fees associatedwith our subordinated convertible term notes (including amortization of therelated debt discount and issuance costs), our lines of credit, the mortgage onour headquarters building, notes payable and various vehicle loans. Interestincome includes earnings on our invested cash balances and amortization of thediscount on our long term receivables. We offer certain customers extended payment terms.  When we record these receivables we arerequired to discount them using a market rate of interest and amortize the discountover the term of the receivable.  Thisamortization is recognized as interest income.

 

*DividendExpense*

 

Dividendexpense includes dividends accrued on our preferred stock and charges fornon-cash deemed dividends.

 

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**Twelve-Month Period Ended December 31, 2009**

**Compared With the**

**Twelve-Month Period Ended December 31, 2008**

 

***Consolidated Results***

 
| ** **                                 | ** ** | **Twelve  Months Ended** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **                       | ** ** | ** **                      | ** ** |
|--------------------------------------------|------------|--------------------------|------------|----------------|------------|--------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | ** **               | ** ** | **12/31/2008** | ** ** | **12/31/2008**     | ** ** | **Change  from 2008 Historical** | ** ** | **Change  from 2008 Pro-forma** | ** ** |
| ** **                                 | ** ** | **12/31/2009**           | ** ** | **Historical** | ** ** | **Pro-forma  (1)** | ** ** | **$**                            | ** ** | **%**                           | ** ** | **$ ** | ** ** | **%** | ** ** |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Revenue                                    |       | $                        | 70,802     |           | $          | 54,975             |       | $                                | 65,112     |                            | $          | 15,827 |   | 28.8 | % | $ | 5,690 |   | 8.7 | % |
| Cost  of sales                             |       | 57,192                   |       | 43,281         |       | 51,682             |       | 13,911                           |       | 32.1                            | %          | 5,510 |   | 10.7 | % |
| Gross  profit                              |       | 13,610                   |       | 11,694         |       | 13,430             |       | 1,916                            |       | 16.4                            | %          | 180 |   | 1.3 | % |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Selling,  general and administrative       |       | 23,940                   |       | 18,100         |       | 22,306             |       | 5,840                            |       | 32.3                            | %          | 1,634 |   | 7.3 | % |
| Amortization  of intangibles               |       | 1,221                    |       | 1,568          |       | 2,129              |       | (347                             | )          | -22.1                           | %          | (908 | ) | -42.6 | % |
| Impairment  loss                           |       | 2,652                    |       | —         |       | —             |       | 2,652                            |       | —                          |       | 2,652 |   | — |   |
| Operating  loss                            |       | (14,203                  | )          | (7,974         | )          | (11,005            | )          | (6,229                           | )          | 78.1                            | %          | (3,198 | ) | 29.1 | % |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Total  other income (expense)              |       | (3,073                   | )          | (2,581         | )          | (3,393             | )          | (492                             | )          | 19.1                            | %          | 320 |   | -9.4 | % |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Loss  from continuing operations           |       | (17,276                  | )          | (10,555        | )          | (14,398            | )          | (6,721                           | )          | 63.7                            | %          | (2,878 | ) | 20.0 | % |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Loss  from discontinued operations         |       | (1,786                   | )          | (2,480         | )          | (2,480             | )          | 694                              |       | -28.0                           | %          | 694 |   | -28.0 | % |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Loss  before income tax benefit            |       | (19,062                  | )          | (13,035        | )          | (16,878            | )          | (6,027                           | )          | 46.2                            | %          | (2,184 | ) | 12.9 | % |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Income  tax benefit                        |       | 1,034                    |       | —         |       | —             |       | 1,034                            |       | —                          |       | 1,034 |   | — |   |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Net  Loss                                  |       | (18,028                  | )          | (13,035        | )          | (16,878            | )          | (4,993                           | )          | 38.3                            | %          | (1,150 | ) | 6.8 | % |
|                                       |       |                     |       |           |       |               |       |                             |       |                            |       |   |   |   |   |
| Preferred  Stock Dividends                 |       | (1,499                   | )          | (288           | )          | (288               | )          | (1,211                           | )          | 420.5                           | %          | (1,211 | ) | 420.5 | % |
| Net  Loss Available to Common Shareholders |       | $                        | (19,527    | )              | $          | (13,323            | )          | $                                | (17,166    | )                               | $          | (6,204 | ) | 46.6 | % | $ | (2,361 | ) | 13.8 | % |

 

----

(1) Assumes the acquisition of Applied EnergyManagement had been completed on January 1, 2008.

 

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Thefollowing table presents the percentage of certain items to revenue:

 
| ** **                                 | ** ** | **Twelve  Months Ended** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | ** **               | ** ** | **12/31/2008** | ** ** | **12/31/2008** | ** ** |
| ** **                                 | ** ** | **12/31/2009**           | ** ** | **Historical** | ** ** | **Pro-forma (1)** | ** ** |
|                                       |       |                     |       |   |   |   |   |
| Revenue                                    |       | 100.0                    | %          | 100.0 | % | 100.0 | % |
| Cost  of sales                             |       | 80.8                     | %          | 78.7 | % | 79.4 | % |
| Gross  profit                              |       | 19.2                     | %          | 21.3 | % | 20.6 | % |
|                                       |       |                     |       |   |   |   |   |
| Selling,  general and administrative       |       | 33.8                     | %          | 32.9 | % | 34.3 | % |
| Amortization  of intangibles               |       | 1.7                      | %          | 2.9 | % | 3.3 | % |
| Impairment  loss                           |       | 3.7                      | %          | 0.0 | % | 0.0 | % |
| Operating  loss                            |       | -20.1                    | %          | -14.5 | % | -16.9 | % |
|                                       |       |                     |       |   |   |   |   |
| Total  other income (expense)              |       | -4.3                     | %          | -4.7 | % | -5.2 | % |
|                                       |       |                     |       |   |   |   |   |
| Loss  from continuing operations           |       | -24.4                    | %          | -19.2 | % | -22.1 | % |
|                                       |       |                     |       |   |   |   |   |
| Loss  from discontinued operations         |       | -2.5                     | %          | -4.5 | % | -3.8 | % |
|                                       |       |                     |       |   |   |   |   |
| Loss  before income tax benefit            |       | -26.9                    | %          | -23.7 | % | -25.9 | % |
| Income  tax benefit                        |       | 1.5                      | %          | 0.0 | % | 0.0 | % |
|                                       |       |                     |       |   |   |   |   |
| Net  Loss                                  |       | -25.5                    | %          | -23.7 | % | -25.9 | % |
|                                       |       |                     |       |   |   |   |   |
| Preferred  Stock Dividends                 |       | -2.1                     | %          | -0.5 | % | -0.4 | % |
|                                       |       |                     |       |   |   |   |   |
| Net  Loss Available to Common Shareholders |       | -27.6                    | %          | -24.2 | % | -26.4 | % |

 

----

(1) Assumes the acquisition of Applied EnergyManagement had been completed on January 1, 2008.

 

***Revenue***

 

**Our consolidated revenue for the twelve-month periodended December 31, 2009 increased $15.8 million or 28.8% over the $55.0million recognized during the twelve-month period ended 2008.  The increase was primarily due to theinclusion of a full twelve months of revenue from AEM and increased revenuederived from our public sector markets. Revenue derived from our commercial and industrial markets was flat fromthe prior year.  Our revenue increased$5.7 million or 8.7% when compared to our pro-forma results for 2008.  This increase again was the result of highersales in our public sector markets.**

 

**Uncertainty on the part of our Commercial &Industrial (C&I) customers related to the economy impacted our results inthe C&I market during 2009.  Webelieve that some of this uncertainty has begun to ease and we have seen someprojects that were previously on hold begin to move forward.  If things continue to improve as we currentlybelieve they will, we expect that we will see higher revenue from C&Icustomers during 2010.  Revenue from ourpublic sector customers was negatively impacted late in 2009 by delays in therelease of funds under the American Recovery and Reinvestment Act of 2009(commonly referred to as the stimulus). While the timing of the release of these funds is outside of ourcontrol, we anticipate they should begin to be released during the third orfourth quarter of 2010.  To the extentthat they are, we expect that our revenue from public sector clients will beflat to up slightly from 2009 levels. During 2009 we began two new initiatives; utility program management anddirect federal work under the FRR contract. Neither of these new initiatives contributed materially to 2009 revenue,but we believe that they could represent as much as 20% to 30% of our 2010revenue.  The combination of the ramp upto the new initiatives and improving conditions in our C&I and publicsector markets is**

 

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**expectedto result in higher revenue in 2010 that is heavily weighted to the third andfourth quarters of the year.**

 

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***Gross Profit***

 

**Our gross profit increased $1.9 million or 16.4% to$13.6 million during 2009 from $11.7 million during 2008 and $0.2 million or1.3% from pro-forma 2008 results.    Ourgross profit margin was 19.2% during 2009 compared to 21.3% for 2008 on a historicalbasis and $20.6% on a pro-forma basis. The decline in our gross margin was due to a change in the mix of ourbusiness that included a larger portion of lower margin jobs.  Our public sector projects and large C&Iprojects typically carry lower margins than small and mid-sized C&Iprojects, but these public sector and large C&I projects also typicallyhave general higher revenue per associated selling expense.   The gross margins earned from our utility programmanagement initiative are expected to approximate our historical consolidatedgross margins, whereas the gross margins from FRR projects will be lower thanthe gross margins earned from our other businesses.  The lower FRR gross margins are offset bylow, largely fixed SG&A for this initiative, thus FRR expected tocontribute to overall profitability at relatively low revenue levels.  We believe that our consolidated grossmargins will increase slightly during 2010 as we spread our fixed costs overhigher revenue.  Our gross margins willvary throughout the year depending on the mix of revenue and overall revenuelevel, with the highest margins expected in the third and fourth quarters whenrevenues peak.**

 

***Selling General &Administrative Expense***

 

**Our selling, general and administrative expenses increased$5.8 million or 32.3% during 2009 to $23.9 million from $18.1 million for2008.  The majority of the increase inour SG&A was due to the inclusion of twelve months of expense from AEM,which was acquired in June 2008. Our SG&A expense increased $1.6 million or 7.3% when compared to2008 pro-forma SG&A.  Our SG&A asa percent of revenue increased slightly during 2009 to 33.8% from 32.9% in 2008on a historical basis, but declined from 34.3% on a pro-forma basis.  The increase in SG&A expense over pro-formawas primarily the result of the investment in the utility program managementand FRR initiatives during 2009.  Neitherof these initiatives had material revenue during 2009, but both are expected tobe significant contributors to 2010 revenue. The 2009 SG&A expense also included a one-time reserve of $300,000for a legal settlement.   Other changesin SG&A included a $1.9 million decline in our share based compensationexpense, which was largely offset by increases in wages, outside services,franchise taxes and rent expense.  We donot intend to increase our SG&A headcount significantly, if at all, in2010, thus expect a much smaller increase in wage expense for the year.  A significant portion of the increase inoutside services was related to implementation of a new accounting system atAEM and a new corporate email system, neither of which will require the samelevel of expenditures in 2010.  Inaddition, our stockholders authorized a reduction in our authorized shares ofcommon stock at our 2009 annual meeting, which will reduce our franchise taxexpense during 2010.  Overall, we expectour SG&A expense will increase moderately during 2010 due primarily to theutility program management and FRR initiatives, but we expect our SG&A as apercent of our revenue to be lower in 2010 than it was in 2009.**

 

***Amortization of Intangibles***

 

Amortization expense declined $347,000, or 22.1%, to $1.2 millionduring 2009 from $1.6 million in 2008. Amortization expense has declined as certain intangible assets associatedwith past acquisitions have become fully amortized.  Absent any new acquisitions, we expect ouramortization expense will decline to $589,000 in 2010 and $613,000 in 2011.

 

***Impairment Loss***

 

During 2009 we determined that the Parke trade name was impaired due toour decision to operate the business under the Lime Energy name.  As a result, we reduced the carrying value ofthis intangible asset to $0, incurring a $2.6 million impairment loss duringthe fourth quarter of 2009.  This losswas partially offset by the reversal of a $1 million deferred tax liabilityassociated with this indefinite-lived asset.

 

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***Other Income (Expense)***

 

Other non-operatingexpense increased $492,000 to $3,073,000 in 2009 from $2,581,000 in 2008.  Interest expense increased $542,000 during2009 to $3,210,000 from $2,668,000 in 2008.  The components of interest expense for theyears ended December 31, 2009 and 2008 are as follows (in thousands):

 
| ** **                                                | ** ** | **Year  ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Line of credit                                            | ** ** | **$**                             | **51**     | ** ** | **$** | **953** | ** ** |
| Note payable                                              | ** ** | **76**                            | ** ** | **67** | ** ** |
| Mortgage                                                  | ** ** | **19**                            | ** ** | **27** | ** ** |
| Subordinated convertible notes                            | ** ** | **329**                           | ** ** | **500** | ** ** |
| Other                                                     | ** ** | **73**                            | ** ** | **117** | ** ** |
| Total  contractual interest                               | ** ** | **548**                           | ** ** | **1,664** | ** ** |
| Amortization  of deferred issuancecosts and debt discount | ** ** | **1,724**                         | ** ** | **1,004** | ** ** |
| Beneficial value of changein conversion  price            | ** ** | **938**                           | ** ** | **—** | ** ** |
| Total Interest Expense                                    | ** ** | **$**                             | **3,210**  | ** ** | **$** | **2,668** | ** ** |

 

Totalcontractual interest expense (the interest on outstanding loan balances)decreased $1,116,000 or 67.1% from $1,664,000 in 2008 to $548,000 in 2009.  The decline in interest expense was primarilydue to reduced use of our line of credit and the conversion of the subordinatednotes.  In November 2008, $14.5 millionoutstanding on the line of credit was converted to common stock and the line ofcredit was terminated in March 2009 when we acquired Advanced Biotherapy, Inc.  The subordinated notes were converted tocommon stock during the third quarter of 2009.

 

Amortizationof deferred issuance costs and debt discount increased $720,000 to $1,724,000in 2009 from $1,004,000 in 2008.  The2009 expense included $1,411,000 of unamortized debt discount of which $756,000and $2,000 of deferred issuance costs were expensed when the subordinated notesconverted to common stock during the third quarter of 2009.

 

InAugust 2009 we issued warrants in connection with the new bridge line ofcredit.  These warrants were valued at$309,000 using a trinomial tree option pricing model and the value was recordedas a debt discount, which we began to amortize over the schedule term of thefacility.  We terminated the bridge lineof credit in October 2009 following the completion of a follow-on offeringof common stock, at which time we expensed the remaining unamortized debtdiscount.

 

Weused a portion of the proceeds from the 2009 follow-on offering to repay mostof our remaining outstanding debt.  As ofDecember 31, 2009 our outstanding debt totaled $731,000, which wascomprised a mortgage and various vehicle loans, and there was no remainingunamortized debt discount or deferred issuance costs.  We expect to incur approximately $26,000 ofinterest expense during 2010 on the debt that was outstanding as of December 31,2009.

 

Ourinterest income increased $50,000 to $137,000 during 2009 from $87,000 for2008.  Approximately $113,000 of the 2009interest income was amortization of the discount on our long-term receivables,compared to $39,000 of amortization recognized on these receivables during2008.

 

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***Discontinued Operations***

 

Ourloss from discontinued operations declined $694,000 or 28% to $1,786,000 in2009 from $2,480,000 in 2008. Discontinued Operations represents the results from our EnergyTechnology business, which we sold in August 2009.

 

***Dividend Expense.***

 

Dividend expense increased $1,211,000 during 2009 to $1,499,000 from$288,000 during 2008.  The dividendexpense was related to our Series A-1 preferred stock which was createdwhen $14.5 million of our line of credit was converted into shares of the Series A-1on November 14, 2008.  The Series A-1was converted into common stock on August 10, 2009, at which time westopped accruing dividends.  There wereno shares of preferred stock outstanding as of December 31, 2009.

 

**Twelve-Month Period Ended December 31, 2008**

**Compared With the**

**Twelve-Month Period Ended December 31, 2007**

 

***Consolidated Results***

 
| ** **                                 | ** ** | **Twelve  Months Ended** | ** ** | **Change**     | ** ** |
|--------------------------------------------|------------|--------------------------|------------|----------------|------------|
| ** **                                 | ** ** | **12/31/2008**           | ** ** | **12/31/2007** | ** ** | **$** | ** ** | **%** | ** ** |
|                                       |       |                     |       |           |       |   |   |   |   |
| Revenue                                    |       | $                        | 54,975     |           | $          | 16,384 |   | $ | 38,591 |   | 235.5 | % |
| Cost  of sales                             |       | 43,281                   |       | 12,756         |       | 30,525 |   | 239.3 | % |
| Gross  profit                              |       | 11,694                   |       | 3,628          |       | 8,066 |   | 222.3 | % |
|                                       |       |                     |       |           |       |   |   |   |   |
| Selling,  general and administrative       |       | 18,100                   |       | 9,259          |       | 8,841 |   | 95.5 | % |
| Amortization  of intangibles               |       | 1,568                    |       | 1,487          |       | 81 |   | 5.4 | % |
| Operating  loss                            |       | (7,974                   | )          | (7,118         | )          | (856 | ) | 12.0 | % |
|                                       |       |                     |       |           |       |   |   |   |   |
| Total  other income (expense)              |       | (2,581                   | )          | (668           | )          | (1,913 | ) | 286.4 | % |
|                                       |       |                     |       |           |       |   |   |   |   |
| Loss  from continuing operations           |       | (10,555                  | )          | (7,786         | )          | (2,769 | ) | 35.6 | % |
|                                       |       |                     |       |           |       |   |   |   |   |
| Loss  from discontinued operations         |       | (2,480                   | )          | (7,767         | )          | 5,287 |   | -68.1 | % |
|                                       |       |                     |       |           |       |   |   |   |   |
| Net  Loss                                  |       | (13,035                  | )          | (15,553        | )          | 2,518 |   | -16.2 | % |
|                                       |       |                     |       |           |       |   |   |   |   |
| Preferred  Stock Dividends                 |       | (288                     | )          | —         |       | (288 | ) | — |   |
| Net Loss  Available to Common Shareholders |       | $                        | (13,323    | )              | $          | (15,553 | ) | $ | 2,230 |   | -14.3 | % |

 

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Thefollowing table presents the percentage of certain items to revenue:

 
| ** **                                 | ** ** | **Twelve  Months Ended** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **12/31/2008**           | ** ** | **12/31/2007** | ** ** |
|                                       |       |                     |       |   |   |
| Revenue                                    |       | 100.0                    | %          | 100.0 | % |
| Cost  of sales                             |       | 78.7                     | %          | 77.9 | % |
| Gross  profit                              |       | 21.3                     | %          | 22.1 | % |
|                                       |       |                     |       |   |   |
| Selling,  general and administrative       |       | 32.9                     | %          | 56.5 | % |
| Amortization  of intangibles               |       | 2.9                      | %          | 9.1 | % |
| Operating  loss                            |       | -14.5                    | %          | -43.4 | % |
|                                       |       |                     |       |   |   |
| Total  other income (expense)              |       | -4.7                     | %          | -4.1 | % |
|                                       |       |                     |       |   |   |
| Loss  from continuing operations           |       | -19.2                    | %          | -47.5 | % |
|                                       |       |                     |       |   |   |
| Loss  from discontinued operations         |       | -4.5                     | %          | -47.4 | % |
|                                       |       |                     |       |   |   |
| Net  Loss                                  |       | -23.7                    | %          | -94.9 | % |
|                                       |       |                     |       |   |   |
| Preferred  Stock Dividends                 |       | -0.5                     | %          | 0.0 | % |
| Net  Loss Available to Common Shareholders |       | -24.2                    | %          | -94.9 | % |

 

***Revenue***

 

Ourrevenue during the twelve month period ended December 31, 2008 was $55.0million, a $38.6 million or 235.5% increase over the $16.4 million recordedduring the twelve month period ended December 31, 2007.  Revenue generated by AEM, which was acquiredin June 2008, was responsible for approximately $31 million of theincrease in 2008 revenue. The balance of the increase was the result of highersales from our existing businesses due largely to increased productivity fromour sales force.

 

Ifwe included AEM’s revenue for the first five months of 2008 and for all of2007, our total revenue increased $7.8 million, or 13.7%, to $65.1 million in2008 from $57.3 million in 2007. This increase was the result of higher salesdue largely to increased productivity from our sales force.

 

***Gross Profit***

 

Ourgross profit increased $8.1 million or 222.3% to $11.7 million during 2008 from$3.6 million earned in 2007, while our gross margin declined to 21.3% during2008 from 22.1% in 2007.  The increase inour gross profit was directly related to the increase in our sales during theyear.  The decline in our gross marginwas attributable to a change in the mix of our sales revenue and theacquisition of AEM.

 

Ifwe included AEM’s gross profit for the first five months of 2008 and for all of2007, our gross profit increased $1 million, or 7.9%, to $13.4 million in 2008from $12.4 million in 2007, while our gross profit margin declined from 21.7%in 2007 to 20.6% in 2008. The increase in gross profit was the result of higherrevenue. The decline in gross margin was due to a change in the mix of sales.

 

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***Selling General &Administrative Expense***

 

**Our selling, general and administrative expense was$18.1 million during 2008, an increase of $8.8 million or 95.5% when comparedto $9.3 million in 2007.  SG&A as apercentage of revenue declined from 56.5% in 2007 to 32.9% in 2008.  The acquisition of AEM was responsible for approximately$6.2 million of the increase in our SG&A expense, while the balance of theincrease was related to an increase in personnel related costs including labor,rent, travel, utilities and outside sales commissions.  The higher personnel costs were the result ofinclusion of 2007 acquisitions for a full year and new hires in sales andadministration.  These increases werepartially offset by the elimination of $268,000 of one-time registrationpenalties included in the 2007 SG&A.**

 

Ifwe included AEM’s SG&A expense for the first five months of 2008 and forall of 2007, our SG&A expense increased $3.8 million or 20.6%, to $22.3million in 2008 from $18.5 million in 2007, while SG&A as a percentage ofrevenue increased from 32.3% in 2007 to 34.3% in 2008. The increase in SG&Aexpense was the result of an increase in personnel related costs includinglabor, rent, travel, utilities, outside sales commissions and share basedcompensation. The higher personnel costs were the result of inclusion of 2007acquisitions for a full year and new hires in sales and administration. Theseincreases were partially offset by the elimination of $268,000 of one-timeregistration penalties included in the 2007 SG&A.

 

***Amortization of Intangibles***

 

Expense associated withthe amortization of intangible assets increased $81,000, or 5.4% to $1.6million in 2008, from $1.5 million in 2007.  Amortization expense related to our 2006 and 2007 acquisitions declinedapproximately $1.1 million as the intangibles associated with theseacquisitions have become fully amortized. This decline was offset by approximately $1.2 million of amortizationexpense on AEM’s intangibles recognized during 2008.

 

***Other Income (Expense)***

 

Other non-operatingexpense increased $1.9 million to $2.6 million in 2008 from $668,000 in2007.  Interest expense increased $1.7million to $2.7 million in 2008 from $1 million in 2007.    The components of interest expense for theyears ended December 31, 2008 and 2007 are as follows (in thousands):

 
| ** **                                                | ** ** | **Year  ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| Line of credit                                            | ** ** | **$**                             | **953**    | ** ** | **$** | **—** | ** ** |
| Note payable                                              | ** ** | **67**                            | ** ** | **—** | ** ** |
| Mortgage                                                  | ** ** | **27**                            | ** ** | **44** | ** ** |
| Subordinated convertible notes                            | ** ** | **500**                           | ** ** | **294** | ** ** |
| Other                                                     | ** ** | **117**                           | ** ** | **4** | ** ** |
| Total  contractual interest                               | ** ** | **1,664**                         | ** ** | **342** | ** ** |
| Amortization  of deferred issuancecosts and debt discount | ** ** | **1,004**                         | ** ** | **593** | ** ** |
| Total Interest Expense                                    | ** ** | **$**                             | **2,668**  | ** ** | **$** | **935** | ** ** |

 

Totalcontractual interest expense (the interest on outstanding loan balances)increased $1.3 million to $17 million in 2008 from $342,000 in 2007.  Contributing to the increase was the use ofour line of credit to fund the acquisition of AEM and higher working capital,the inclusion of a full 12 months of interest on the subordinated convertiblenotes, which were issued in late May 2007, interest on new vehicle loansand the interest on the debt we assumed as part of the AEM acquisition.  Amortization of 

 

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deferredissuance costs and debt discount associated with the subordinated convertiblenotes increased due to the inclusion of a full year of expense during 2008.

 

Interestincome declined $180,000, or 67% to $87,000 in 2008 from $267,000 in 2007.  The decline was the result of lower averageinvested cash balances and lower interest rates.

 

***Discontinued Operations***

 

Ourloss from discontinued operations declined $5.3 million or 68% to $2.5 millionin 2008 from $7.8 million in 2007.  The2007 loss included an impairment charge of $4.2 million related to our decisionto write-off the carrying value of goodwill associated the Energy Technology business.  Reductions in research and development andpayroll also contributed to the decline in the loss for 2008.

 

***Dividend Expense.***

 

InNovember 2008 we converted $14.7 million on a revolving credit note toshares of Series A-1 preferred stock. The dividend expense related to this new issue of preferred stock was$288,000.  There was no dividend expenseduring 2007.

 

**Liquidity and Capital Resources**

 

***Overview***

 

Asof December 31, 2009, we had cash and cash equivalents of $23.4 millionincluding restricted cash of $500,000, compared to cash and cash equivalents of$3.7 million on December 31, 2008. Our contractual obligations as of December 31, 2009 totaled $3.5million, and include: $748,000 of debt (including expected interest payments of$17,000); and $2.8 million in lease obligations.

 

Ourprincipal cash requirements are for operating expenses, including employeecosts, the cost of outside services including those providing accounting,legal, engineering and electrical, mechanical and plumbing contractingservices, and the funding of inventory and accounts receivable, and capitalexpenditures. We have financed our operations since inception primarily throughthe private placement of our common and preferred stock, as well as throughvarious forms of secured debt.

 

Thefollowing table summarizes, for the periods indicated, selected items in ourconsolidated statement of cash flows (in thousands):

 
| **Year  ended December 31**                      | ** ** | **2009**   | ** **  | **2008**   | ** ** | **2007**    | ** ** |
|-------------------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|
|                                                  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  |       |
| Net cash used in operating activities                 | ** ** | **$**      | **(12,707** | **)**      | **$**      | **(13,444** | **)**      | **$** | **(6,774** | ) |
| Net cash used in investing activities                 | ** ** | **(1,914** | **)**       | **(4,204** | **)**      | **(1,218**  | )          |
| Net cash provided by financing activities             | ** ** | **33,757** | ** **  | **16,601** | ** ** | **8,109**   | ** ** |
|                                                  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** |
| Net Increase (Decrease) in Cash and Cash  Equivalents | ** ** | **19,136** | ** **  | **(1,047** | **)**      | **117**     | ** ** |
|                                                  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** |
| Cash and Cash Equivalents, at beginning of period     | ** ** | **3,734**  | ** **  | **4,781**  | ** ** | **4,664**   | ** ** |
|                                                  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** |
| Cash and Cash Equivalents, at end of period           | ** ** | **$**      | **22,870**  | ** ** | **$**      | **3,734**   | ** ** | **$** | **4,781** | ** ** |

 

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**2009Compared to 2008**

 

Netcash increased $19.1 million during 2009 compared to a decline of $1.0 millionduring 2008.

 

*OperatingActivities*

 

Operatingactivities consumed $12.7 million during 2009 and $13.4 million during 2008.

 

Whethercash is consumed or generated by operating activities is a function of theprofitability of our operations and changes in working capital.  To get a better understanding of cash sourcesand uses, we like to split the cash used or provided by operating activitiesinto two pieces: the cash consumed (or generated) by operating activitiesbefore changes in working capital; and the cash consumed (or generated) fromchanges in working capital.

 

During2009 the cash consumed by operating activities before changes in workingcapital was $9.7 million, a $4.6 or 91% increase over the $5.1 million consumedduring 2008.  The increase was the resultof higher cash SG&A expense during 2009 resulting from the inclusion of afull twelve months of expense from AEM, the costs related to the utilityprogram management and FRR initiatives which were launched during 2009, higherwages due to headcount additions, and higher franchise tax expense, outside servicesand rents.  This was partially offset byan increase in our gross profit during 2009. We anticipate that the cash SG&A expense will grow at a much lowerrate than our revenue and gross profit during 2010 resulting in a significantimprovement in the cash consumed by operating activities before changes inworking capital.

 

Changesin working capital consumed $3.0 million during 2009, a decline of $5.4 millionor 64% from the $8.4 million consumed during 2008.  This improvement was due to increased receivablesturnover and a lower and flatter seasonal sales peak during 2009 than the oneexperienced during 2008.  We expect ourworking capital requirements to grow as our revenue continues to increase.  However, the utility program management andFRR initiatives are both expected to be less working capital intensive than ourother existing businesses, therefore we expect that our working capitalrequirements will not grow as fast as our total revenue in future periods asthese two initiatives begin to represent a larger portion of our overallrevenue.

 

*InvestingActivities*

 

Thecash consumed by investing activities declined $2.3 million to $1.9 millionduring 2009 from $4.2 million during 2008. Cash used for acquisitions declined $2.8 million to $1 million during2009, compared to $3.8 million used during 2008.  During 2009 we made an earn-out payment tothe former stockholders of AEM and we acquired the FRR contract.  Capital expenditures declined $25,000 during2009 to $378,000 from $403,000 during 2008. Our capital expenditures during both years were for constructionvehicles, primarily vans, and office equipment. During 2009 we received $11,000 in proceeds from the sale of certainfixed assets compared to receiving $3,000 during 2008.

 

*FinancingActivities*

 

Wegenerated $33.8 million from financing activities during 2009, compared togenerating $16.6 million during 2008.  Wecompleted three offerings of our common stock, raising gross proceeds of $42.3million.  The proceeds from theseofferings were partially offset by $3.1 million in offering related costs.  We used $4.0 million during 2009 to repay ourline of credit and $1.6 million to repay other notes.  We also received $91,000 from the issuance ofshares under our Employee Stock Purchase Plan, $45,000 on the exercise ofcertain options and warrants and $27,000 through the financing of vehiclepurchases.

 

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**2008Compared to 2007**

 

Netcash declined $1.0 million during 2008 as compared to increasing $117,000during 2007.

 

*OperatingActivities*

 

Operatingactivities consumed $13.4 million during 2008 as compared to consuming $6.8million during 2007.

 

Thecash consumed by operating activities before changes in working capitalincreased $1.3 million or 32% to $5.1 million during 2008 as compared to $3.8million during 2007.  Our operating loss,excluding non-cash charges (depreciation, amortization, share-basedcompensation and impairment losses) declined $646,000 or 14% to $4.2 millionduring 2008 from $4.8 million in 2007 due to increased sales and reducedSG&A expense as a percentage of revenue. This was more than offset by increased interest expense resulting fromborrowings under a new line of credit to fund the acquisition of AEM andincreased working capital.

 

Changesin working capital consumed $8.4 million during 2008, an increase of $5.5million or 186% from the $2.9 million consumed n 2007.  The increase in working capital was largelythe result of a 194% increase in revenue during 2008.

 

*InvestingActivities*

 

Cashconsumed in investing activities increased $3.0 million or 245% to $4.2 millionduring 2008 from $1.2 million in 2007. Cash used for acquisitions increased $3.1 million to $3.8 million during2008 from $704,000.  During 2008 weacquired AEM, while in 2007 we acquired Texas Energy Products and PreferredLighting.  The cash used to fund capitalexpenditures declined $111,000 or 22% to $403,000 in 2008 from $514,000 in2007.  2008 capital investments wereprimarily for delivery/service vehicles while 2007 capital investments includedthe purchase of delivery/service vehicles and a new accounting system andrelated hardware.

 

*FinancingActivities*

 

Netcash generated by financing activities increased $8.5 million to $16.6 millionin 2008 from $8.1 million during 2007. Early in 2008 we began to work with an investment bank on a public saleof shares of our common stock.  Thisoffering was put on hold in May 2008 when the opportunity to acquire AEMmaterialized.  We resumed work on theoffering in July 2008, but determined in August that due to deterioratingmarket conditions, it was unlikely that we would be successful raising capitalin the public markets.  We insteaddecided to use much of the material prepared for the public offering in aprivate offering to a small group of investors. We closed a $6 million private placement in November 2008.  The first $3 million tranche of the privateplacement, which included non-affiliated investors closed on November 14, 2008,while the second tranche, which included affiliated investors, closed in January2009 following the completion of mailing to our stockholders as required by SECrules.  We incurred $760,000 in expenserelated to our 2008 fund raising efforts.

 

Alsoduring 2008 we drew $3.5 million on our line of credit to fund the acquisitionof AEM, $2 million to fund an equity infusion into AEM to assist with itsworking capital requirements and $9.4 million to fund the consolidated workingcapital and general operating requirements of the Company.  We also borrowed $134,000 to fund theacquisition of service/delivery vehicles and made scheduled payments of $620,000on our mortgage and various other notes. In addition, we received $120,000 during 2008 from the exercise ofoptions and warrants.

 

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**Sourcesof Liquidity**

 

Ourprimary sources of liquidity are our available cash reserves, which were $22.8million on December 31, 2009.

 

Our ability to continue to expand the sales of our products andservices will require the continued commitment of significant funds. The actualtiming and amount of our future funding requirements will depend on manyfactors, including the amount, timing and profitability of future revenues,working capital requirements, the level and amount of product marketing andsales efforts, among other things.

 

Wehave raised a significant amount of capital since our formation through theissuance of shares of our common and preferred stock and notes, which hasallowed us acquire companies and to continue to execute our business plan.  Most of these funds have been consumed byoperating activities, either to fund our losses or for working capitalrequirements.  In an attempt to move theCompany to a position where it can start to generate positive cash flow ourmanagement has set the following key strategies for cash flow improvement in2010:

 

·                  Focus on increasing thesales and profitability of our products and services while controlling thegrowth in our SG&A expense.  We believe that to a great degree our abilityto generate positive cash flow is dependent on our ability to increase saleswhile controlling the growth of our SG&A and maintaining or improving ourgross margins.  We believe that we havebuilt a corporate infrastructure over the past three years that is capable ofsupporting a large, diversified national company.  We believe that this infrastructure cansupport significantly higher revenue without a proportional increase in ourSG&A.  We are focused on continuallyreducing our SG&A expense as a percentage of revenue with a target of reducingit to 11% to 14% within the next three to five years,which we believe is a sustainable SG&A expense ratio for the business overthe longer term and reflects our expectations with respect to our ability toachieve additional operating leverage.  If we are able to achieve this goal, whileholding or improving our gross margins, we believe we will begin to generatepositive cash flow and earnings within the next 12 to 24 months.

 

·                  Aggressively manage ourcosts in order to conserve cash.  The prudent use of the capital resourcesavailable to us remains one of our top priorities.  We are constantly reviewing our operationslooking for more efficient ways to achieve our objectives.

 

We believe that if we are successful in increasing our revenue whilecontrolling the growth in our operating expenses we should have sufficientliquidity to allow us to operate until our operations turn cash flow positive.

 

*The information set forth above represents certain expectations of ourbusiness over time based on our business model. We caution you that these expectations may not materialize and are notindicative of the actual results we will achieve.  See “Risk Factors” and “Cautionary StatementOn Forward-Looking Information.”*

 

*Off-BalanceSheet Arrangements*

 

None.

 

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**Recent Accounting Pronouncements**

 

TheFinancial Accounting Standards Board (FASB) issued Accounting StandardsCodification (ASC) 105-10, “The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles,” which was effective forfiscal years, and interim periods within such fiscal years, ending after September15, 2009. ASC 105-10 establishes an authoritative United States GAAPsuperseding all pre-existing accounting standards and literature. ASC 105-10 iseffective for our September 30, 2009 interim financial reporting, and did nothave a material effect on our financial statements upon adoption. Allreferences to specific authoritative guidance have been updated within thisreport to reflect the new Accounting Standards Codification structure.

 

InDecember 2007, the Financial Accounting Standards Board (FASB) issued Statementof Financial Accounting Standards (SFAS) No. 141(R), “Business Combinations”(SFAS 141(R)) (codified within ASC Topic 805). SFAS 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,the goodwill acquired and any noncontrolling interest in the acquiree.  This statement also establishes disclosurerequirements to enable the evaluation of the nature and financial effect of thebusiness combination. SFAS 141(R) is effective for fiscal years beginning on orafter December 15, 2008.  The adoption ofthis statement did not have a material impact on our consolidated results ofoperations and financial condition, but will affect future acquisitions.

 

EffectiveJanuary 1, 2009, we adopted a new accounting standard included in ASC 350,Goodwill and Other, formerly FASB Staff Position FAS 142-3, Determination ofthe Useful Life of Intangible Assets which amended previous guidance fordetermining the useful life of a recognized intangible asset and requiresenhanced disclosures so that users of financial statements are able to assessthe extent to which the expected future cash flows associated with the assetare affected by the Company’s intent and/or ability to renew or extend theagreement. The adoption of this new accounting standard did not have a materialimpact on our consolidated Financial Statements.

 

EffectiveJanuary 1, 2009, we adopted a new accounting standard included in ASC 260,Earnings Per Share, formerly FASB Staff Position No. EITF 03-6-1, DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities. This pronouncement establishes that unvestedshare-based payment awards that contain nonforfeitable rights to dividends areparticipating securities and shall be included in the computation of earningsper share under the two-class method. The adoption of this new accountingstandard did not have a material effect on our consolidated financialstatements.

 

InJune 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.46(R)” (SFAS 167) (codified under the ASC 810). SFAS 167 amends theconsolidation guidance applicable to variable interest entities and affects theoverall consolidation analysis under FASB Interpretation No. 46(R). SFAS 167 iseffective for fiscal years beginning after November 15, 2009. The adoption ofthis statement is not expected to have a material impact on our consolidatedresults of operations and financial condition.

 

## **Item 7A.         Quantitativeand Qualitative Disclosures About Market Risk.**

 

Notapplicable.

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## **Item 8.            FinancialStatements and Supplementary Data.**

 

The consolidated financial statements and the reportof BDO Seidman, LLP, Independent Registered Public Accounting Firm on suchfinancial statements are filed as part of this report beginning on page F-1.

 

## **Item 9.            Changein and Disagreements with Accountants on Accounting and Financial Disclosure.**

 

Not applicable.

 

## **Item 9A.         Controlsand Procedures.**

 

***Disclosure Controls andProcedures***

 

Our management carriedout an evaluation, under the supervision and with the participation of ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofour disclosure controls and procedures (as such term is defined in Rules 13a-15(e)and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as ofthe end of the period covered by this report. Based on the evaluation, ourChief Executive Officer and Chief Financial Officer concluded that, as of December31, 2009, our disclosure controls and procedures were effective.

 

***Management’sAnnual Report on Internal Control Over Financial Reporting***

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act). Internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of our financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Because of inherentlimitations, internal control over financial reporting is not intended toprovide absolute assurance that a misstatement of our financial statementswould be prevented or detected.

 

As of the end of theperiod covered by this report, our management carried out an evaluation, underthe supervision and with the participation of our Chief Executive Officer andChief Financial Officer, of the effectiveness of our internal control overfinancial reporting. In carrying out its evaluation, our management used thecriteria set forth in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”). Based on its assessment, managementconcluded that our internal control over financial reporting was effective asof December 31, 2009.

 

This annual reportdoes not include an attestation report of our registered public accounting firmregarding internal control over financial reporting.  Management’s report was not subject toattestation by the our registered public accounting firm pursuant to temporary rulesof the Securities and Exchange Commission that permit us to provide onlymanagement’s report in this annual report.

 

***Changesin Internal Control Over Financial Reporting***

 

There were no changesin our internal control over financial reporting during the quarter ended December31, 2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

## **Item 9B.         OtherInformation.**

 

Not applicable.

 

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# **PART III**

 

Certaininformation required to be included in Part III is omitted from this reportbecause we intend to file a definitive proxy statement relating to our 2010Annual Meeting of Stockholders (the “Proxy Statement”) no later than 120 daysafter the end of the fiscal year covered by this report, and certaininformation to be included therein is incorporated herein by reference.

 

## **Item 10.         Directors,Executive Officers and Corporate Governance.**

 

Information required by thisitem regarding our directors and executive officers and compliance by ourdirectors, executive officers and certain beneficial owners of our common stockwith Section 16(a) of the Exchange Act is incorporated by reference to allinformation under the captions entitled “Election of Directors,” “ExecutiveOfficers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in theProxy Statement.  Information required bythis item regarding our codes of ethics is incorporated by reference to allinformation under the caption “Committees of the Board of Directors—Codes ofConduct and Business Ethics” in the Proxy Statement.  Information required by this item regardingour separately designated standing Audit Committee and our Audit CommitteeFinancial Expert is incorporated by reference to all information under the caption“Committees of the Board of Directors—Audit Committee” in the Proxy Statement.

 

## **Item 11.         ExecutiveCompensation.**

 

Information required by thisitem regarding compensation of our named executive officers is incorporated byreference to all information under the caption “Executive Compensation” in theProxy Statement.  Information required bythis item regarding compensation of our directors is incorporated by referenceto all information under the caption “Compensation of Directors” in the ProxyStatement.

 

## **Item12.**                            Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.

 

Information required by thisitem regarding security ownership of certain beneficial owners, directors andexecutive officers is incorporated by reference to all information under thecaption “Security Ownership of Principal Stockholders and Management—BeneficialOwners of Greater than 5% of Each Class of Our Common Stock” and “—Directorsand Executive Officers” in the Proxy Statement.

 

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***Securities Authorized for Issuance Under Equity Compensation Plans***

 

Thefollowing information reflects certain information about our equitycompensation plans as of December 31, 2009:

 
| ** **                                                        | ** ** | **Equity Compensation Plan Information**                                                              | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **(a)**                                                                                               | ** ** | **(b)** | ** ** | **(c)** | ** ** |
| **Plan Category**                                                 | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of  securities  remaining available  for future issuance  under equity  compensation plans  (excluding  securities reflected  in column (a))** | ** ** |
| Equity compensation plans approved by security  holders           |       | 560,080                                                                                               |       | $ | 5.15 |   | 292,522 |   |
| Equity compensation plans not approved by security  holders *(1)* |       | 1,881,264                                                                                             |       | $ | 11.00 |   | — |   |
| Total                                                             |       | 2,441,344                                                                                             |       | $ | 9.66 |   | 292,522 |   |

 

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(1)          We grant stock options toour non-employee directors pursuant to a Directors Stock Option Plan (See “Compensationof Directors”), which grants are included in this category.

 

## **Item 13.         CertainRelationships and Related Transactions, and Director Independence.**

 

Information required by thisitem regarding certain relationships and related transactions is incorporatedby reference to all information under the caption “Transactions with RelatedPersons” in the Proxy Statement. Information required by this item regarding the director independence isincorporated by reference to all information under the caption “Election ofDirectors—Independent Directors.”

 

## **Item 14.         PrincipalAccountant Fees and Services.**

## ** **

Information required by thisitem regarding principal auditor fees and services is incorporated by referenceto all information under the caption “Audit Committee Disclosure—IndependentAuditors’ Fees” in the Proxy Statement. Information required by this item regarding our Audit Committee’spre-approval policies and procedures and the status of our auditors’ employeesis incorporated by reference to all information under the captions “AuditCommittee Disclosure—Procedures for Audit Committee Pre-Approval of Audit andPermissible Non-Audit Services of Independent Auditor.”

 

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# **PART IV**

 

## **Item 15.         Exhibitsand Financial Statement Schedules.**

 

**(a)(1)      Financial Statements**

 

The following financialstatements are filed as part of this annual report and set forth on the page indicated:

 
| F-2  - F-3   | Consolidated Balance  Sheets as of December 31, 2009 and December 31, 2008                    |
|--------------|-----------------------------------------------------------------------------------------------|
|         |                                                                                          |
| F-4          | Consolidated  Statements of Operations for the years ended December 31, 2009, 2008 and 2007   |
|         |                                                                                          |
| F-5          | Statements  of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007 |
|         |                                                                                          |
| F-6  - F-7   | Statements of  Consolidated Cash Flows for the years ended December 31, 2009, 2008 and 2007   |
|         |                                                                                          |
| F-8  - F-43  | Notes to  Consolidated Financial Statements                                                   |
|         |                                                                                          |
| F  – 44 | Schedule II  — Valuation and Qualifying Accounts                                         |

 

**(a)(2)      Financial Statement Schedule**

 

Schedule II—Valuation and Qualifying Accountsis set forth on page F-44 to this annual report. All other schedules areomitted because they are not applicable or the required information is shown inthe consolidated financial statements and the Notes thereto.

 

**(a)(3)      Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.1                 |       | Stock  Purchase Agreement dated June 11, 2008, by and among Lime, the stockholders  of Applied Energy Management, Inc. and Stephen Glick, as Stockholder  Representative (Incorporated herein by reference to Exhibit 10.4 of our  Current Report on Form 8-K filed on June 11, 2008) (We will furnish  supplementally a copy of any omitted schedule to the Commission upon request) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2                 |       | Stock  Purchase Agreement dated November 18, 2008 by and among Lime and controlling  stockholders of Advanced Biotherapy, Inc. (Incorporated herein by reference  to Exhibit 2.1.1 of our Registration Statement on Form S-4 filed on January 23,  2009 (File No. 333-156924)) (We will furnish supplementally a copy of any  omitted schedule to the Commission upon request)        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1*                |       | First  Restated Certificate of Incorporation                                                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2                 |       | Amended  and Restated Bylaws, as amended (Incorporated herein by reference to Exhibit 3.1  of our Current Report on Form 8-K filed June 11, 2007)                                                                                                                                                                                                                                     |

 

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| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                             |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                   |
| 10.1                |       | Loan  Agreement between Lime and various lenders, including Richard P. Kiphart, dated  May 29, 2007 (Incorporated herein by reference to Exhibit 10.1 of our Current  Report on Form 8-K filed on May 30, 2007)                                        |
|                |       |                                                                                                                                                                                                                                                   |
| 10.2                |       | Warrant  to Purchase Common Stock, issued May 29, 2007 by Lime to Richard P. Kiphart  (Incorporated herein by reference to Exhibit 4.1 of our Current Report on  Form 8-K filed on May 30, 2007)                                                       |
|                |       |                                                                                                                                                                                                                                                   |
| 10.3                |       | Investor  Rights Agreement between Lime and various investors, including Richard P.  Kiphart, dated May 29, 2007 (Incorporated herein by reference to Exhibit 10.2  of our Current Report on Form 8-K filed on May 30, 2007)                           |
|                |       |                                                                                                                                                                                                                                                   |
| 10.3.1              |       | Second  Amendment to Investor Rights Agreement dated August 10, 2009 between Lime and  various investors, including Richard P. Kiphart (Incorporated herein by  reference to Exhibit 10.1 of our Current Report on Form 8-K filed on August 12,  2009) |
|                |       |                                                                                                                                                                                                                                                   |
| 10.4.1              |       | Revolving  Line of Credit Note dated March 12, 2008 by and among Lime and Advanced  Biotherapy, Inc. and Richard P. Kiphart (Incorporated herein by reference to  Exhibit 10.1 of our Current Report on Form 8-K filed on March 14, 2008)              |
|                |       |                                                                                                                                                                                                                                                   |
| 10.4.2              |       | Amended  and Restated Revolving Line of Credit Note dated June 6, 2008 between Lime  and Richard P. Kiphart (Incorporated herein by reference to Exhibit 10.1 of  our Current Report on Form 8-K filed on June 11, 2008)                               |
|                |       |                                                                                                                                                                                                                                                   |
| 10.4.3              |       | Amended  and Restated Revolving Line of Credit Note dated June 6, 2008 between Lime  and Advanced Biotherapy, Inc. (Incorporated herein by reference to Exhibit 10.2  of our Current Report on Form 8-K filed on June 11, 2008)                        |
|                |       |                                                                                                                                                                                                                                                   |
| 10.4.4              |       | Second  Amended and Restated Revolving Line of Credit Note dated August 14, 2008  between Lime and Richard P. Kiphart (Incorporated herein by reference to  Exhibit 10.1 of our Current Report on Form 8-K filed on August 19, 2008)                   |
|                |       |                                                                                                                                                                                                                                                   |
| 10.4.5              |       | Second  Amended and Restated Revolving Line of Credit Note dated August 14, 2008  between Lime and Advanced Biotherapy, Inc. (Incorporated herein by reference  to Exhibit 10.2 of our Current Report on Form 8-K filed on August 19, 2008)            |
|                |       |                                                                                                                                                                                                                                                   |
| 10.4.6              |       | Third  Amended and Restated Revolving Line of Credit Note dated October 31, 2008  between Lime and Advanced Biotherapy, Inc. (Incorporated herein by reference  to Exhibit 10.1 of our Current Report on Form 8-K filed on October 31, 2008)           |
|                |       |                                                                                                                                                                                                                                                   |
| 10.5.1              |       | Note  Issuance Agreement dated March 12, 2008 by and among Lime and Advanced  Biotherapy, Inc. and Richard P. Kiphart (Incorporated herein by reference to  Exhibit 10.2 of our Current Report on Form 8-K filed on March 14, 2008)                    |
|                |       |                                                                                                                                                                                                                                                   |
| 10.5.2              |       | Amended  and Restated Note Issuance Agreement dated June 6, 2008 by and among Lime and  Advanced Biotherapy, Inc. and Richard P. Kiphart (Incorporated herein by  reference to Exhibit 10.3 of our Current Report on Form 8-K filed on June 11,  2008) |
|                |       |                                                                                                                                                                                                                                                   |
| 10.6                |       | Registration  Rights Agreement dated June 11, 2008 by and among Lime and the stockholders  of Applied Energy Management, Inc. (Incorporated herein by reference to  Exhibit 10.5 of our Current Report on Form 8-K filed on June 11, 2008)             |

 

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| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                  |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.7                |       | Letter  of Credit Agreement dated July 11, 2008 between Lime and Richard P. Kiphart  (Incorporated herein by reference to Exhibit 10.1 of our Current Report on  Form 8-K filed on July 15, 2008)                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.8                |       | Equity  Purchase Agreement dated July 10, 2008 between Lime and Duke Ventures, LLC  (Incorporated herein by reference to Exhibit 10.1 of our Current Report on  Form 8-K filed on July 15, 2008)                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.9.1              |       | Note  Issuance Agreement dated August 14, 2008 by and among Lime and Advanced  Biotherapy, Inc. and Richard P. Kiphart (Incorporated herein by reference to  Exhibit 10.3 of our Current Report on Form 8-K filed on August 19, 2008)                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.9.2              |       | Amended  and Restated Note Issuance Agreement dated October 31, 2008 by and among Lime  and Advanced Biotherapy, Inc. and Richard P. Kiphart (Incorporated herein by  reference to Exhibit 10.2 of our Current Report on Form 8-K filed on October 31,  2008)                                               |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.10.1             |       | Security  Agreement dated August 14, 2008 by and among Lime and Advanced Biotherapy, Inc.  and Richard P. Kiphart (Incorporated herein by reference to Exhibit 10.4 of  our Current Report on Form 8-K filed on August 19, 2008)                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.10.2             |       | Amendment  No. 1 to Security Agreement dated August 14, 2008 by and among Lime and  Advanced Biotherapy, Inc. and Richard P. Kiphart (Incorporated herein by  reference to Exhibit 10.3 of our Current Report on Form 8-K filed on October 31,  2008)                                                       |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.11               |       | Promissory  Note between dated October 31, 2008 between Applied Energy Management, Inc.  and Wachovia Bank, National Association in the principal amount of $2,115,775  (Incorporated herein by reference to Exhibit 10.1 of our Current Report on  Form 8-K filed on November 5, 2008)                     |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.12.1             |       | Form  of Tranche A Subscription Agreement for Common Stock and Warrants effective  as of November 13, 2008 by and among Line and various investors, including  Lime officers and directors (Incorporated herein by reference to Exhibit 10.1  of our Current Report on Form 8-K filed on November 18, 2008) |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.12.2             |       | Form  of Tranche B Subscription Agreement for Common Stock and Warrants effective  as of November 13, 2008 by and among Line and various investors, including  Lime officers and directors (Incorporated herein by reference to Exhibit 10.2  of our Current Report on Form 8-K filed on November 18, 2008) |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.13               |       | Form  of Warrant to Purchase Common Stock, issued November 13, 2008 by and among  Line and various investors, including Lime officers and directors  (Incorporated herein by reference to Exhibit 4.2 of our Current Report on  Form 8-K filed on November 18, 2008)                                        |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.14               |       | Stock  Purchase Agreement dated November 14, 2008 between Lime and Richard P.  Kiphart (Incorporated herein by reference to Exhibit 10.3 of our Current  Report on Form 8-K filed on November 18, 2008)                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                        |
| 10.15               |       | Organic  Farm Marketing, LLC Convertible Note (Incorporated herein by reference to  Exhibit 10.21 of Advanced Biotherapy, Inc.’s Current Report on Form 8-K filed  on December 31, 2007) (File No. 0-26323)                                                                                            |

 

48

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| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.16.1             |       | Third  Amended and Restated Mortgage, Assignment of Rents and Security Agreement  dated December 13, 2005 by Lime and American Chartered Bank  (Incorporated herein by reference to Exhibit 10.1 of our Current Report  on Form 8-K filed on December 15, 2005)                       |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.16.2             |       | Fourth  Modification to Mortgage, Assignment of Rents and Security Agreement dated  December 28, 2006 by Lime and American Chartered Bank (Incorporated  herein by reference to Exhibit 10.1 of our Current Report on  Form 8-K filed on December 29, 2006)                           |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.16.3             |       | Fifth  Modification to Mortgage, Assignment of Rents and Security Agreement dated  December 17, 2007 by Lime and American Chartered Bank (Incorporated  herein by reference to Exhibit 10.1 of our Current Report on  Form 8-K filed on December 18, 2007)                            |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.16.4             |       | Third  Amended and Restated Mortgage Note dated December 17, 2007 by Lime and  American Chartered Bank (Incorporated herein by reference to  Exhibit 10.2 of our Current Report on Form 8-K filed on  December 18, 2007)                                                              |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.17.1             |       | Commercial  Lease Agreement dated December 15, 2005 by and between P.AN.D.A.  Investments and Parke Industries (Incorporated herein by reference to  Exhibit 10.17.1 of our Annual Report on Form 10-K for the fiscal  year ended December 31, 2008 and filed on March 11, 2009) |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.17.2             |       | First  Amendment to Commercial Lease Agreement dated June 30, 2006 by and  between M&D Investments and Parke Industries, LLC (Incorporated herein by  reference to Exhibit 10.6 of our Current Report on Form 8-K filed  on July 6, 2006)                                         |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.18.1  +          |       | Employment  Agreement, dated as of January 23, 2006, between Lime and David R.  Asplund (Incorporated herein by reference to Exhibit 10.1 of our Current  Report on Form 8-K filed on February 22, 2006)                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.18.2  +          |       | Amendment  to Employment Agreement with David R. Asplund dated January 25, 2007  (Incorporated herein by reference to Exhibit 10.18.2 of our Annual  Report on Form 10-K for the fiscal year ended December 31, 2008 and  filed on March 11, 2009)                               |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.18.3  +          |       | Second  Amendment to Employment Agreement dated October 1, 2007 between Lime and  David R. Asplund. (Incorporated herein by reference to Exhibit 10.1 of  our Current Report on Form 8-K filed on October 2, 2007)                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.18.4  +          |       | Employee  Stock Option Agreement dated July 11, 2006 between Lime and David R.  Asplund (Incorporated herein by reference to Exhibit 10.1 of our Current  Report on Form 8-K filed on July 17, 2006)                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.19.1  +          |       | Employment  Agreement dated as of June 30, 2006 between Parke Acquisition, LLC and  Daniel W. Parke (Incorporated herein by reference to Exhibit 10.3 of our  Current Report on Form 8-K filed on July 6, 2006)                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.19.2  +          |       | Amendment  to Employment Agreement dated October 1, 2007 between Parke Acquisition,  LLC and Daniel W. Parke (Incorporated herein by reference to  Exhibit 10.2 of our Current Report on Form 8-K filed on  October 2, 2007)                                                          |
|                |       |                                                                                                                                                                                                                                                                                                      |
| 10.19.3  +          |       | Employee  Stock Option Agreement dated June 30, 2006 between Lime and Daniel W.  Parke (Incorporated herein by reference to Exhibit 10.5 of our Current  Report on Form 8-K filed on July 6, 2006)                                                                                    |

 

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| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                               |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                     |
| 10.19.4  +          |       | Employee  Stock Option Agreement dated July 11, 2006 between Lime and Daniel W.  Parke (Incorporated herein by reference to Exhibit 10.2 of our Current  Report on Form 8-K filed on July 17, 2006)                                  |
|                |       |                                                                                                                                                                                                                                                     |
| 10.19.5  +          |       | Second  Amendment to Employment Agreement dated July 1, 2009 between Parke  Acquisition, LLC and Daniel W. Parke (Incorporated herein by reference to  Exhibit 10.2 of our Current Report on Form 8-K filed on  August 7. 2009)      |
|                |       |                                                                                                                                                                                                                                                     |
| 10.20.1  +          |       | Employment  Agreement, dated as of August 15, 2006, between Electric City Corp. and  Jeffrey R. Mistarz (Incorporated herein by reference to Exhibit 10.1 of  our Current Report on Form 8-K filed on August 18, 2006)               |
|                |       |                                                                                                                                                                                                                                                     |
| 10.20.2  +          |       | Amendment  to Employment Agreement dated October 1, 2007 between Lime and Jeffrey  R. Mistarz. (Incorporated herein by reference to Exhibit 10.3 of our  Current Report on Form 8-K filed on October 2, 2007)                        |
|                |       |                                                                                                                                                                                                                                                     |
| 10.20.3  +          |       | Employee  Option Agreement dated August 15, 2006 between Lime and Jeffrey R.  Mistarz (Incorporated herein by reference to Exhibit 10.2 of our Current  Report on Form 8-K filed on August 18, 2006)                                 |
|                |       |                                                                                                                                                                                                                                                     |
| 10.20.4  +          |       | Employee  Stock Option Agreement dated July 11, 2006 between Lime and Jeffrey R.  Mistarz (Incorporated herein by reference to Exhibit 10.3 of our Current  Report on Form 8-K filed on July 17, 2006)                               |
|                |       |                                                                                                                                                                                                                                                     |
| 10.21               |       | Employment  Agreement, dated as of June 10, 2008, between Applied Energy  Management, Inc. and John O’Rourke (Incorporated herein by reference to  Exhibit 10.1 of our Current Report on Form 8-K filed on  March 9, 2009) |
|                |       |                                                                                                                                                                                                                                                     |
| 10.22  +            |       | Amended  and Restated Directors Stock Option Plan (Incorporated herein by reference to  Exhibit 4.3 of our Quarterly Report on Form 10-Q for the period  ended March 31, 2004 and filed on May 13, 2004)                             |
|                |       |                                                                                                                                                                                                                                                     |
| 10.23  +            |       | 2009  Management Incentive Compensation Plan (Incorporated herein by reference to  Exhibit 10.1 of our Current Report on Form 8-K filed on  August 7, 2009)                                                                               |
|                |       |                                                                                                                                                                                                                                                     |
| 10.24               |       | 2009  Note Issuance Agreement dated August 10, 2009 between Lime and Richard  P. Kiphart (Incorporated herein by reference to Exhibit 10.2 of our  Current Report on Form 8-K filed on August 12, 2009)                              |
|                |       |                                                                                                                                                                                                                                                     |
| 10.25               |       | 2009  Revolving Line of Credit Note issued August 10, 2009 by Lime to Richard  P. Kiphart (Incorporated herein by reference to Exhibit 10.2 of our  Current Report on Form 8-K filed on August 12, 2009)                             |
|                |       |                                                                                                                                                                                                                                                     |
| 10.26               |       | 2009  Security Agreement dated August 10, 2009 between Lime and Richard P.  Kiphart (Incorporated herein by reference to Exhibit 10.3 of our Current  Report on Form 8-K filed on August 12, 2009)                                   |
|                |       |                                                                                                                                                                                                                                                     |
| 10.27               |       | Warrant  to Purchase Common Stock issued August 10, 2009 by Lime to Richard P.  Kiphart (Incorporated herein by reference to Exhibit 10.4 of our Current  Report on Form 8-K filed on August 12, 2009)                               |

 

50

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| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                       |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                             |
| 10.28               |       | Warrant  to Purchase Common Stock issued August 10, 2009 by Lime to Richard P.  Kiphart (Incorporated herein by reference to Exhibit 10.5 of our Current  Report on Form 8-K filed on August 12, 2009)                                       |
|                |       |                                                                                                                                                                                                                                                             |
| 10.29               |       | Asset  Purchase Agreement dated as of August 10, 2009, between Elutions, Inc.  and Maximum Performance Group, Inc. (Incorporated herein by reference to  Exhibit 10.6 of our Current Report on Form 8-K filed on  August 12, 2009) |
|                |       |                                                                                                                                                                                                                                                             |
| 21.1*               |       | List  of Subsidiaries                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                             |
| 23*                 |       | Consent  of BDO Seidman LLP                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                             |
| 24.1*               |       | Power  of Attorney (included on signature page hereto)                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                             |
| 31.1*               |       | Certification  of the Principal Executive Officer pursuant to Section 302 of the Sarbanes — Oxley  Act of 2002                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                             |
| 31.2*               |       | Certification  of the Principal Financial Officer pursuant to Section 302 of the Sarbanes — Oxley  Act of 2002                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                             |
| 32.1*               |       | Certification  of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes — Oxley Act of 2002                                                                                               |
|                |       |                                                                                                                                                                                                                                                             |
| 32.2*               |       | Certification  of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes — Oxley Act of 2002                                                                                               |

 

----

+Management contract or compensation plan or arrangement

*Filed herewith

 

# **SIGNATURES**

# ** **

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|   |   | LIME  ENERGY CO.         |
|--------|--------|--------------------------|
|   |   |                     |
|   | By:    | /s/  David R. Asplund    |
|   |   | David  R. Asplund        |
|   |   | Chief  Executive Officer |
|   |   | March 23,  2010     |

 

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Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed below by the following persons on behalf of theregistrant in the capacities and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                                                                                    | ** ** | **Date**            |
|------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------|
|                   |       |                                                                                         |       |                |
| /s/  David Asplund     |       | Chief Executive Officer & Director                                                  |       | March 23, 2010 |
| David  Asplund         | * *   | *(principal executive officer)*                                                              |       |                |
|                   | * *   | * *                                                                                     |       |                |
|                   | * *   | * *                                                                                     |       |                |
| /s/  Daniel Parke      |       | President & Director                                                                |       | March 23, 2010 |
| Daniel  Parke          | * *   | * *                                                                                     |       |                |
|                   | * *   | * *                                                                                     |       |                |
| /s/  Jeffrey Mistarz   |       | Executive Vice President, Chief Financial Officer,  Treasurer & Corporate Secretary |       | March 23, 2010 |
| Jeffrey  Mistarz       | * *   | *(principal financial officer and principal  accounting officer)*                            |       |                |
|                   | * *   | * *                                                                                     |       |                |
| /s/  Richard Kiphart   |       | Chairman of the Board                                                                        |       | March 23, 2010 |
| Richard  Kiphart       |       |                                                                                         |       |                |
|                   |       |                                                                                         |       |                |
| /s/  Gregory Barnum    |       | Director                                                                                     |       | March 23, 2010 |
| Gregory  Barnum        |       |                                                                                         |       |                |
|                   |       |                                                                                         |       |                |
| /s/  Christopher Capps |       | Director                                                                                     |       | March 23, 2010 |
| Christopher  Capps     |       |                                                                                         |       |                |
|                   |       |                                                                                         |       |                |
| /s/  William Carey     |       | Director                                                                                     |       | March 23, 2010 |
| William  Carey         |       |                                                                                         |       |                |
|                   |       |                                                                                         |       |                |
| /s/  Stephen Glick     |       | Director                                                                                     |       | March 23, 2010 |
| Stephen  Glick         |       |                                                                                         |       |                |
|                   |       |                                                                                         |       |                |
| /s/  Joseph Desmond    |       | Director                                                                                     |       | March 23, 2010 |
| Joseph  Desmond        |       |                                                                                         |       |                |
|                   |       |                                                                                         |       |                |
| /s/  David Valentine   |       | Director                                                                                     |       | March 23, 2010 |
| David  Valentine       |       |                                                                                         |       |                |

 

52

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**Report of Independent Registered Public AccountingFirm**

 

LimeEnergy Co.

ElkGrove Village, Illinois

 

Wehave audited the accompanying consolidated balance sheets of Lime Energy Co. asof December 31, 2009 and 2008, and the related consolidated statements ofoperations, stockholders’ equity and cash flows for each of the three years inthe period ended December 31, 2009. In connection with our audits of thefinancial statements, we have also audited the financial statement schedulelisted in the accompanying index. These financial statements and schedule arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallpresentation of the financial statements and schedule. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Lime Energy Co. at December 31,2009 and 2008, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2009, in conformity withaccounting principles generally accepted in the United States of America.

 

Also,in our opinion, the financial statement schedule when considered in relation tothe basic consolidated financial statements taken as a whole, present fairly,in all material respects, the information set forth therein.

 

 
| Chicago,  Illinois   | /s/  BDO SEIDMAN, LLP |
|----------------------|-----------------------|
|                 |                  |
|                 |                  |
| March 22,  2010 |                  |

 

F-1

----

Table of Contents

 

**Lime Energy Co.**

**Consolidated Balance Sheets**

**($ in thousands)**

 
| **December 31,**                                                                                                         | ** ** | **2009** | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
|                                                                                                                          |       |     |       |       |       |
| **Assets**                                                                                                                    |       |     |       |       |       |
|                                                                                                                          |       |     |       |       |       |
| **Current assets**                                                                                                            |       |     |       |       |       |
| Cash  and cash equivalents                                                                                                    | ** ** | **$**    | 22,870     | ** ** | **$**      | 3,734 | ** ** |
| Restricted  cash                                                                                                              |       | 500      |       | —     |       |
| Accounts  receivable, less allowance for doubtful accounts of $322 and $163 at December 31,  2009 and 2008, respectively |       | 19,330   |       | 24,227     |       |
| Inventories  (Note 8)                                                                                                         |       | 230      |       | 665        |       |
| Costs  and estimated earnings in excess of billings on uncompleted contracts                                                  |       | 5,532    |       | 4,078      |       |
| Prepaid  expenses and other                                                                                                   |       | 752      |       | 1,418      |       |
| ** **                                                                                                                    |       |     |       |       |       |
| **Total Current Assets**                                                                                                      |       | 49,214   |       | 34,122     |       |
|                                                                                                                          |       |     |       |       |       |
| **Net Property and Equipment**(Note 9)                                                                                        |       | 1,917    |       | 2,081      |       |
|                                                                                                                          |       |     |       |       |       |
| **Long Term Receivables**                                                                                                     |       | 545      |       | 1,031      |       |
|                                                                                                                          |       |     |       |       |       |
| **Deferred Financing Costs,**net of amortization of $0  and $5 at December 31, 2009 and 2008, respectively               |       | —   |       | 4          |       |
|                                                                                                                          |       |     |       |       |       |
| **Intangibles,**net of amortization of $4,902 and $5,786 at****at  December 31, 2009 and 2008, respectively (Note 10)    |       | 3,382    |       | 7,137      |       |
|                                                                                                                          |       |     |       |       |       |
| **Goodwill (Note 10)**                                                                                                        |       | 18,627   |       | 18,513     |       |
|                                                                                                                          |       |     |       |       |       |
| ** **                                                                                                                    | ** ** | **$**    | 73,685     | ** ** | **$**      | 62,888 | ** ** |

 

F-2

----

Tableof Contents

 

**Lime Energy Co.**

**Consolidated Balance Sheets**

**($ in thousands)**

 
| **December 31,**                                                                                                                                                                                                                     | ** ** | **2009** | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
|                                                                                                                                                                                                                                      |       |     |       |       |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                             |       |     |       |       |       |
|                                                                                                                                                                                                                                      |       |     |       |       |       |
| **Current liabilities**                                                                                                                                                                                                                   |       |     |       |       |       |
| Lines  of credit (Note 12)                                                                                                                                                                                                                | ** ** | **$**    | —     | ** ** | **$**      | 3,987 | ** ** |
| Current  maturities of long-term debt (Note 15)                                                                                                                                                                                           |       | 187      |       | 187        |       |
| Accounts  payable                                                                                                                                                                                                                         |       | 8,424    |       | 15,452     |       |
| Accrued  expenses (Note 11)                                                                                                                                                                                                               |       | 4,892    |       | 3,855      |       |
| Billings  in excess of costs and estimated earnings on uncompleted contracts                                                                                                                                                              |       | 634      |       | 1,958      |       |
| Deferred  revenue                                                                                                                                                                                                                         |       | —   |       | 358        |       |
| Customer  deposits                                                                                                                                                                                                                        |       | 799      |       | 1,289      |       |
| **Total Current Liabilities**                                                                                                                                                                                                             |       | 14,936   |       | 27,086     |       |
|                                                                                                                                                                                                                                      |       |     |       |       |       |
| **Deferred Revenue**                                                                                                                                                                                                                      |       | —   |       | 90         |       |
| **Long-Term Debt,**less current maturities net of unamortized****discount of $1,411 as of December 31, 2008  (Notes 13, 14 and 15)                                                                                                   |       | 544      |       | 5,717      |       |
| **Deferred Tax Liability (Note 19)**                                                                                                                                                                                                      |       | —   |       | 1,034      |       |
|                                                                                                                                                                                                                                      |       |     |       |       |       |
| **Total Liabilities**                                                                                                                                                                                                                     |       | 15,480   |       | 33,927     |       |
|                                                                                                                                                                                                                                      |       |     |       |       |       |
| **Stockholders’ Equity**(Notes16, 23 and 24)                                                                                                                                                                                         |       |     |       |       |       |
| Preferred  stock, $0.01 par value; 0 and 1,000,000 shares authorized, 0 and 358,710  issued as of December 31, 2009 and 2008 respectively (liquidation value  of $0 and $14,707 as of December 31, 2009 and 2008, respectively) |       | —   |       | 4          |       |
| Common  stock, $.0001 par value; 50,000,000 shares authorized 23,510,662 and  9,555,053 issued as of December 31, 2009 and 2008, respectively                                                                                        |       | 2        |       | 1          |       |
| Additional  paid-in capital                                                                                                                                                                                                               |       | 181,665  |       | 134,390    |       |
| Accumulated  deficit                                                                                                                                                                                                                      |       | (123,462 | )          | (105,434   | )          |
|                                                                                                                                                                                                                                      |       |     |       |       |       |
| **Total Stockholders’ Equity**                                                                                                                                                                                                       |       | 58,205   |       | 28,961     |       |
|                                                                                                                                                                                                                                      |       |     |       |       |       |
| ** **                                                                                                                                                                                                                                | ** ** | **$**    | 73,685     | ** ** | **$**      | 62,888 | ** ** |

 

*Seeaccompanying notes to consolidated financial statements.*

 

F-3

----

Tableof Contents

 

**Lime Energy Co.**

**Consolidated Statements of Operations**

**($ in thousands, except per share data)**

 
| ** **                                                                                                                                                                             | ** ** | **Year ended   December 31,   2009** | ** ** | **Year ended   December 31,   2008** | ** ** | **Year ended   December 31,   2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| **Revenue**                                                                                                                                                                            | ** ** | **$**                                     | 70,802     | ** **                                | **$**      | 54,975                                    | ** ** | **$** | 16,384 | ** ** |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Cost  of sales                                                                                                                                                                         |       | 57,192                                    |       | 43,281                                    |       | 12,756                                    |       |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Gross  Profit                                                                                                                                                                          |       | 13,610                                    |       | 11,694                                    |       | 3,628                                     |       |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Selling,  general and administrative (includes share based compensation expense of  $1,621, $3,503 and $3,053 for the years ended December 31, 2009, 2008  and 2007 respectively) |       | 23,940                                    |       | 18,100                                    |       | 9,259                                     |       |
| Amortization  of intangibles (Note 10)                                                                                                                                                 |       | 1,221                                     |       | 1,568                                     |       | 1,487                                     |       |
| Impairment  loss (Note 6)                                                                                                                                                              |       | 2,652                                     |       | —                                    |       | —                                    |       |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| **Operating loss**                                                                                                                                                                     |       | (14,203                                   | )          | (7,974                                    | )          | (7,118                                    | )          |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| **Other Income (Expense)**                                                                                                                                                             |       |                                      |       |                                      |       |                                      |       |
| Interest  income                                                                                                                                                                       |       | 137                                       |       | 87                                        |       | 267                                       |       |
| Interest  expense (Notes 12 and 14)                                                                                                                                                    |       | (3,210                                    | )          | (2,668                                    | )          | (935                                      | )          |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Total  other income (expense)                                                                                                                                                          |       | (3,073                                    | )          | (2,581                                    | )          | (668                                      | )          |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Loss  from continuing operations before discontinued operations                                                                                                                        |       | (17,276                                   | )          | (10,555                                   | )          | (7,786                                    | )          |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| **Discontinued Operations:**                                                                                                                                                           |       |                                      |       |                                      |       |                                      |       |
| Loss  from operation of discontinued business (Note 7)                                                                                                                                 |       | (1,786                                    | )          | (2,480                                    | )          | (7,767                                    | )          |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| **Loss before income taxes**                                                                                                                                                           |       | (19,062                                   | )          | (13,035                                   | )          | (15,553                                   | )          |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Income  tax benefit                                                                                                                                                                    |       | 1,034                                     |       | —                                    |       | —                                    |       |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| **Net loss**                                                                                                                                                                           |       | (18,028                                   | )          | (13,035                                   | )          | (15,553                                   | )          |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Preferred  Dividend (Note 16)                                                                                                                                                          |       | (1,499                                    | )          | (288                                      | )          | —                                    |       |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Net  Loss Available to Common                                                                                                                                                          | ** ** | **$**                                     | (19,527    | )                                         | **$**      | (13,323                                   | )          | **$** | (15,553 | ) |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Basic  and diluted loss per common share from continuing operations                                                                                                                    |       | $                                         | (1.12      | )                                         | $          | (1.29                                     | )          | $ | (1.03 | ) |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Discontinued  operations                                                                                                                                                               |       | (0.11                                     | )          | (0.30                                     | )          | (1.03                                     | )          |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| Basic  and Diluted Loss Per Common Share                                                                                                                                               | ** ** | **$**                                     | (1.23      | )                                         | **$**      | (1.59                                     | )          | **$** | (2.06 | ) |
|                                                                                                                                                                                   |       |                                      |       |                                      |       |                                      |       |
| **Weighted Average Common Shares Outstanding (Note 3)**                                                                                                                                |       | 15,892,768                                |       | 8,381,697                                 |       | 7,558,673                                 |       |

 

*See accompanying notes to consolidated financial statements.*

 

F-4

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Table of Contents

 

**LimeEnergy Co.**

**ConsolidatedStatements of Stockholders' Equity**

**(inthousands)**

 
| ** **                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Series A-1** | ** **  | **Series A-1** | ** ** | **Additional** | ** ** | ** **      | ** **  | **Total**              | ** **   |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------------|-------------|---------------------|------------|----------------|------------|-----------------|-------------|------------------------|--------------|
| ** **                                                                           | ** ** | **Common** | ** ** | **Common** | ** ** | **Preferred**       | ** **  | **Preferred**       | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** **  | **Stockholders’** | ** **   |
| ** **                                                                           | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Shares**          | ** **  | **Stock**           | ** ** | **Capital**    | ** ** | **Deficit**     | ** **  | **Equity (Deficit)**   | ** **   |
|                                                                                 |       |       |       |       |       |                |        |                |       |           |       |            |        |                   |         |
| **Balance,**  December 31, 2006                                                 | ** ** | **7,112**  | ** ** | **$**      | **1**      | ** **          | **—**  | ** **          | **$**      | **—**     | ** ** | **$**           | **95,030**  | ** **             | **$**        | **(76,846** | **)** | **$** | **18,185** | ** ** |
| Issuance of common stock (less issuance costs of  $203)                              |       | 429        |       | —     | ** ** | **—**          | ** **  | **—**          |       | 2,797          |       | —          |        | 2,797                  |         |
| Offering costs for 2006 issuance of common stock                                     |       | —     |       | —     | ** ** | **—**          | ** **  | **—**          |       | (45            | )          | —          |        | (45                    | )            |
| Acquisition of Texas Energy Products, Inc.                                      |       | 28         |       | —     | ** ** | **—**          | ** **  | **—**          |       | 214            |       | —          |        | 214                    |         |
| Acquisition of Preferred Lighting, Inc.                                         |       | 15         |       | —     | ** ** | **—**          | ** **  | **—**          |       | 385            |       | —          |        | 385                    |         |
| Release of escrow shares to former owners of  Maximum Performance Group, Inc.   |       | 3          |       | —     |       | **—**          |        | **—**          |       | 26             |       | —          |        | 26                     |         |
| Satisfaction of liquidated damages through the  issuance of common stock             |       | 88         |       | —     | ** ** | **—**          | ** **  | **—**          |       | 614            |       | —          |        | 614                    |         |
| Share based compensation                                                             |       | —     |       | —     | ** ** | **—**          | ** **  | **—**          |       | 3,727          |       | —          |        | 3,727                  |         |
| Warrants issued in connection with Subordinated  Convertible Notes                   |       | —     |       | —     | ** ** | **—**          | ** **  | **—**          |       | 1,136          |       | —          |        | 1,136                  |         |
| Value of beneficial conversion feature on  Subordinated Convertible Notes            |       | —     |       | —     |       | **—**          |        | **—**          |       | 1,866          |       | —          |        | 1,866                  |         |
| Satisfaction of interest obligation through issuance  of common stock                |       | 7          |       | —     | ** ** | **—**          | ** **  | **—**          |       | 84             |       | —          |        | 84                     |         |
| Warrants issued for services received                                                |       | —     |       | —     | ** ** | **—**          | ** **  | **—**          |       | 162            |       | —          |        | 162                    |         |
| Exercise of options and warrants                                                     |       | 38         |       | —     | ** ** | **—**          | ** **  | **—**          |       | 252            |       | —          |        | 252                    |         |
| Warrant repricing                                                                    |       | —     |       | —     | ** ** | **—**          | ** **  | **—**          |       | 19             |       | —          |        | 19                     |         |
| Net loss for the year ended December 31, 2007                                   |       | —     |       | —     | ** ** | **—**          | ** **  | **—**          |       | —         |       | (15,553         | )           | (15,553                | )            |
| **Balance,**  December 31, 2007                                                 | ** ** | **7,720**  | ** ** | **$**      | **1**      | ** **          | **—**  | ** **          | **$**      | **—**     | ** ** | **$**           | **106,267** | ** **             | **$**        | **(92,399** | **)** | **$** | **13,869** | ** ** |
|                                                                                 |       |       |       |       |       |                |        |                |       |           |       |            |        |                   |         |
| Issuance of common stock (less issuance costs of  $711)                              |       | 855        |       | —     |       | —              |        | —              |       | 2,289          |       | —          |        | 2,289                  |         |
| Acquisition of Applied Energy Management, Inc.                                  |       | 883        |       | —     |       | —              |        | —              |       | 7,000          |       | —          |        | 7,000                  |         |
| Conversion of revolving line of credit note (less  transaction costs of $49)         |       | —     |       | —     |       | 358,710             |        | 4                   |       | 14,655         |       | —          |        | 14,659                 |         |
| Conversion of note payable                                                           |       | 33         |       | —     |       | —              |        | —              |       | 200            |       | —          |        | 200                    |         |
| Cumulative dividends on preferred stock                                              |       | —     |       | —     |       | —              |        | —              |       | (288           | )          | —          |        | (288                   | )            |
| Satisfaction of interest obligation through  issuance of common stock                |       | 32         |       | —     |       | —              |        | —              |       | 250            |       | —          |        | 250                    |         |
| Share based compensation                                                             |       | —     |       | —     |       | —              |        | —              |       | 3,784          |       | —          |        | 3,784                  |         |
| Warrants issued for services received                                                |       | —     |       | —     |       | —              |        | —              |       | 113            |       | —          |        | 113                    |         |
| Exercise of options and warrants                                                     |       | 32         |       | —     |       | —              |        | —              |       | 120            |       | —          |        | 120                    |         |
| Net loss for the year ended December 31, 2008                                   |       | —     |       | —     |       | —              |        | —              |       | —         |       | (13,035         | )           | (13,035                | )            |
| **Balance,**  December 31, 2008                                                 | ** ** | **9,555**  | ** ** | **$**      | **1**      | ** **          | **358,710** | ** **          | **$**      | **4**          | ** ** | **$**           | **134,390** | ** **             | **$**        | **(105,434** | **)** | **$** | **28,961** | ** ** |
|                                                                                 |       |       |       |       |       |                |        |                |       |           |       |            |        |                   |         |
| Issuance of common stock (less issuance costs of  $2,359)                            |       | 6,683      |       | 1          |       | —              |        | —              |       | 32,540         |       | —          |        | 32,541                 |         |
| Acquisition of Advanced Biotherapy, Inc. (less  transaction costs of $771)      |       | 2,486      |       | —     |       | —              |        | —              |       | 6,738          |       | —          |        | 6,738                  |         |
| Earn-out shares paid to former owners of Applied  Energy Management, Inc.       |       | 63         |       | —     |       | —              |        | —              |       | 293            |       | —          |        | 293                    |         |
| Preferred dividends                                                                  |       | —     |       | —     |       | —              |        | —              |       | (1,499         | )          | —          |        | (1,499                 | )            |
| Satisfaction of accrued dividends through the  issuance of preferred stock           |       | —     |       | —     |       | 19                  |        | —              |       | 781            |       | —          |        | 781                    |         |
| Satisfaction of interest obligation through  issuance of common stock                |       | 45         |       | —     |       | —              |        | —              |       | 204            |       | —          |        | 204                    |         |
| Conversion of subordinated notes                                                     |       | 852        |       | —     |       | —              |        | —              |       | 5,000          |       | —          |        | 5,000                  |         |
| Beneficial conversion value of adjustment in  conversion price of subordinated notes |       | —     |       | —     |       | —              |        | —              |       | 938            |       | —          |        | 938                    |         |
| Conversion of series A-1 preferred stock                                             |       | 3,778      |       | —     |       | (358,729            | )           | (4                  | )          | 4              |       | —          |        | —                 |         |
| Warrants issued in connection with bridge line of  credit                            |       | —     |       | —     |       | —              |        | —              |       | 309            |       | —          |        | 309                    |         |
| Share based compensation                                                             |       | —     |       | —     |       | —              |        | —              |       | 1,803          |       | —          |        | 1,803                  |         |
| Shares issued for benefit plans and option  exercises                                |       | 47         |       | —     |       | —              |        | —              |       | 137            |       | —          |        | 137                    |         |
| Shares and warrants issued for services received                                     |       | 2          |       | —     |       | —              |        | —              |       | 27             |       | —          |        | 27                     |         |
| Net loss for the year ended December 31, 2009                                   |       | —     |       | —     |       | —              |        | —              |       | —         |       | (18,028         | )           | (18,028                | )            |
|                                                                                 |       |       |       |       |       |                |        |                |       |           |       |            |        |                   |         |
| **Balance,**  December 31, 2009                                                 | ** ** | **23,511** | ** ** | **$**      | **2**      | ** **          | **—**  | ** **          | **$**      | **—**     | ** ** | **181,665**     | ** **  | **$**                  | **(123,462** | **)** | **$** | **58,205** | ** ** |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

F-5

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Tableof Contents

 

**Lime Energy Co.**

**Statementsof Cash Flows**

**($ in thousands)**

 
| ** **                                                                                                            | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                            | ** ** | **2009**              | ** ** | **2008**              | ** ** | **2007**              | ** ** |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| **Cash Flows Used in Operating Activities**                                                                           |       |                  |       |                  |       |                  |       |
| Net  Loss                                                                                                             | ** ** | **$**                 | (18,028    | )                     | **$**      | (13,035               | )          | **$** | (15,553 | ) |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| Adjustments  to reconcile net loss to net cash used in operating activities, net of assets  acquired and disposed of: |       |                  |       |                  |       |                  |       |
| Provision  for bad debt                                                                                               |       | 304                   |       | 128                   |       | 126                   |       |
| Share  based compensation                                                                                             |       | 1,803                 |       | 3,784                 |       | 3,727                 |       |
| Preferred  stock dividends                                                                                            |       | (1,499                | )          | (288                  | )          | —                |       |
| Depreciation  and amortization                                                                                        |       | 1,906                 |       | 2,540                 |       | 2,200                 |       |
| Amortization  of deferred financing costs                                                                             |       | 313                   |       | 3                     |       | 2                     |       |
| Amortization  of original issue discount                                                                              |       | 1,411                 |       | 1,001                 |       | 591                   |       |
| Liquidated  damages satisfied through issuance of stock                                                               |       | —                |       | —                |       | 614                   |       |
| Issuance  of warrants in exchange for services received                                                               |       | 27                    |       | 113                   |       | 162                   |       |
| Beneficial  value of change in conversion price of suborinated notes                                                  |       | 938                   |       | —                |       | —                |       |
| PIK  notes issued for interest                                                                                        |       | 21                    |       | 228                   |       | —                |       |
| Accrued  interest converted to common stock                                                                           |       | 204                   |       | 250                   |       | 84                    |       |
| Accrued  interest converted to preferred stock                                                                        |       | 781                   |       | 207                   |       | —                |       |
| Loss  on disposition of fixed assets                                                                                  |       | 12                    |       | 2                     |       | —                |       |
| Warrant  repricing                                                                                                    |       | —                |       | —                |       | 19                    |       |
| Trade  name impairment                                                                                                |       | 2,652                 |       | —                |       | —                |       |
| Imapirment  on disposal of Energy Technology business                                                                 |       | 503                   |       | —                |       | —                |       |
| Deferred  income tax benefit                                                                                          |       | (1,034                | )          | —                |       | —                |       |
| Goodwill  impairment                                                                                                  |       | —                |       | —                |       | 4,182                 |       |
| Changes  in assets and liabilities, net of business acquisitions and dispositions                                     |       |                  |       |                  |       |                  |       |
| Accounts  receivable                                                                                                  |       | 4,967                 |       | (13,302               | )          | (3,701                | )          |
| Inventories                                                                                                           |       | (224                  | )          | 28                    |       | 42                    |       |
| Costs  and estimated earnings in excess of billings onuncompleted contracts                                           |       | (1,454                | )          | (2,286                | )          | (953                  | )          |
| Prepaid  expenses and other current assets                                                                            |       | 666                   |       | (542                  | )          | (192                  | )          |
| Accounts  payable                                                                                                     |       | (7,044                | )          | 7,054                 |       | 1,646                 |       |
| Accrued  liabilities                                                                                                  |       | 1,905                 |       | 455                   |       | 281                   |       |
| Billings  in excess of costs and estimated earnings onuncompleted contracts                                           |       | (1,324                | )          | 800                   |       | 572                   |       |
| Deferred  revenue                                                                                                     |       | (95                   | )          | (691                  | )          | (548                  | )          |
| Other  current liabilities                                                                                            |       | (418                  | )          | 107                   |       | (75                   | )          |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| Net  cash used in operating activities                                                                                |       | (12,707               | )          | (13,444               | )          | (6,774                | )          |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| **Cash Flows Used in Investing Activities**                                                                           |       |                  |       |                  |       |                  |       |
| Acquisition  (including acquisition costs), net of cash acquired                                                      |       | (1,047                | )          | (3,804                | )          | (704                  | )          |
| Proceeds  from sale of fixed assets                                                                                   |       | 11                    |       | 3                     |       | —                |       |
| Purchase  of property and equipment                                                                                   |       | (378                  | )          | (403                  | )          | (514                  | )          |
| Restricted  cash                                                                                                      |       | (500                  | )          | —                |       | —                |       |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| Net  cash used in investing activities                                                                                |       | (1,914                | )          | (4,204                | )          | (1,218                | )          |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| **Cash Flows From Financing Activities**                                                                              |       |                  |       |                  |       |                  |       |
| (Payments)  borrowings on line of credit                                                                              |       | (3,966                | )          | 14,726                |       | —                |       |
| Proceeds  from long-term debt                                                                                         |       | 27                    |       | 134                   |       | 5,171                 |       |
| Payments  of long-term debt                                                                                           |       | (1,611                | )          | (620                  | )          | (57                   | )          |
| Proceeds  from issuance of common stock                                                                               |       | 42,301                |       | 3,001                 |       | 3,000                 |       |
| Costs  related to stock issuances                                                                                     |       | (3,130                | )          | (760                  | )          | (248                  | )          |
| Cash  paid for deferred financing costs                                                                               |       | —                |       | —                |       | (9                    | )          |
| Proceeds  from issuance shares for benefit plans                                                                      |       | 91                    |       | —                |       | —                |       |
| Proceeds  from exercise of options and warrants                                                                       |       | 45                    |       | 120                   |       | 252                   |       |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| Net  cash provided by financing activities                                                                            |       | 33,757                |       | 16,601                |       | 8,109                 |       |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| **Net Increase (Decrease) in Cash and Cash Equivalents**                                                              |       | 19,136                |       | (1,047                | )          | 117                   |       |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| **Cash and Cash Equivalents, at beginning of period**                                                                 |       | 3,734                 |       | 4,781                 |       | 4,664                 |       |
|                                                                                                                  |       |                  |       |                  |       |                  |       |
| **Cash and Cash Equivalents, at end of period**                                                                       | ** ** | **$**                 | 22,870     | ** **            | **$**      | 3,734                 | ** ** | **$** | 4,781 | ** ** |

 

F-6

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Tableof Contents

 

**LimeEnergy Co.**

**Statementsof Cash Flows**

**($ inthousands)**

 
| ** **                                                                                                     | ** ** | **Year ended  December 31,  2009** | ** ** | **Year ended  December 31,  2008** | ** ** | **Year ended  December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| **Supplemental Disclosures of Cash Flow  Information**                                                         |       |                                         |       |                                         |       | ** **                                   |       |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Cash  paid during the period for interest — continuing operations                                         | ** ** | **$**                                        | **467**    | ** **                                   | **$**      | **1,124**                                    | ** ** | **$** | **133** | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Cash  paid during the period for interest — discontinued****operations                                    | ** ** | **1**                                        | ** ** | **3**                                        | ** ** | **1**                                        | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Interest  obligation satisfied through the issuance of****common  stock                                        | ** ** | **204**                                      | ** ** | **250**                                      | ** ** | **84**                                       | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Cash  paid for preferred dividends                                                                             | ** ** | **1,006**                                    | ** ** | **—**                                   | ** ** | **—**                                   | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Conversion  of convertible debt to common stock                                                                | ** ** | **5,000**                                    | ** ** | **—**                                   |       | **—**                                   |       |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Stock,  warrants and options issued in****exchange for  services received                                      | ** ** | **27**                                       | ** ** | **113**                                      | ** ** | **17**                                       | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Accrued  earn-out satisfied through the issuance of****common  stock                                           | ** ** | **293**                                      | ** ** | **—**                                   | ** ** | **—**                                   | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Satisfaction  of accrued dividend through the issuance of****19,063  shares of Series A-1 preferred stock | ** ** | **781**                                      | ** ** | **—**                                   | ** ** | **—**                                   | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Extinguishment  of line of credit                                                                              | ** ** | **21**                                       | ** ** | **—**                                   | ** ** | **—**                                   | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Accrual  satisfied through the issuance of****common stock                                                     | ** ** | **—**                                   | ** ** | **—**                                   | ** ** | **346**                                      | ** ** |
|                                                                                                           |       |                                         |       |                                         |       | ** **                                   |       |
| Issuance  of revolving credit note in satisfaction of****interest  payable                                     | ** ** | **$**                                        | **21**     | ** **                                   | **$**      | **228**                                      | ** ** | **$** | **—** | ** ** |

 

The holder of a $14,500revolving credit note converted the note and $207 of accrued interest thereoninto 358,710 shares of the Company’s Series A-1 preferred stock on November 14,2008.

 

The holder of a $150 notepayable converted the note and $50 of accrued interest into 32,848 shares ofthe Company’s common stock on July 10, 2008.

 

*See accompanying notes toconsolidated financial statements.*

 

F-7

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Table of Contents

 

Lime Energy Co.

Notes to ConsolidatedFinancial Statements

 

***Note 1 — Description of Business***

 

Lime Energy Co. (the “Company”), a Delaware corporation headquarteredin Elk Grove Village, Illinois, is a provider of integrated energy engineering,consulting and implementation solutions.  The Company is made up of 17 separatecompanies, but with the sale of the Energy Technology business in August 2009,all of the remaining businesses operate in the same business segment, theEnergy Efficiency Services segment.  Thesubsidiary companies comprising these segments are as follows:

 

*EnergyEfficiency Services:*

Applied Energy Management, Inc, andits eight subsidiary companies (“AEM”)

Kapadia Energy Services, Inc.(“Kapadia”)

Lime Finance, Inc. (“LimeFinance”)

Lime Midwest, Inc. (“LimeMidwest”)

Lime Energy Co New York, Inc.(“Lime New York”)

Parke Industries, Incorporated (“Parke”)

Preferred Lighting, Inc. (“PreferredLighting”) and

Texas Energy Products, Inc. (“TexasEnergy”)

 

*DiscontinuedOperations (Energy Technology):*

MaximumPerformance Group, Inc. (“MPG”)

 

On August 10, 2009, the Company sold the assets of its EnergyTechnology segment.  The operatingresults of this segment have been reported as discontinued operations in theaccompanying financial statements.

 

***Note 2 — Basis of Presentation***

 

The accompanying consolidated financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America (“GAAP”).

 

***Note 3 - Summary of Significant AccountingPolicies***

 

***Principles ofConsolidation***

 

The consolidated financial statements include the accounts of LimeEnergy Co. and its wholly owned subsidiaries.  All significant intercompany balances andtransactions have been eliminated.

 

***Use of Estimates***

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

F-8

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Table ofContents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Cash and Cash Equivalents***

 

The Company considers highly liquid investments with a maturity ofthree months or less when purchased to be cash equivalents.

 

***Concentration of Risk***

 

The Company’s customers are primarily Energy Service Companies (“ESCOs”)and owners of, managers of, or tenants of, commercial and industrialbuildings.  Two customers accounted forapproximately 30% of the Company’s consolidated billings during the year ended December 31,2009, while two customers accounted for approximately 25% of the Company’sconsolidated billings during the year ended December 31, 2008.  One customer accounted for approximately 13%of the Company’s consolidated billings during the year ended December 31,2007.

 

The Company purchases itsmaterials from a variety of suppliers and continues to seek out alternatesuppliers for critical components so that it can be assured that its sales willnot be interrupted by the inability of a single supplier to deliverproduct.  During the year ended December 31,2009, no supplier accounted for more than 10% of the Company’s purchases, whileone supplier accounted for approximately 10% of the Company’s purchases duringthe year ended December 31, 2008 and two suppliers accounted forapproximately 17% of its purchases during the year ended December 31,2007.

 

The Company maintains cash and cash equivalents in accounts withfinancial institutions in excess of the amount insured by the Federal DepositInsurance Corporation. The Company monitors the financial stability of theseinstitutions regularly and management does not believe there is significantcredit risk associated with deposits in excess of federally insured amounts.

 

***Allowance forDoubtful Accounts***

 

TheCompany records an allowance for doubtful accounts based on specificallyidentified amounts that it believes to be uncollectible.  If actual collections experience changes,revisions to the allowance may be required. After all attempts to collect a receivable have failed, the receivable iswritten off against the allowance.  Basedon the information available to it, the Company believes its allowance fordoubtful accounts is adequate. However, actual write-offs might exceed therecorded allowance.

 

***Inventories***

 

Inventoriesare stated at the lower of cost or market. Cost is determined utilizing the first-in, first-out (FIFO) method.

 

***Properties &Equipment***

 

Propertyand equipment are stated at cost.  Forfinancial reporting purposes depreciation is computed over the estimated usefullives of the assets by the straight-line method over the following lives:

 
| Buildings                 |   | 39  years     |
|---------------------------|--------|---------------|
| Office  equipment         |   | 3  - 5 years  |
| Furniture                 |   | 5  - 10 years |
| Construction  equipment   |   | 3  - 5 years  |
| Transportation  equipment |   | 3  - 5 years  |

 

F-9

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Goodwill***

 

Goodwillrepresents the purchase price in excess of the fair value of assets acquired inbusiness combinations.  ASC 350, “Goodwilland Other Intangible Assets,” requires the Company to assess goodwill and otherindefinite-lived intangible assets for impairment at least annually in theabsence of an indicator of possible impairment and immediately upon anindicator of possible impairment.  Duringthe fourth quarter of 2007, the Company completed its annual assessment ofimpairment regarding the goodwill recorded for its Energy Efficiency Servicesand Energy Technology businesses.   Thatassessment, supported by independent appraisals of the fair value of thesegment, made using customary valuation methodologies, including discountedcash flows and fundamental analysis, did not identify any impairment for theEnergy Efficiency Services business, but did determine that the value of theEnergy Technology’s goodwill was impaired. The decline in the fair value of the Energy Technology segment wasprimarily the result of lower than expected sales of the eMAC line of HVACcontrollers, in large part due to delays in product enhancements designed toreplace discontinued components and add cellular communicationcapabilities.  As a result of the declinein the fair value, the Company recorded an impairment loss of $4,182,000 duringthe fourth quarter of 2007.

 

During the fourth quarter of 2008 the Company updated its analyses forthe Energy Efficiency Services business and concluded that the fair value ofthe businesses based on the discounted current value of the estimated futurecash flows exceeded the carrying value, indicating that the goodwill was notimpaired.

 

The company tested the goodwill associated with the AEM purchase forimpairment for the first time at the end of 2009.  For goodwill testing purposes, the Companyanalyzed the goodwill associated with the AEM acquisition and the C&Ibusiness sepaerately.  The goodwillimpairment analysis indicated there was no goodwill impairment as the fairvalue of the C&I and AEM testing units exceeded their carrying values.  The Company considered various factors indetermining the fair value of the testing units, including discounted cashflows from projected earnings, values for comparable companies and the marketprice of our common stock. It will continue to monitor for any impairmentindicators such as underperformance of projected earnings, net book valuecompared to market capitalization, declining stock price and significantadverse economic and industry trends.  Inthe event that either testing unit does not achieve projected results, or, asthe result of changes in facts of circumstances, the Company could incur agoodwill impairment charge in a future period.

 

TheCompany records impairment losses on long-lived assets used in operations whenevents and circumstances indicate that the assets might be impaired and theundiscounted cash flows estimated to be generated by those assets are less thanthe carrying amount of those items. The Company’s cash flow estimates are basedon historical results adjusted to reflect its best estimate of future marketand operating conditions. The net carrying value of assets not recoverable isreduced to fair value.

 

Theseestimates of fair value represent management’s best estimate based on industrytrends and reference to market rates and transactions.  During 2009, based on negotiations to sellits Energy Technology business, the Company reduced the carrying value ofcertain assets of the business unit to their expected fair value, incurring animpairment loss of $503,000.

 

F-10

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***RevenueRecognition***

 

TheCompany recognizes revenue when all four of the following criteria are met: (i) persuasiveevidence has been received that an arrangement exists; (ii) delivery ofthe products and/or services has occurred; (iii) the selling price isfixed or determinable; and (iv) collectibility is reasonably assured.  In addition, the Company follows theprovisions of the Securities and Exchange Commission’s Staff AccountingBulletin No. 104, Revenue Recognition, which sets forth guidelines in thetiming of revenue recognition based upon factors such as passage of title,installation, payments and customer acceptance. Any amounts received prior to satisfying the Company’s revenuerecognition criteria is recorded as either Costs and Estimated Earnings InExcess Of Billings On Uncompleted Contracts or Deferred Revenue in theaccompanying balance sheet.

 

TheCompany accounts for revenue on its long-term contracts utilizing a combinationof the percentage completion method and the completed contract method,depending on the length of time required to complete the underlyingproject.  For projects expected to takemore than 30 to 60 days to complete it uses the percentage of completion methodto recognize revenue in conjunction with the cost-to-cost method of measuringthe extent of progress toward completion, consistent with ASC 605-35 and theAICPA’s Statement of Position 81-1 (SOP 81-1). For shorter term projects it uses the completed contract method wherebyrevenue is recognized once the project is substantially complete.  Regardless of the method used to recordrevenue, any anticipated losses on contracts are charged to operations as soonas they are determinable.

 

Billingson contracts that do not meet the Company’s revenue recognition policyrequirements for which it has been paid or has a valid account receivable arerecorded as Billings in Excess of Costs and Estimated Earnings on UncompletedContracts (“Billings in Excess”). Billings in Excess totaled $634,000 and$1,958,000 as of December 31, 2009 and 2008, respectively.

 

TheCompany’s MPG subsidiary, which is included in discontinued operations, oftenbundled contracts to provide monitoring services and Internet access with thesale of its eMAC hardware.  As a result,these sales were considered to be contracts with multiple deliverables which atthe time the hardware was delivered and installed included undelivered servicesessential to the functionality of the product. Accordingly, the Company deferred the revenue for the product andservices and the cost of the equipment and installation and recognized themover the term of the monitoring contract. The monitoring contracts varied in length from 1 month to 5 years.  Deferred revenue totaled $0, and $448,000 asof December 31, 2009 and 2008, respectively, related to these contracts.

 

***Costs and Estimated Earnings inExcess of Billings on Uncompleted Contracts***

 

Asof December 31, 2009, the Company had several customer projects underwayfor which it had incurred costs but not recognized revenue due to its revenuerecognition policies, or had recognized revenue but not yet invoiced thecustomer.  The Company records theseexpenses and unbilled revenue as a current asset titled “Costs and estimatedearnings in excess of billings on uncompleted contracts.” The expenses includedin this account will be recognized as the related projects are completed andrevenue is recognized.  The Company hadcosts and estimated earnings in excess of billings on uncompleted contracts of$5,532,000, and $4,078,000 at December 31, 2009 and 2008, respectively.

 

***Shipping andHandling Costs***

 

TheCompany classifies freight costs billed to customers as revenue.  Costs related to freight are classified ascost of sales.

 

F-11

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Advertising,Marketing and Promotional Costs***

 

Expenditureson advertising, marketing and promotions are charged to operations in theperiod incurred and totaled $182,000, $157,000 and $168,000 for the periodsended December 31, 2009, 2008 and 2007, respectively.

 

***Income Taxes***

 

Incometaxes are accounted for under the asset and liability method.  Deferred income taxes are recognized for thetax consequences in future years of the differences between the tax basis ofassets and liabilities and their financial reporting amounts at each period endbased on enacted tax laws and statutory tax rates applicable to the periods inwhich the differences are expected to affect taxable earnings.  Valuation allowances are established when necessaryto reduce deferred tax assets to the amount more likely than not to berealized.

 

***Net Loss PerShare***

 

TheCompany computes loss per share under ASC 260-10, “Earnings Per Share.”  The statement requires presentation of twoamounts; basic and diluted loss per share. Basic loss per share is computed by dividing the loss available tocommon stockholders by the weighted average common shares outstanding.  Diluted earnings per share would include allcommon stock equivalents unless anti-dilutive. The Company has not included the outstanding options, warrants,convertible preferred stock or convertible debt as common stock equivalentsbecause the effect would be antidilutive.

 

Thefollowing table sets forth the weighted average shares issuable upon exerciseof outstanding options and warrants and conversion of preferred stock andconvertible debt that is not included in the basic and diluted net loss pershare available to common stockholders:

 
| **December 31,**                                                       | ** ** | **2009**      | ** ** | **2008**      | ** ** | **2007**      | ** ** |
|-----------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Weighted  average shares issuable upon exercise of outstanding options      | ** ** | **2,550,960** | ** ** | **2,162,516** | ** ** | **1,744,873** | ** ** |
| Weighted  average shares issuable upon exercise of outstanding warrants     | ** ** | **792,693**   | ** ** | **416,428**   | ** ** | **332,560**   | ** ** |
| Weighted  average shares issuable upon conversion of convertible debt *(1)* | ** ** | **467,437**   | ** ** | **714,286**   | ** ** | **419,276**   | ** ** |
|                                                                        | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Total                                                                       | ** ** | **3,811,090** | ** ** | **3,293,230** | ** ** | **2,496,709** | ** ** |

 

----

*(1)**      *The subordinated convertible notes were converted to common stockduring 2009

 

***Fair Value ofFinancial Instruments***

 

Thecarrying amounts reported in the consolidated balance sheets for cash, accountsreceivable, accounts payable and accrued expenses approximate fair valuebecause of the short-term nature of these amounts.  The Company’s long-term debt approximatesfair value based on instruments with similar terms.

 

F-12

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Stock-basedCompensation***

 

TheCompany has a stock incentive plan that provides for stock-based employeecompensation, including the granting of stock options and shares of restrictedstock, to certain key employees. Effective January 1, 2006, the Company adopted ASC 718 (Statementof Financial Accounting Standards No. 123R, Share-Based Payment), whichrequires companies to record stock compensation expense for equity-based awardsgranted, including stock options and restricted stock unit grants, over theservice period of the equity-based award based on the fair value of the awardat the date of grant. The Company recognized $1,803,000, $3,784,000, and$3,727,000 of stock compensation expense during the years ended December 31,2009, 2008 and 2007, respectively. Please refer to Note 25 for additional information regarding stock-basedcompensation expense.

 

***WarrantyObligations***

 

TheCompany warrants to the purchasers of its products that the product will befree of defects in material and workmanship for one year from the date ofinstallation. The Company records the estimated cost that may be incurred underits warranties at the time the product revenue is recognized based upon therelationship between historical and anticipated warranty costs and salesvolumes.  The Company periodicallyassesses the adequacy of its recorded warranty liability and adjusts theamounts as necessary.  With the sale ofits Energy Technology business in 2009, the Company no longer sells productsthat it warrants.

 

***Insurance Reserves***

 

FromOctober 2005 through August 2008, the Company maintained a partiallyself-funded health insurance program for its employees.  Under the program the Company was responsiblefor the first $35,000 of each individual claim, but its exposure is limited ona monthly and cumulative basis through insurance provided by a third partyinsurance company.  The Company accruedon a monthly basis an amount sufficient to cover its maximum exposure under theprogram.  At the end of each plan year itassesses the adequacy of the reserve based on its claims history and adjusted thereserve as necessary.  The Company isresponsible for a certain amount of claims incurred prior to the termination ofthe plan but paid after the plan’s termination on August 31, 2008.  It established a reserve to cover the maximumpotential liability for post termination payments. It had accrued liabilitiesof $0 and $28,000 as of December 31, 2009 and 2008, respectively, to coverfuture claims under the program.

 

***Recent AccountingPronouncements***

 

The Financial AccountingStandards Board (FASB) issued Accounting Standards Codification (ASC) 105-10, “TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles,” which was effective for fiscal years, and interimperiods within such fiscal years, ending after September 15, 2009. ASC105-10 establishes an authoritative United States GAAP superseding allpre-existing accounting standards and literature. ASC 105-10 is effective forthe Company’s September 30, 2009 interim financial reporting, and as aresult the Company changed its references to the new Accounting StandardsCodification. All references to specific authoritative guidance have beenupdated within this report to reflect the new Accounting Standards Codificationstructure.

 

In December 2007, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 141(R), “Business Combinations” (SFAS141(R)) (codified within ASC Topic 805). SFAS 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,the goodwill acquired and any non-controlling interest in the acquiree.  This statement also establishesdisclosurerequirements to enable the evaluation of the nature and financial effect of thebusiness 

 

F-13

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Tableof Contents

 

Lime Energy Co.

Notesto Consolidated Financial Statements

 

combination. SFAS 141(R) is effective for fiscal years beginningon or after December 15, 2008.  Theadoption of this statement will affect the Company’s accounting for futureacquisitions.

 

Effective January 1,2009, the Company adopted a new accounting standard included in ASC 350, Goodwilland Other, formerly FASB Staff Position FAS 142-3, Determination of the UsefulLife of Intangible Assets which amended previous guidance for determining theuseful life of a recognized intangible asset and requires enhanced disclosuresso that users of financial statements are able to assess the extent to whichthe expected future cash flows associated with the asset are affected by theCompany’s intent and/or ability to renew or extend the agreement. The adoptionof this new accounting standard did not have a material impact on the Company’sconsolidated Financial Statements.

 

Effective January 1,2009, the Company adopted a new accounting standard included in ASC 260,Earnings Per Share, formerly FASB Staff Position No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities. This pronouncement establishes that unvestedshare-based payment awards that contain nonforfeitable rights to dividends areparticipating securities and shall be included in the computation of earningsper share under the two-class method. The adoption of this new accounting standard did not have a materialeffect on the Company’s consolidated financial statements.

 

In June 2009, the FASBissued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(SFAS 167) (codified under ASC 810). SFAS 167 amends the consolidation guidanceapplicable to variable interest entities and affects the overall consolidationanalysis under FASB Interpretation No. 46(R). SFAS 167 is effective forfiscal years beginning after November 15, 2009. The adoption of thisstatement is not expected to have a impact on the Company’s consolidatedresults of operations and financial condition.

 

***Note 4 — Acquisitions***

 

*Applied Energy Management, Inc.*

 

On June 11, 2008 the Company acquired allof the outstanding capital stock of Applied Energy Management, Inc. (“AEM”)for $4 million in cash and 945,777 shares of the Company’s common stock, ofwhich $3.5 million in cash and 882,725 shares were paid at the time of closingand $500,000 and 63,052 shares were paid in 2009 following determination of theamounts owed under an earn-out provision of the purchase agreement.  For accounting purposes the common stockissued in June 2008 was valued at $7.93 per share, the average closingprice of the stock for the 30 trading days prior to the closing and the sharesissued in 2009 were valued at $4.65, the closing price of the stock on December 31,2008.  The acquisition was recorded usingthe purchase method of accounting.

 

F-14

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

The assets acquired and liabilities assumed in theacquisitions, are as follows (in thousands):

 
| Cash                                                                         | ** ** | **$**       | **2**      | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------|
| Accounts  receivable                                                         | ** ** | **5,477**   | ** ** |
| Costs  and estimated profits in excess of billings on uncompleted contracts  | ** ** | **839**     | ** ** |
| Other  current assets                                                        | ** ** | **251**     | ** ** |
| Property  and equipment                                                      | ** ** | **589**     | ** ** |
| Identifiable  intangible assets                                              | ** ** | **5,250**   | ** ** |
| Goodwill                                                                     | ** ** | **11,858**  | ** ** |
| Total  Assets Acquired                                                       | ** ** | **24,266**  | ** ** |
|                                                                         | ** ** | ** **  | ** ** |
| Line  of credit                                                              | ** ** | **(3,761**  | **)**      |
| Accounts  payable                                                            | ** ** | **(5,306**  | **)**      |
| Billings  in excess of costs and estimated earnings on uncompleted contracts | ** ** | **(521**    | **)**      |
| Accrued  expenses                                                            | ** ** | **(857**    | **)**      |
| Long  term debt                                                              | ** ** | **(2,120**  | **)**      |
| Total  liabilities assumed                                                   | ** ** | **(12,565** | **)**      |
|                                                                         | ** ** | ** **  | ** ** |
| Net  assets acquired                                                         | ** ** | **11,701**  | ** ** |
|                                                                         | ** ** |        | ** ** |
| Less  valuation of shares issued for acquisition                             | ** ** | **(7,293**  | **)**      |
| Acquisition  costs                                                           | ** ** | **(408**    | **)**      |
|                                                                         | ** ** |        | ** ** |
| Total  cash paid                                                             | ** ** | **$**       | **4,000**  | ** ** |

 

The Company hasassessed the fair values of acquired assets and assumed liabilities andallocated the purchase price accordingly. For purposes of the allocation, ithas allocated $5,250,000 of the AEM purchase price to identifiable intangibleassets with definitive lives such as sales backlog and the sales pipeline.These amounts have been capitalized and are being amortized over the estimateduseful life of the related identifiable intangible assets based on the expectedfuture cash flows.  Amortization ofgoodwill and intangibles related to this acquisition will not be deductible fortax purposes.  The amounts capitalizedand the estimated useful life of the identifiable intangible assets are asfollows:

 
| **Asset  Class**  | ** ** | **Estimated  Value** | ** ** | **Estimated  Useful Life** | ** ** |
|-------------------|------------|----------------------|------------|----------------------------|------------|
| Contract  backlog |       | $                    | 252,000    |                       | 12 months  |   |
| Sales  pipeline   |       | 1,862,000            |       | 18 months                  |       |
| Customer  list    |       | 3,011,000            |       | 5 to 15 years              |       |
| Technology        |       | 125,000              |       | 5 years                    |       |
|                   |            |                      |            |                            |            |  |

 

Founded in 1984,AEM designs, engineers and constructs projects that improve energy efficiencyand reduce water consumption in commercial, industrial, government and publicbuildings.  AEM’s services include energyconsulting, lighting retrofit, water conservation, mechanical and electricalconservation, building envelope weatherization and renewable projectdevelopment and implementation.  AEM isheadquartered near Charlotte, North Carolina, and has offices in Pennsylvania,Massachusetts, New York, New Jersey, North Carolina and Florida.  AEM had approximately 200 employees at thetime of the acquisition.

 

F-15

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

*TexasEnergy Products and Preferred Lighting, Inc.*

 

On June 6, 2007, effective retroactive toMay 31, 2007, the Company entered into an Asset Purchase Agreement withGeorge Bradley Boyett dba Texas Energy Products.  Pursuant to the agreement, Texas EnergyProducts, Inc., a newly formed wholly owned subsidiary of Lime Energy,acquired all of the business assets and assumed certain liabilities held by Mr. Boyettfor $319,000 in cash and 28,571 shares of Lime Energy common stock.  For accounting purposes the common stock wasvalued at $7.49 per share, the average closing price of the stock for the 20 tradingdays immediately prior to the closing. The acquisition was recorded using the purchase method of accounting.

 

On August 6, 2007, effective retroactiveto July 31, 2007, the Company entered into an Asset Purchase Agreementwith Preferred Lighting, Inc. pursuant to which a newly formed whollyowned subsidiary of Lime Energy, acquired all of the business assets andassumed certain liabilities held by Preferred Lighting, Inc. for $410,000in cash (including $110,000 paid in 2008 pursuant to an earn-out based on 2007earnings), 15,069 shares of Lime Energy common stock and warrants to purchase21,429 shares of Lime Energy common stock at $13.23 per share.  For accounting purposes the common stock wasvalued at $13.30 per share, the average closing price of the stock for the 20trading days immediately prior to the closing and the warrants were valued at$184,500 using a modified Black-Scholes option pricing model utilizing thefollowing assumptions: risk free rate of 4.909%, expected volatility of 75.0%,expected dividend of $0, and expected life of four years.  The acquisition was alsorecorded using the purchase method of accounting.

 

The assets acquired and liabilities assumed inthe acquisitions, are as follows (in thousands):

 
| ** **                                                    | ** ** | **Texas  Energy** | ** ** | **Preferred  Lighting** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|
|                                                          | ** ** | ** **        | ** ** | ** **              | ** ** |
| Cash                                                          | ** ** | **$**             | **18**     | ** **              | **$**      | **31** | ** ** |
| Accounts  receivable                                          | ** ** | **78**            | ** ** | **24**                  | ** ** |
| Inventory                                                     | ** ** | **68**            | ** ** | **54**                  | ** ** |
| Other  current assets                                         | ** ** | **5**             | ** ** | **17**                  | ** ** |
| Property  and equipment                                       | ** ** | **7**             | ** ** | **9**                   | ** ** |
| Identifiable  intangible assets                               | ** ** | **496**           | ** ** | **368**                 | ** ** |
| Goodwill  (deductible)                                        | ** ** | **35**            | ** ** | **439**                 | ** ** |
| Total  assets acquired                                        | ** ** | **707**           | ** ** | **942**                 | ** ** |
|                                                          | ** ** | ** **        | ** ** | ** **              | ** ** |
| Accounts  payable                                             | ** ** | **(101**          | **)**      | **—**              | ** ** |
| Accrued  expenses                                             | ** ** | **(19**           | **)**      | **(20**                 | **)**      |
| Other  current liabilities                                    | ** ** | **(36**           | **)**      | **(108**                | **)**      |
| Total  liabilities assumed                                    | ** ** | **(156**          | **)**      | **(128**                | **)**      |
|                                                          | ** ** | ** **        | ** ** | ** **              | ** ** |
| Net  assets acquired                                          | ** ** | **551**           | ** ** | **814**                 | ** ** |
|                                                          | ** ** | ** **        | ** ** | ** **              | ** ** |
| Less  valuation of shares and warrants issued for acquisition | ** ** | **(214**          | **)**      | **(385**                | **)**      |
| Acquisition  costs                                            | ** ** | **(18**           | **)**      | **(19**                 | **)**      |
| Total  cash paid                                              | ** ** | **$**             | **319**    | ** **              | **$**      | **410** | ** ** |

 

The Company hasassessed the fair values of acquired assets and assumed liabilities andallocated the purchase price accordingly. For purposes of the allocation, ithas allocated $496,000 and $368,100 of the Texas Energy Products and PreferredLighting purchase prices, respectively, to identifiable intangible assets withdefinitive lives such as sales backlog and the sales pipeline. These amountshave been capitalized and will be amortized over the estimated useful life ofthe related identifiable intangible assets

 

F-16

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

based on the expectedfuture cash flows.  This amortization andgoodwill will be deductible for tax purposes. The amounts capitalized and the estimated useful life of theidentifiable intangible assets are as follows (in thousands):

 
| **Asset  Class**            | ** ** | **Estimated  Value** | ** ** | **Estimated  Useful Life** | ** ** |
|-----------------------------|------------|----------------------|------------|----------------------------|------------|
| * *                    |       |                 |       |                       |       |
| ***Texas Energy Products*** |       |                 |       |                       |       |
| Sales  backlog              |       | $                    | 223        |                       | 3 Months   |   |
| Sales  pipeline             |       | 273                  |       | 6 Months                   |       |
|                        |       |                 |       |                       |       |
| ***Preferred Lighting***    |       |                 |       |                       |       |
| Sales  backlog              |       | $                    | 15         |                       | 4 months   |   |
| Sales  pipeline             |       | 335                  |       | 16 months                  |       |
| Customer  list              |       | 18                   |       | 3 years                    |       |

 

Both companies are energy efficiency servicescompanies that specialize in energy efficient lighting upgrades.  In addition Texas Energy products marketsenergy efficient window film and roofing. Texas Energy Products is headquartered in Austin, Texas, and has a salesoffice in Dallas, Texas.  PreferredLighting is headquartered in Seattle, Washington.

 

The acquisitionsof AEM, Texas Energy and Preferred Lighting were recorded using the purchasemethod of accounting.  Accordingly, theresults of operations for each company have been included in the consolidatedstatement of operations since their respective dates of acquisition.

 

Unaudited pro forma results of operations forthe years ended December 31, 2008 and 2007 for the Company assuming theacquisition of AEM had taken place on January 1, 2007 are as follows (inthousands, except per share data):

 
| **Year ended December 31,**                              | ** ** | **2008**    | ** **  | **2007**    | ** ** |
|---------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
|                                                          |       |        |        |        |       |
| Revenue:                                                      |       |        |        |        |       |
| As Reported                                                   | ** ** | **$**       | **54,975**  | ** **  | **$**      | **16,384** | ** ** |
| Pro-forma                                                     | ** ** | **65,112**  | ** **  | **57,284**  | ** ** |
|                                                          | ** ** | ** **  | ** **  | ** **  | ** ** |
| Net Loss from  Continuing Operations:                         | ** ** | ** **  | ** **  | ** **  | ** ** |
| As Reported                                                   | ** ** | **$**       | **(10,556** | **)**       | **$**      | **(7,786** | **)** |
| Pro-forma                                                     | ** ** | **(13,401** | **)**       | **(11,609** | **)**      |
|                                                          | ** ** | ** **  | ** **  | ** **  | ** ** |
| Basic and Diluted Loss  per Share from Continuing Operations: | ** ** | ** **  | ** **  | ** **  | ** ** |
| As Reported                                                   | ** ** | **$**       | **(1.29**   | **)**       | **$**      | **(1.03** | **)** |
| Pro-forma                                                     | ** ** | **(1.56**   | **)**       | **(1.37**   | **)**      |

 

The pro forma operating results as if theCompany had completed the acquisitions of Texas Energy and Preferred Lightingare not significant to the Company’s financial statements and are notpresented.

 

F-17

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Note 5 — Acquisition of Advanced Biotherapy, Inc.***

 

On March 3, 2009, the Company exchanged 2,252,341 shares of itscommon stock for 1,060,421,884 shares of Advanced Biotherapy, Inc. (“ADVB”)held by certain stockholders of ADVB (the “Sellers”) representing approximately90.8% of ADVB’s issued and outstanding shares pursuant to a Stock PurchaseAgreement dated November 18, 2008. The Company then completed a short-form merger in which it merged ADVBwith and into a newly formed merger subsidiary, with the merger subsidiarycontinuing as the surviving entity.  Uponthe closing of the merger the Company obtained access to ADVB’s assets,including approximately $7.4 million of cash and a revolving credit note issuedby the Company that had an outstanding balance of $42,000 and accrued interestpayable of $28,000.  The Company hascancelled the revolving credit note and does not plan to continue to operateADVB as a going concern.

 

The Company exchanged the remaining shares of ADVB for 233,808 sharesof the Company’s common stock, pursuant to a Form S-4 registrationstatement (File No. 333-156924) that was declared effective by theSecurities and Exchange Commission on February 6, 2009.

 

Richard P. Kiphart, one of the Sellers, was the beneficial owner ofmore than 80% of the shares of ADVB and served as its Chairman. Mr. Kiphartalso served and continues to serve as Chairman of the Company, and was thebeneficial owner of approximately 40% of the common shares of the Company.  David Valentine is also a stockholder anddirector of Lime and was a stockholder and director of ADVB.

 

ADVB was formed for the purpose of developingbiologic therapeutic antibodies for the treatment of a range of autoimmunediseases based on an anti-cytokine platform technology. ADVB’s activitiesconsisted primarily of research, development and investigational human clinicaltrials.  During 2006, ADVB completed adebt restructuring and equity placement at which time Mr. Kiphart becameADVB’s chairman and majority owner.  Dueto the time and expense required to commercialize the methods underlying itspatents in combination with the remaining life of the patents, ADVB’smanagement decided to discontinue all research and development work in 2006 andinstead focus on investment and acquisition opportunities.  As of December 31, 2008, it had onepart-time employee whom Lime Energy did not retain after the stock exchange.

 

ADVB had no revenue generating operations and didnot have employees capable of developing a product that would be considered abusiness. Therefore the Company did not consider ADVB a business as defined byRegulation S-X, Rule 11-01(d) or by generally accepted accountingprinciples. Consequently, the merger was not accounted for as a businesscombination under the guidance of ASC 805, Business Combinations.  The substance of the ADVB acquisitionincludes two distinct events. First, as a result of the transaction, theCompany has settled the amounts due to ADVB under its revolving credit note(see Note 12).  In addition, the Companyreceived approximately $7.4 million of cash in exchange for the shares ofcommon stock it issued in connection with the ADVB acquisition. As a result ofthe merger, the Company eliminated any debt due to ADVB, recorded the assets acquired(consisting primarily of cash and cash equivalents) at fair value and creditedequity for the value of its common shares issued in connection with the ADVBacquisition.

 

***Note 6 — Impairment Loss***

 

During 2009, the Company determined that valueattributed to the Parke trade name was impaired due to its decision to operatethe business under the Lime Energy name. As a result, it reduced thecarrying value of this intangible asset to $0, incurring a $2.6 millionimpairment loss during the fourth 

 

F-18

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Tableof Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

quarter of 2009. This loss was partially offset by the reversal of a $1 million deferredtax liability associated with this indefinite-lived asset.

 

***Note 7 — Discontinued Operations***

 

The Company adopted ASC 360-10-05 “Impairment or Disposal of Long-LivedAssets” at the beginning of 2002.  Amongother things, ASC 205-20 “Presentation of Financial Statements” requires thatthe results of operations and related disposal costs as well as the gain orloss on the disposal of a business unit be presented on the statement ofoperations as a separate component of income before extraordinary items for allperiods presented.

 

On August 10,2009, the Company sold its Energy Technology business.  Due to the continuing losses incurred by thissegment, the Company determined in 2007 that the goodwill associated with thesegment was completely impaired and recorded a charge of $4,182,000.  This impairment charge has beenincluded in the 2007 loss from discontinued operations.  During the quarter ended June 30, 2009, inanticipation of the sale of the Energy Technology business, Lime reduced thecarrying value of business’ assets to their expected fair value, incurring animpairment loss of $503,000.  This losshas been included in the 2009 loss from discontinued operations.

 

The assets and liabilities of thediscontinued operations that are included in the Company’s consolidated assetsand liabilities are as follows (in thousands):

 
| **December 31,**                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Accounts receivable                      |       | $        | 5          |     | $          | 413 |   |
| Other current assets                     |       | —   |       | 774      |       |
| Total current assets                     |       | 5        |       | 1,187    |       |
|                                     |       |     |       |     |       |
| Net property, plant & equipment |       | —   |       | 118      |       |
| Other assets                             |       | —   |       | 327      |       |
| Total assets                             |       | $        | 5          |     | $          | 1,632 |   |
|                                     |       |     |       |     |       |
|                                     |       |     |       |     |       |
| Accounts payable                         |       | $        | 1          |     | $          | 107 |   |
| Other current liabilities                |       | 1        |       | 612      |       |
| Total current liabilities                |       | 2        |       | 719      |       |
|                                     |       |     |       |     |       |
| Long term liabilities                    |       | —   |       | 103      |       |
| Total liabilities                        |       | $        | 2          |     | $          | 822 |   |

 

The revenue and loss related to discontinued operations was as follows(in thousands):

*** ***
| **Year ended December 31** | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenue                         | ** ** | **$**      | **837**    | ** ** | **$**      | **2,247**  | ** ** | **$** | **3,097** | ** ** |
| Operating  Loss                 | ** ** | **(1,283** | **)**      | **(2,480** | **)**      | **(7,767** | )          |
| Loss  on Sale                   | ** ** | **(503**   | **)**      | **—** | ** ** | **—** |       |
|                                 |            |            |            |            |            |            |            |  |  |  |

 

F-19

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Note 8 — Inventories***

 

Inventories consisted of the following (in thousands):

 
| **December 31,**     | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
| Raw  materials            | ** ** | **$**      | **230**    | ** ** | **$**      | **667** |   |
| Finished  goods           | ** ** | **—** | ** ** | **—** |       |
| Reserve  for obsolescence | ** ** | **—** | ** ** | **(2**     | )          |
|                      | ** ** | ** ** | ** ** | ** ** |       |
|                      | ** ** | **$**      | **230**    | ** ** | **$**      | **665** |   |

 

***Note 9 — Property and Equipment***

 

Property and equipment consist of the following (in thousands):

 
| **December 31,**          | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Land                           |       | $        | 205        |     | $          | 205 |   |
| Buildings                      |       | 1,118    |       | 1,085    |       |
| Furniture                      |       | 198      |       | 194      |       |
| Construction  equipment        |       | 345      |       | 297      |       |
| Office  equipment              |       | 985      |       | 904      |       |
| Transportation  equipment      |       | 634      |       | 613      |       |
|                           |       | 3,485    |       | 3,298    |       |
|                           |       |     |       |     |       |
| Less  accumulated depreciation |       | (1,568   | )          | (1,217   | )          |
|                           |       |     |       |     |       |
|                           |       | $        | 1,917      |     | $          | 2,081 |   |

 

Total depreciation expense was $506,000, $448,000and $189,000 for the years ended December 31, 2009, 2008 and 2007,respectively.  Included in this expensewas depreciation from discontinued operations of $33,000, $80,000 and $53,000for the years ended December 31, 2009, 2008 and 2007, respectively.

 

F-20

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Table of Contents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Note 10 — Goodwill andOther Intangible Assets***

 

Goodwillrepresents the purchase price in excess of the fair value of assets acquired inbusiness combinations.  ASC 350, *Goodwill and Other Intangible Assets*, requires the Companyto assess goodwill for impairment at least annually in the absence of anindicator of possible impairment and immediately upon an indicator of possibleimpairment.   The following is a summary ofthe Company’s goodwill (in thousands):

 
| ** **                                                                                                                            | ** ** | **Energy  Technology** | ** ** | **Energy  Efficiency  Services** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|------------|------------|
|                                                                                                                                  | ** ** | ** **             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Balance at December 31,  2006**                                                                                                | ** ** | **$**                  | **4,156**  | ** **                       | **$**      | **6,295**  | ** ** | **$** | **10,451** | ** ** |
| ** **                                                                                                                            | ** ** | ** **             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Release of escrow shares toformer owners of MaximumPerformance  Group, Inc.                                                      | ** ** | **26**                 | ** ** | **—**                       | ** ** | **26**     | ** ** |
|                                                                                                                                  | ** ** | ** **             | ** ** | ** **                       | ** ** |       | ** ** |
| Acquisition of Texas EnergyProducts, Inc.                                                                                        | ** ** | **—**             | ** ** | **29**                           | ** ** | **29**     | ** ** |
|                                                                                                                                  | ** ** | ** **             | ** ** | ** **                       | ** ** |       | ** ** |
| Acquisition of PreferredLighting, Inc.                                                                                           | ** ** | **—**             | ** ** | **433**                          | ** ** | **433**    | ** ** |
|                                                                                                                                  | ** ** | ** **             | ** ** | ** **                       | ** ** |       | ** ** |
| Impairment charge                                                                                                                     | ** ** | **(4,182**             | **)**      | **—**                       | ** ** | **(4,182** | )          |
| ** **                                                                                                                            | ** ** | ** **             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Balance at December 31,  2007**                                                                                                | ** ** | **$**                  | **—** | ** **                       | **$**      | **6,757**  | ** ** | **$** | **6,757** | ** ** |
|                                                                                                                                  |       |                   |       |                             |       |       |       |
| Additional costs incurred in connection with the  acquisitions of Texas Energy Products, Inc. and Preferred  Lighting, Inc. | ** ** | **—**             | ** ** | **12**                           | ** ** | **12**     | ** ** |
|                                                                                                                                  | ** ** | ** **             | ** ** | ** **                       | ** ** |       | ** ** |
| Acquisition of Applied EnergyManagement, Inc.                                                                                    | ** ** | **—**             | ** ** | **11,744**                       | ** ** | **11,744** | ** ** |
|                                                                                                                                  | ** ** | ** **             | ** ** | ** **                       | ** ** |       | ** ** |
| **Balance at December 31,  2008**                                                                                                | ** ** | **$**                  | **—** | ** **                       | **$**      | **18,513** | ** ** | **$** | **18,513** | ** ** |
|                                                                                                                                  | ** ** | ** **             | ** ** | ** **                       | ** ** |       | ** ** |
| Additional costs incurred in connection with the  acquisitions of Applied Energy Management, Inc.                                | ** ** | **—**             | ** ** | **114**                          | ** ** | **114**    | ** ** |
|                                                                                                                                  | ** ** | ** **             | ** ** | ** **                       | ** ** |       | ** ** |
| **Balance at December 31,  2009**                                                                                                | ** ** | **$**                  | **—** | ** **                       | **$**      | **18,627** | ** ** | **$** | **18,627** | ** ** |

 

See Note 4 for additional information regarding the acquisitions ofTexas Energy Products, Preferred Lighting, Inc. and Applied EnergyManagement, Inc.  The goodwillrelated to the acquisition of Applied Energy Management is non-deductible forincome tax purposes.

 

F-21

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Table of Contents

 

Lime Energy Co.

Notes toConsolidated Financial Statements

 

The components of intangible assets as of December 31, 2009 and2008 are as follows (in thousands):

 
| ** **                             | ** ** | **Weighted  Average  Remaining  Life  (months)** | ** ** | **Gross Book  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|
| **As of December 31, 2009 *(1)*** | ** ** | ** **                                       | ** ** | ** **            | ** ** | ** **                    | ** ** |                | ** ** |
| Indefinite-lived assets *(2)*          | ** ** | ** **                                       | ** ** | **$**                 | **—** | ** **                    | **$**      | **—**          |       | **$** | **—** |   |
| Amortized intangible assets *(3)*:     | ** ** | ** **                                       | ** ** | ** **            | ** ** | ** **                    | ** ** |                | ** ** |
| Technology and software                | ** ** | **21.0**                                         | ** ** | **125**               | ** ** | **40**                        | ** ** | **85**              | ** ** |
| Customer relationships                 | ** ** | **49.7**                                         | ** ** | **3,176**             | ** ** | **394**                       | ** ** | **2,782**           | ** ** |
| Customer contracts                     | ** ** | **16.5**                                         | ** ** | **1,329**             | ** ** | **933**                       | ** ** | **396**             | ** ** |
| Non-compete agreements                 | ** ** | **0.0**                                          | ** ** | **423**               | ** ** | **423**                       | ** ** | **—**          | ** ** |
| Sales pipe-line                        | ** ** | **4.5**                                          | ** ** | **3,231**             | ** ** | **3,112**                     | ** ** | **119**             | ** ** |
| Total                                  | ** ** | ** **                                       | ** ** | **8,284**             | ** ** | **4,902**                     | ** ** | **3,382**           | ** ** |
| ** **                             | ** ** | ** **                                       | ** ** | ** **            | ** ** | ** **                    | ** ** |                | ** ** |
| **As of December 31, 2008**       | ** ** | ** **                                       | ** ** | ** **            | ** ** | ** **                    | ** ** |                | ** ** |
| Indefinite-lived assets                | ** ** | ** **                                       | ** ** | **$**                 | **2,652**  | ** **                    | **$**      | **—**          |       | **$** | **2,652** |   |
| Amortized intangible assets:           | ** ** | ** **                                       | ** ** | ** **            | ** ** | ** **                    | ** ** |                | ** ** |
| Technology and software                | ** ** | **12.3**                                         | ** ** | **2,105**             | ** ** | **1,830**                     | ** ** | **275**             | ** ** |
| Customer relationships                 | ** ** | **56.3**                                         | ** ** | **3,444**             | ** ** | **262**                       | ** ** | **3,182**           | ** ** |
| Customer contracts                     | ** ** | **3.0**                                          | ** ** | **1,068**             | ** ** | **927**                       | ** ** | **141**             | ** ** |
| Non-compete agreements                 | ** ** | **0.0**                                          | ** ** | **423**               | ** ** | **423**                       | ** ** | **—**          | ** ** |
| Sales pipe-line                        | ** ** | **7.8**                                          | ** ** | **3,231**             | ** ** | **2,344**                     | ** ** | **887**             | ** ** |
| Total                                  | ** ** | ** **                                       | ** ** | **$**                 | **12,923** | ** **                    | **$**      | **5,786**           |       | **$** | **7,137** |   |

 

----

(1)   Balances as of December 31,2009 have been adjusted to exclude intangible assets of discontinued operationswhich were written off during 2009.

(2)   During 2009 the companywrote-off the $2,652 value of the Parke trade name due to its decision tooperate all of its businesses under the Lime Energy name.  The fair value measure of the trade name wasdetermined using unobservable inputs that reflect our own assumptions regardinghow market participants price the trade name at the measurement date.

(3)   The company wrote-offapproximately $148,000 of intangibles related to its Energy Technology businessas part of the impairment charge it took during 2009 related to this business.

 

The aggregate amortization expense from continuing operations was$1,221,000, $1,568,000 and $1,487,000 for the years ended December 31,2009, 2008 and 2007, respectively.  Theaggregate amortization expense from discontinued operations was $179,000,$524,000 and $525,000 for the years ended December 31, 2009, 2008 and2007, respectively.  The estimatedamortization expense for intangible assets for each of the next five years asof December 31, 2009, is as follows (in thousands):

 
| ** ** | ** ** | **Amortization  Expense** | ** ** |
|------------|------------|---------------------------|------------|
| 2010       | ** ** | **$**                     | **589**    | ** ** |
| 2011       | ** ** | **613**                   | ** ** |
| 2012       | ** ** | **561**                   | ** ** |
| 2013       | ** ** | **405**                   | ** ** |
| 2014       | ** ** | **342**                   | ** ** |
|       | ** ** | **$**                     | **2,510**  | ** ** |

 

F-22

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Table of Contents

 

Lime Energy Co.

Notes toConsolidated Financial Statements

 

***Note 11 — Accrued Expenses***

 

Accrued expenses are comprised of the following (in thousands):

 
| **December 31,**     | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Commissions               |       | 5        |       | —   |       |
| Compensation              |       | 1,358    |       | 1,245    |       |
| Discountinued  operations |       | 364      |       | —   |       |
| Dividends                 |       | —   |       | 288      |       |
| Earn-out  payable         |       | —   |       | 793      |       |
| Insurance                 |       | 22       |       | 31       |       |
| Interest                  |       | 2        |       | 226      |       |
| Job  costs                |       | 2,145    |       | 326      |       |
| Lease  expense            |       | 10       |       | 41       |       |
| Legal  settlement         |       | 300      |       | —   |       |
| Professional  fees        |       | —   |       | 199      |       |
| Real  estate taxes        |       | 43       |       | 42       |       |
| Sales  tax payable        |       | 345      |       | 243      |       |
| Warranty  reserve         |       | —   |       | 209      |       |
| Other                     |       | 298      |       | 212      |       |
|                      |       |     |       |     |       |
|                      |       | 4,892    |       | 3,855    |       |

 

***Note 12 — Lines of Credit***

 

On March 12, 2008, the Company entered into a $3 million revolvingline of credit note with Advanced Biotherapy, Inc. (“ADVB”) and RichardKiphart, the Company’s chairman and largest individual investor.  On June 6, 2008 and August 14, 2008the note and related documents were amended to increase the size of the line to$16 million with Mr. Kiphart increasing his commitment under his note to$14.5 million from $1.5 million.  On October 31,2008 the note and related documents with ADVB were amended to increase itscommitment from $1.5 million to $4.5 million. On November 14, 2008, Mr. Kiphart converted his note intoshares of the Company’s Series A-1 preferred stock.  On November 18, 2008, the Companyentered an agreement to acquire 90.8% of the shares of ADVB and it completed ashort-form merger on March 3, 2009, whereby it merged ADVB with a newlycreated acquisition subsidiary. Following the merger it canceled the outstanding balance of $42,000 andaccrued interest of $28,000 on the ADVB line of credit.  Please refer to Note 5 for additionalinformation regarding the ADVB acquisition.

 

OnAugust 10, 2009, the Company and Mr. Kiphart entered into a new $2million revolving bridge line to meet any potential liquidity needs the Companymight have prior to the completion of its follow-on public offering of commonstock.  The bridge line note was tomature on February 10, 2010 and carried an interest rate of 17% per annum,with 12% payable quarterly in cash and the remaining 5% to be capitalized andadded to the principal balance on the note. The loan agreement also required that if the Company terminated the notebefore its scheduled maturity it would owe Mr. Kiphart the differencebetween $70,000 and any interest and unused line fees paid.  The Company issued Mr. Kiphart twowarrants in connection with the issuance of the revolving bridge line ofcredit.  The first warrant gives Mr. Kiphartthe right to purchase 75,000 shares of the Company’s common stock at $6.40 pershare any time prior to August 10, 2013. This warrant was valued at $309,000 using a trinomial tree optionpricing

 

F-23

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Tableof Contents

 

Lime Energy Co.

Notes toConsolidated Financial Statements

 

modelusing the following assumptions: risk free rate of 0.19%; expected volatilityof 94.6%; expected dividend of $0; and expected life of four years.  The value of the warrant was booked todeferred financing costs and which the Company began amortizing over the termof the bridge line.  The second warrantgave Mr. Kiphart the right to purchase 62,500 shares of the Company’scommon stock at $6.40 per share any time prior to February 20, 2014, butthis right only vested if the Company failed to repay any outstanding balanceon the bridge line at maturity.

 

TheCompany completed its follow-on offering of common stock in September 2009and terminated the bridge line on October 2, 2009.  The line was never utilized.  Upon termination, it paid Mr. Kiphartthe $70,000 fee described above, terminated the warrant to purchase 62,500shares of its common stock and expensed the remaining unamortized discount asinterest expense.

 

***Note 13 — Notes Payable***

 

As part of theacquisition of Maximum Performance Group, Inc., the Company assumed a$150,000 demand note payable to Duke Investments, LLC (formerly known asCinergy Investments, LLC).  The noteaccrued interest at the rate of prime plus 3%. Duke converted the note and accrued interest of $50,000 into 32,848shares of the Company’s common stock on July 10, 2008.

 

As part of theacquisition of AEM, the Company assumed two notes totaling $1,422,000 payableto an entity owned by a former stockholder of AEM.  The Notes were repaid in full on September 28,2009.

 

***Note 14 — Subordinated Convertible TermNotes***

*** ***

During the second quarter of 2007, eight investors, including RichardKiphart, the Company’s Chairman and largest individual stockholder(collectively the “Investors”), and the Company entered into a loan agreementunder which the Investors lent the Company $5 million in the form ofsubordinated convertible term notes (the “Term Notes”).  The Term Notes were to mature on May 31,2010, and accrued interest at the rate of 10% per year.  Interest was payable quarterly, 50% in cashand 50% in shares of the Company’s common stock valued at the market price ofthe Company’s common stock on the interest due date.

 

As part of the transaction, the Company issued the Investors four-yearwarrants to purchase 206,044 shares of its common stock at $7.28 pershare.  These warrants were valued at$1,137,000 utilizing a modified Black-Scholes option pricing model utilizingthe following assumptions: risk free rate of 4.846%; expected volatility of93.3%; expected dividend of $0; and expected life of four years.

 

The shares issued as part of the quarterly interest payments andissuable upon conversion of the term loan or exercise of the warrants were notregistered for resale, though the Company has granted the Investors the rightto demand the Company use its best efforts to file a registration statement toregister a certain minimum number of shares.

 

In recording the transaction, the Company allocated the value of theproceeds to the Term Notes and warrants based on their relative fairvalues.  In doing so, it determined thatthe Term Notes contained a beneficial conversion feature since the fair marketvalue of the common stock issuable upon conversion of the Term Notes(determined on the Term Note issuance date) exceeded the value allocated to theTerm Notes of $3,863,000.  The Term Noteswere convertible into 714,286 shares of common stock, which at the market priceof $8.02 per share on date of issuance of the Term Notes was worth$5,730,000.  The difference between themarket value of the shares issuable upon conversion and the value allocated tothe Term Notes of $1,867,000 was considered to be the value of the beneficialconversion feature.

 

F-24

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Tableof Contents

 

Lime Energy Co.

Notes toConsolidated Financial Statements

 

The value of the beneficial conversion feature and the value of thewarrants were recorded as a discount to the Term Notes which was then amortizedover the term of the Term Notes using the effective interest method.  Amortization of the discount of $1,411,000and $1,001,000 was included in interest expense during the years ended December 31,2009 and 2008, respectively.

 

In addition, the Company incurred costs of approximately $9,000relative to the Term Note offering. These costs were capitalized and were also being amortized over the termof the Term Notes using the effective interest method.  Amortization of the deferred issuance costsof $4,000, and $3,000 was included in interest expense during the years ended December 31,2009 and 2008, respectively.

 

On August 10, 2009, the Company and Mr. Kiphart agreed toconvert his Term Notes, totaling $3.1 million, into 484,375 shares of theCompany’s common stock at the prior day’s closing market price of $6.40 pershare.  Also on August 10, 2009, theholders of the remaining Term Notes all elected to convert their notes intocommon stock upon the closing of the underwritten public offering at the lowerof the offering price less the underwriters’ discount and the stated conversionprice of the notes of $7.00 per share. The public follow-on offering closed on September 25, 2009, atwhich time the $1.9 million in Term Notes were converted into 367,504 shares ofcommon stock.

 

Uponthe conversion of Mr. Kiphart’s Term Notes on August 10, 2009 and theremaining $1.9 million of Term Notes on September 25, 2009, the Companyexpensed the unamortized discount totaling $756,000 and deferred issuance coststotaling $2,000.  In addition, becausethe Term Notes were converted at less than their stated conversion price of $7.00,the Company was required to record a non-cash interest charge of $938,000 whichrepresented the value of the additional shares issued as a result of thereduction in the conversion price.

 

As of December 31, 2009, there were no TermNotes outstanding.

 

F-25

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Table of Contents

 

Lime Energy Co.

Notes toConsolidated Financial Statements

 

Not***e 15 — Long Term Debt***

 

The Company’s long term debt consists of the following (in thousands):

 
| **December 31,**                                                                                                                                                                                                                                                                                                                                 | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** | ** ** |       | ** ** |
| Mortgage  note to American Chartered Bank, prime (3.25% as of December 31, 2009)  plus 1⁄2% or 5%, whichever is greater, payable in monthly installments of $3,  plus interest until July 2011. A final payment of $364 is due in  July 2011. This note is collateralized by the building and land in Elk  Grove Village, Illinois. | ** ** | **$**      | **418**    | ** ** | **$**      | **454** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** | ** ** |       | ** ** |
| Subordinated  convertible term note (less debt discount of $1,411, as of December 31,  2008, 10%.                                                                                                                                                                                                                                                | ** ** | **—** | ** ** | **3,589**  | ** ** |
|                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** | ** ** |       | ** ** |
| Notes  payable, interest rates of between prime and 9.25%.                                                                                                                                                                                                                                                                                            | ** ** | **—** | ** ** | **1,422**  | ** ** |
|                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** | ** ** |       | ** ** |
| Various  other notes with monthly payments totaling $8 and interest rates between 0.9%  and 9.25%                                                                                                                                                                                                                                                     | ** ** | **313**    | ** ** | **439**    | ** ** |
|                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** | ** ** |       | ** ** |
| Total  debt                                                                                                                                                                                                                                                                                                                                           | ** ** | **731**    | ** ** | **5,904**  | ** ** |
|                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** | ** ** |       | ** ** |
| Less  current portion                                                                                                                                                                                                                                                                                                                                 | ** ** | **187**    | ** ** | **187**    | ** ** |
|                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** | ** ** |       | ** ** |
| Total  long-term debt                                                                                                                                                                                                                                                                                                                                 | ** ** | **$**      | **544**    | ** ** | **$**      | **5,717** | ** ** |

 

The aggregate amounts of long-term debt maturing in future years as of December 31,2009, are as follows (in thousands):

 
| ** ** | ** ** | **Aggregate  Maturities** | ** ** |
|------------|------------|---------------------------|------------|
| 2010       | ** ** | **187**                   | ** ** |
| 2011       | ** ** | **468**                   | ** ** |
| 2012       | ** ** | **63**                    | ** ** |
| 2013       | ** ** | **9**                     | ** ** |
| 2014       | ** ** | **4**                     | ** ** |
|       | ** ** | **$**                     | **731**    | ** ** |
|            |            |                           |            |  |

 

F-26

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Table ofContents

 

Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Note 16 — Preferred Stock***

 

On November 14, 2008, Richard Kiphart agreed to convert his $14.5million revolving line of credit note and $207,000 of accrued interest into358,710 shares of Series A-1 preferred stock.  Each outstanding share of preferred stock wasentitled to cumulative quarterly dividends at a rate of (i) 15% per annumof its stated value (which was $41.00) on or prior to March 31, 2009 (9%in cash and 6% in additional shares of preferred stock); and (ii) 17% perannum of its stated value, at any time on or after April 1, 2009 (9% incash and 8% in additional shares of preferred stock).  The preferred stock was convertible at theholder’s election any time after December 31, 2009 into shares of theCompany’s common stock at the rate of 10 shares of common stock for each shareof preferred stock.  It paid $1,006,000and $0 in cash dividends during the year ended December 31, 2009 and 2008,respectively.

 

On August 10, 2009, to facilitate the anticipated public offeringof its common stock, the Company and Mr. Kiphart agreed to convert his Series A-1preferred stock into 3,777,705 shares of the Company’s common stock.  Following this conversion there were noshares of Series A-1 Preferred Stock outstanding.

 

***Note 17 — Interest Expense***

 

Interest expenseis comprised of the following (in thousands):

 
| **Year ended December 31**                                               | ** ** | **2009**  | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|------------|------------|
| Line  of credit (Note 12)                                                     | ** ** | **$**     | **51**     |       | **$**      | **953**    |       | **$** | **—** |   |
| Note  payable (Note 13)                                                       | ** ** | **76**    | ** ** | **67**     | ** ** | **—** | ** ** |
| Mortgage (Note 15)                                                            | ** ** | **19**    | ** ** | **27**     | ** ** | **44**     | ** ** |
| Subordinated  convertible notes (Note 14)                                     | ** ** | **329**   | ** ** | **500**    | ** ** | **294**    | ** ** |
| Other                                                                         | ** ** | **73**    | ** ** | **117**    | ** ** | **5**      | ** ** |
| Amortization of  deferred issuance costs and debt  discount (Notes 12 and 14) | ** ** | **1,724** | ** ** | **1,004**  | ** ** | **592**    | ** ** |
| Value  of beneficial conversion (Note 14)                                     | ** ** | **938**   | ** ** | **—** | ** ** | **—** | ** ** |
| Total  Interest Expense                                                       | ** ** | **$**     | **3,210**  |       | **$**      | **2,668**  |       | **$** | **935** |   |

 

***Note 18 — Lease Commitments***

 

The Company leases a facility in Glendora, California froma company controlled by Dan Parke, the Company’s President and a director.  Total rent expense for this facility amountedto $130,000, $126,000 and $78,000 for 2009, 2008 and 2007, respectively.  The Company believes that the rates chargedby Mr. Parke are reasonable in that they are equivalent to rates chargedto other unaffiliated third parties in the building.  The Company also leases offices inCalifornia, Florida, Massachusetts, New Jersey, New York, North Carolina,Pennsylvania, Texas, Utah and Washington from unrelated third parties on whichit paid a total of $708,000, $630,000 and $236,000 during 2009, 2008 and 2007,respectively.

 

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Lime Energy Co.

Notes toConsolidated Financial Statements

 

Future minimum rentals to be paid by theCompany as of December 31, 2009 are as follows:

 
| **Year  ending December 31,** | ** ** | **Related  Party** | ** **  | **Unrelated  Party** | ** ** | **Total**     | ** ** |
|------------------------------------|------------|--------------------|-------------|----------------------|------------|---------------|------------|
| 2010                               | ** ** | **$**              | **159,000** | ** **           | **$**      | **821,000**   | ** ** | **$** | **980,000** | ** ** |
| 2011                               | ** ** | **164,000**        | ** **  | **510,000**          | ** ** | **674,000**   | ** ** |
| 2012                               | ** ** | **169,000**        | ** **  | **368,000**          | ** ** | **537,000**   | ** ** |
| 2013                               | ** ** | **—**         | ** **  | **169,000**          | ** ** | **169,000**   | ** ** |
| 2014                               | ** ** | **—**         | ** **  | **135,000**          | ** ** | **135,000**   | ** ** |
| 2015                               | ** ** | **—**         | ** **  | **141,000**          | ** ** | **141,000**   | ** ** |
| 2016                               | ** ** | **—**         | ** **  | **138,000**          | ** ** | **138,000**   | ** ** |
| 2017                               | ** ** | **—**         | ** **  | **15,000**           | ** ** | **15,000**    | ** ** |
| Total                              | ** ** | **$**              | **492,000** | ** **           | **$**      | **2,297,000** | ** ** | **$** | **2,789,000** | ** ** |

 

***Note 19 — Income Taxes***

 

Thecomposition of income tax expense (benefit) is as follows (in thousands):

 
| **Year ended December 31** | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Deferred                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal                         | ** ** | **$**      | **(6,481** | **)**      | **$**      | **(4,432** | **)**      | **$** | **(3,866** | ) |
| State                           | ** ** | **(952**   | **)**      | **(652**   | **)**      | **(569**   | )          |
| Change  in valuation allowance  | ** ** | **6,399**  | ** ** | **5,084**  | ** ** | **4,435**  | ** ** |
| Benefit  for income taxes       | ** ** | **$**      | **(1,034** | **)**      | **$**      | **—** | ** ** | **$** | **—** | ** ** |

 

Significantcomponents of the Company’s deferred tax asset are as follows (in thousands):

 
| **December 31**                                                                             | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Deferred  tax asset consisting principally of net operating losses                               | ** ** | **$**       | **37,261** | ** **  | **$**      | **31,630** | ** ** |
| Deferred  tax liabilities, principally related to non-deductible identifiable  intangible assets | ** ** | **(661**    | **)**      | **(2,463**  | **)**      |
| Less  valuation allowance                                                                        | ** ** | **(36,600** | **)**      | **(30,201** | **)**      |
| Total  net deferred tax liability                                                                | ** ** | **$**       | **—** | ** **  | **$**      | **(1,034** | **)** |

 

TheCompany has recorded a valuation allowance equaling the deferred tax asset dueto the uncertainty of its realization in the future.  At December 31, 2009, the Company hadU.S. federal net operating loss carryforwards available to offset futuretaxable income of approximately $88 million, which expire in the years 2018through 2029.  Under Section 382 ofthe Internal Revenue Code (IRC) of 1986, as amended, the utilization of U.S.net operating loss carryforwards may be limited under the change in stockownership rules of the IRC. As a result of ownership changes as defined bySection 382, which have occurred at various points in our history, webelieve utilization of our net operating loss carryfowards will besignificantly limited under certain circumstances.  Based on an analysis of ownership changesprior to 2008, approximately $10.9 million of our net operating losses willexpire

 

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Lime Energy Co.

Notes to Consolidated Financial Statements

 

unuseddue to Section 382 limitations.  TheCompany is currently in the process of reviewing the 2008 and 2009 ownershipchanges to determine if these transactions will result in further Section 382limitations of the Company’s net operating losses.

 

Thereconciliation of income tax expense (benefit) to the amount computed byapplying the federal statutory rate is as follows (in thousands):

 
| **Year ended December 31,**                | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  tax (benefit) at federal statutory rate | ** ** | **$**      | **(6,481** | **)**      | **$**      | **(4,431** | **)**      | **$** | **(5,288** | ) |
|                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       |
| State  taxes (net of federal tax benefit)       | ** ** | **(952**   | **)**      | **(653**   | **)**      | **(569**   | )          |
|                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       |
| Non-deductible  goodwill impairment             | ** ** | **—** | ** ** | **—** | ** ** | **1,422**  | ** ** |
|                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase  in valuation allowance                | ** ** | **6,399**  | ** ** | **5,084**  | ** ** | **4,435**  | ** ** |
|                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  tax expense (benefit)                   | ** ** | **$**      | **(1,034** | **)**      | **$**      | **—** | ** ** | **$** | **—** | ** ** |

 

The Company has recorded a valuation allowance of $36.6 million due tothe uncertainty of future utilization of the deferred tax assets.  In assessing the adequacy of the valuationallowance, the Company determined that there existed a deferred tax liabilityrelated to an indefinite-lived intangible, for which the expected reversal wasindeterminate. Due to uncertainty of whether this deferred tax liability wouldreverse prior to expiration of the net operating losses and other deferred taxassets, this liability was not  beennetted against the Company’s deferred tax assets, resulting in a net deferredtax liability of approximately $1 million as of December 31, 2008.  During 2009, the Company wrote-off the valueof this indefinite-lived intangible, and reduced the value of this deferred taxliability to $0.

 

***Note 20 — Commitments andContingencies***

 

a)              The Companyentered into employment agreements with certain executive officers expiring in2011.  Total future commitments underthese agreements are as follows (in thousands):

 
| **Year  ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2010                               | ** ** | **$**      | **1,050**  | ** ** |
| 2011                               | ** ** | **104**    | ** ** |
| Total                              | ** ** | **$**      | **1,154**  | ** ** |

 

Thecompany also occasionally enters into employment contracts with other, non-executiveemployees.

 

b)             The Company is involved incertain litigation in the normal course of its business. Management intends tovigorously defend these cases.  In February 2009,a complaint captioned *ByronGonzales v. Lime Energy Co. and Parke Industries, LLC* was filedagainst the Company in San Francisco Superior Court. The complaint, as amended in March 2009, alleges that the Companyfailed to pay regular and overtime wages and to reimburse for necessarybusiness expenditures such as tools.  Theseclaims are asserted on behalf of Mr. Gonzales and a putative class ofelectrical installers and foreman employed by the Company inCalifornia.  The Company considered thelitigation to be immaterial because of the scope of the claims and the defensesavailable to it.  During litigation in March 2010,plaintiffs indicated an intent to allege additional claims pertaining to apurported denial of meal periods.  Whilethe Company vigorously denies the allegations, rather than engage in protractedlitigation and incur substantial legal expenses and management time, it agreedwith the plaintiff to settle all class claims for $300,000, from which will bepaid class counsel’s fees and costs. The settlement is subject to courtapproval and, if granted, expiration of the appeal period for objections.

 

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Lime Energy Co.

Notes to Consolidated Financial Statements

 

***Note 21 - The June 2006PIPE Transaction***

** **

OnJune 29, 2006, the Company entered into a securities purchase agreementwith a group of 17 investors (the “PIPE Investors”) pursuant to which it issuedto such purchasers an aggregate of 2,553,571 shares of its common stock at aprice of $7.00 per share for total gross proceeds of $17,875,000 (the “PIPETransaction”).   A provision of thetransaction documents required the Company to file and have declared effectiveby November 3, 2006, a registration statement registering the sharesissued as part of the PIPE Transaction. To the extent that it failed to have the registration statement declaredeffective by this date, the Company was required to pay penalties to the PIPEinvestors at the rate of 1% per month of the purchase price paid by theinvestors.  Largely as a result of thequestions regarding the need to amend its Certificate of Incorporation toeffect the 2006 reverse split of its stock, the Company was not able to havethe registration statement declared effective until February 14,2007.  All of the investors in the PIPETransaction agreed to accept shares of the Company’s common stock as payment ofthis registration penalty.  Penaltiestotaling $614,000 were satisfied through the issuance of 87,673 shares ofcommon stock in early 2007.

 

***Note 22 — The November 2008PIPE Transaction***

 

On November 13,2008, the Company entered into Subscription Agreements with 15 investors tosell 1,787,893 Units, each comprised of one share of the Company’s common stockand a warrant to purchase an additional quarter share of common stock (the “Units”).  The sale price was $3.51 per Unit, which isequal to 75% of the volume-weighted average price of the Company’s stock forthe ten days prior to closing.  Thewarrants allow holders to purchase a share of common stock for $4.10 per share,which was the closing price of the Company’s common stock on the day prior tothe closing, and the warrants are exercisable any time after May 13, 2009and before November 13, 2011.  Thetotal gross proceeds raised in the offering totaled $6,275,500.

 

The privateoffering closed in two tranches: tranche A, which is comprised of unaffiliatedinvestors; and tranche B which is comprised of affiliated investors, primarilyexecutive officers and directors of the Company.  The Company raised $3,000,500 in tranche A,which closed on November 13, 2008 and $3,275,000 in tranche B, whichclosed on January 30, 2009. The issuance of the Units sold in tranche Brequired approval by holders of a majority of the Company’s outstanding votingstock pursuant to the NASDAQ Marketplace Rules. The Company received the written consent in lieu of a meeting ofstockholders from the holders of shares representing 58.7% of the totaloutstanding shares of its common stock on November 13, 2008, which wassufficient under the General Corporation Law of the State of Delaware and theCompany’s By-Laws to approve the transaction.

 

Securities andExchange Commission rules require that any corporate actions requiring thestockholder approval that are approved pursuant to a written consent in lieu ofa meeting be communicated to all stockholder via an Information Statement andthat the corporate action so approved can not take place until at least 20 daysfollowing the mailing or giving of the Information Statement tostockholders.  The Company mailed anInformation Statement to all of its stockholders on December 31, 2008informing them of the November 13, 2008 written consent in lieu of ameeting.

 

Proceeds from the offering will be used for generalcorporate purposes.

 

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Lime Energy Co.

Notes toConsolidated Financial Statements

 

***Note 23 — Equity Transactions***

 

*2007 Transactions*

 

a)              In January 2007,pursuant to the Directors’ Option Plan the Company granted options to certainoutside directors with an exercise price of $6.30 per share, which was themarket price on the date of issuance. Warrants held by 12 investors, including Messrs. Asplund andKiphart, contained anti-dilution provisions that automatically adjust theexercise price on the warrants to the issuance price of any securityconvertible into the Company’s common stock if the price of the newly issuedsecurity is less than the exercise price on the holder’s warrant.  Prior to granting of the director options,the exercise price on these warrants was $7.00 per share.  The grant of the director options caused theexercise price on these warrants to automatically be reduced to $6.30 pershare.  Utilizing a modified Black-Scholesoption pricing model, the Company determined that the increase in value ofthese warrants that resulted from this adjustment was $19,000, which theCompany recorded as an expense in January 2007.  The Company used the following assumptionswhen determining the change in value of these warrants: risk free rate of5.026%; expected volatility of between 73.5% and 127.7% expected dividend of$0; and expected lives of between 0.5 years and 1.7 years.

 

b)             During January 2007,the Company issued consultants warrants with terms of between two and threeyears to purchase 38,571 shares of its common stock at prices of $7.00 to $7.56per share as partial consideration for services provided the Company.  These warrants were valued at $162,000 usinga modified Black-Scholes option pricing model utilizing the followingassumptions: risk free rate of 5.129%; expected volatility of 88.9%; expecteddividend of $0; and expected life of two to three years.  The value of the warrants was charged tooperations during 2007.

 

c)              A provision of the June 2006PIPE transaction required the Company to file and have declared effective by nolater than November 3, 2006, a registration statement registering theshares issued as part of the transaction. To the extent that it failed to have the registration statement declaredeffective by this date, it was required to pay penalties to the PIPE investorsat the rate of 1% per month of the purchase price paid by the investors.  Largely as a result of the questionsregarding the need to amend its Certificate of Incorporation to effect the 2006reverse split of its stock, the Company was not able to have the registrationstatement declared effective until February 14, 2007.  All of the investors in the PIPE transactionagreed to accept shares of the Company’s common stock as payment of thisregistration penalty.  These penalties,totaling $614,000, were satisfied through the issuance of 87,673 shares ofcommon stock in January and February 2007.

 

***d)***          On February 23, 2007, the Company commenced a rights offeringto stockholders in which it distributed to each holder of record as of February 23,2007 (other than the former Series E Preferred stockholders and DanielParke, who waived their rights to participate), non-transferable subscriptionrights to purchase shares of the Company’s common stock at $7.00 pershare.  Stockholders that participated inthe rights offering were also able to subscribe for any shares that were notpurchased by other stockholders pursuant to their subscription rights.  The rights offering closed on March 30,2007 and raised $2,797,000 (net of issuance costs of $203,000) through theissuance of 428,519 shares of common stock to 260 of the Company’s existingstockholders.  The Company received theproceeds from the offering and issued the common stock to the participantsduring the first week of April 2007.

*** ***

***e)***              In connection with theplacement of the subordinated convertible term notes during the second quarterof 2007 the Company issued four-year warrants to eight investors, including Richard Kiphart, the Company’schairman and largest individual stockholder, to purchase 206,044 shares of its 

 

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Lime Energy Co.

Notes toConsolidated Financial Statements

 

***common stock at $7.28 per share.  These warrants were valued at $1,137,000using a modified Black-Scholes option pricing model*** utilizing the followingassumptions: risk free rate of 4.846%; expected volatility of 93.3%; expecteddividend of $0; and expected life of four years.  The value of the warrants was recorded as adiscount to the subordinated convertible term notes and are being amortizedover the life of the notes using the effective interest method.

*** ***

f)                As part of the MPGacquisition, 23,735 shares of common stock were deposited in escrow for thebenefit of the selling stockholders of MPG to be released over the two-yearperiod following the April 30, 2005 purchase of MPG if it achieved certainrevenue targets during the period.  During May 2007 the Company issued 2,818 shares to the former MPGstockholders which it determined it owed them pursuant to the MPG mergeragreement.  These shares were valued at$8.89 per share, the market value on the date of their release, and recorded asan increase in the goodwill associated with the MPG acquisition.  The remaining 20,917 shares that were inescrow were returned to the Company and retired and became authorized but un-issued shares.

 

g)             Delano Group Securities LLC acted as anadvisor on the acquisition of MPG in 2005. Part of Delano’s compensation for its services was tied to thepurchase price paid for MPG.  Mr. DavidAsplund owned and operated Delano prior to joining Lime Energy as its CEO in January 2006.  Since the release of the escrow shares wasconsidered a payment of additional consideration to the former stockholders ofMPG, the Company issued Mr. Asplund 141 shares of its common stock in May 2007in satisfaction of the commission owed Delano. These shares were valued at $1,252, based on the market value on thedate of their issuance, and recorded as an increase in the goodwill associatedwith the MPG acquisition.

 

h)             On June 6,2007, the Company acquired the assets and assumed certain liabilities of GeorgeBradley Boyett dba Texas Energy Products. The purchase consideration consisted of 28,571 shares of Lime Energycommon stock and cash of $313,000.  Foraccounting purposes the stock was valued at $7.49 per share, the average closing price of the stock for the 20 trading daysimmediately prior to the closing.  Please refer to Note 4 for additionalinformation regarding this transaction.

 

i)                 On August 6,2007, the Company acquired the assets and assumed certain liabilities ofPreferred Lighting, Inc. for 15,069 shares of Lime Energy common stock andcash of $410,000 (including $110,000 paid in 2008pursuant to an earn-out based on 2007 earnings).  The company also issued five year warrants tothe former owners of Preferred Lighting to purchase 21,429 shares of theCompany’s common stock at $13.23 per share. These warrants were valued at$185,000 using a modified Black-Scholes option pricing model utilizingthe following assumptions: risk free rate of 4.909%; expected volatility of75.0%; expected dividend of $0; and expected life of four years. The value ofthe warrants were considered part of the purchase consideration.  Please refer to Note 4 for additionalinformation regarding this transaction.

 

j)                 During 2007,the Company issued 7,088 shares of its common stock to the holders of itssubordinated convertible term notes in satisfaction of 50% of the interest owedon the note.

 

k)              During 2007certain employees and a former director exercised options to purchase 33,005 sharesof the Company’s common stock as exercise prices ranging from $6.30 to $7.14per share.

 

l)                 During 2007 sixinvestors exercised their warrants to purchase 5,001 shares of the Company’scommon stock at $6.30 per share.  One ofthese investors elected to exercise its warrant on a cashless basis,surrendering 569 shares it would have otherwise be entitled to receive onexercise to cover the exercise price.

 

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Lime Energy Co.

Notes toConsolidated Financial Statements

 

*2008 Transactions*

 

m)           During 2008, the Companyissued consultants warrants with terms of between three and four years topurchase 22,143 shares of its common stock at prices of $5.00 to $9.45 pershare as partial consideration for services provided the Company.  These warrants were valued at $113,000 usinga modified Black-Sholes option pricing model utilizing the followingassumptions: risk free rates of 0.7% to 3.259%, expected volatility of 91.6% to92.4%, expected dividend of $0 and expected life of three to four years.  The value of the warrants was charged tooperations during 2008.

 

n)             During 2008,the Company issued 32,581 shares of its common stock to the holders of itssubordinated convertible term notes in satisfaction of 50% of the interest owedon the notes.

 

o)             During 2008, holders ofcertain options and warrants exercised their rights to purchase 31,786 sharesof the Company’s common stock at prices between $6.30 and $7.35 per share.  Some of the warrants were exercised on acashless basis with the holders surrendering 41,453 shares they would haveotherwise been entitled to receive on exercise to cover the cost of exercise.

 

p)             In June 2008, theCompany issued 882,725 shares of its common stock to the former stockholders ofApplied Energy Management, Inc. as partial consideration for the purchaseof the company.  Please refer to Note 4for additional information regarding this transaction.

 

q)             In July 2008, theholder of a $150,000 demand note elected to convert the note, along with$50,000 of accrued interest, into 32,848 shares of the Company’s common stock.

 

r)                In November 2008 theCompany issued 854,844 shares of its common stock along with three yearwarrants to purchase 213,713 addition shares of common stock at $4.10 per shareto nine investors in exchange for $3,001,000. The net proceeds from this offering will be used for general corporate purposes.  Please refer to Note 22 for additionalinformation regarding this offering.

 

*2009 Transactions*

 

s)          In January 2009, theCompany issued 933,049 shares of its common stock along with three yearwarrants to purchase 233,263 additional shares of common stock at $4.10 pershare to seven investors in exchange for $3,275,000.  The net proceeds from this offering will beused for general corporate purposes. Please refer to Note 22 for additional information regarding thisoffering.

 

t)                In March 2009, theCompany issued 2,486,149 shares to acquire all of the outstanding shares ofAdvanced Biotherapy, Inc.  In connectionwith this transaction the Company tendered to exchange outstanding options andwarrants issued by Advanced Biotherapy, Inc. for new options and warrantsto purchase shares of the Company’s common stock.  Pursuant to the tender offer it issuedoptions to purchase 213,451 shares with exercise prices between $3.29 and$196.88 per share and terms of 1 to 9.5 years, and warrants to purchase 5,421shares with exercise prices between $46.88 and $117.36 per share and terms ofbetween nine months and 5.75 years. Please see Note 15 for additionalinformation regarding this transaction.

 

u)             In March 2009, theCompany issued 63,052 shares of its common stock to the former owners ofApplied Energy Management, Inc. pursuant to an earn-out provision of theagreement to acquire the company.  Pleaserefer to Note 4 for additional information regarding this transaction.

 

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Lime Energy Co.

Notes toConsolidated Financial Statements

 

v)             In August 2009, theCompany issued 3,777,705 shares of common stock upon the conversion of all ofthe shares of its outstanding Series A-1 convertible preferred stock.  Please refer to Note 16 for additionalinformation regarding the conversion of the Series A-1 preferred stock.

 

w)           The Company issued twowarrants in August 2009, in connection with the establishment of therevolving bridge line of credit.  Thefirst warrant gives the holder the right to purchase 75,000 shares of theCompany’s common stock at $6.40 per share any time prior to August 10,2013.  This warrant was valued at$309,000 using a trinomial tree option pricing model using the followingassumptions: risk free rate of 0.19%; expected volatility of 94.6%; expecteddividend of $0; and expected life of four years.  The value of the warrant was booked todeferred financing costs.  The secondwarrant gave the holder the right to purchase 62,500 shares of the Company’scommon stock at $6.40 per share any time prior to February 20, 2014, butthis right only vested if the Company failed to repay any outstanding balanceon the bridge line at maturity.  Thebridge line was cancelled in October 2009 at which time the second warrantterminated.  Please see Note 12 foradditional information regarding the bridge line of credit.

 

x)               During 2009, the Companyissued 851,879 shares of its common stock upon the conversion of its convertiblesubordinated notes.  Please refer to Note14 for additional information regarding the conversion of the convertiblesubordinated notes.

 

y)             During 2009, the Companyissued 45,400 shares of its common stock to the holders of its subordinatedconvertible term notes in satisfaction of 50% of the interest owed on thenotes.

 

z)               During 2009, the Companyissued 19,063 shares of its Series A-1 preferred stock in partialsatisfaction of dividends owed the holder.

 

aa)        In August 2009, the Company issued 2,000 sharesto a consultant as partial compensation for services received.  These shares were valued at the market on thedate of issuance and charged to operations during August.

 

bb)      In October 2009, the Company completed a publicoffering in which is issued 5,750,000 shares of its common stock in exchangefor gross proceeds of $31,625,000, while incurring $2,344,000 of issuancecosts.  The net proceeds from thisoffering were used to repay debt, with the remaining proceeds to be used forgeneral corporate purposes.

 

cc)        During 2009,holders of certain of the Company’s options exercised their rights to purchase19,285 shares of the Company’s common stock. The options had exercise prices between $3.30 and $7.00.  The Company received $45,000 from the exerciseof these options.  Holders of some ofthese options exercised them on a cashless basis, surrendering 11,202 sharesthey would have otherwise been entitled to receive on exercise to cover thecost of exercise.

 

dd)      During 2009,the Company issued 27,090 shares of its common stock to employees under itsEmployee Stock Purchase Plan in exchange $91,000. The proceeds will be used forgeneral corporate purposes.

 

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Lime Energy Co.

Notes toConsolidated Financial Statements

 

ee)        The Company had outstandingwarrants to purchase 827,728 and 551,425 shares of its common stock as of December 31,2009 and 2008, respectively, at an exercise price of between $4.10 per shareand $688.80 per share.  These warrantscan be exercised at any time prior to their expiration dates which rangebetween January 2010 and May 2015. The following table summarizes information about warrants outstanding asof December 31, 2009:

 
| ** **              | ** ** | **Warrants Outstanding**                            | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|
| **Exercise  Price**     | ** ** | **Number  Outstanding at  December 31,  2009** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                    |       |                                                |       |   |   |   |   |
| $4.10  - $5.00          | ** ** | **456,976**                                         | ** ** | **1.9  years** | ** ** | **$** | **4.11** | ** ** |
| $5.01  - $7.00          | ** ** | **75,000**                                          | ** ** | **3.6  years** | ** ** | **6.40** | ** ** |
| $7.01  - $10.00         | ** ** | **244,616**                                         | ** ** | **1.3  years** | ** ** | **7.42** | ** ** |
| $10.01  – $15.00   | ** ** | **21,429**                                          | ** ** | **2.6  years** | ** ** | **13.23** | ** ** |
| $15.01  - $100.0        | ** ** | **5,421**                                           | ** ** | **0.1  years** | ** ** | **70.59** | ** ** |
| $100.01  – $688.80 | ** ** | **24,286**                                          | ** ** | **2.4  years** | ** ** | **123.38** | ** ** |
|                    | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|                    | ** ** | **827,728**                                         | ** ** | **1.9  years** | ** ** | **$** | **9.47** | ** ** |

 

***Note 24 — ReverseSplits***

 

On June 15, 2006, the Company effected a 1 for 15 reverse split ofits common stock.  A second reverse splitof the Company’s common stock was effected on January 25, 2007, this oneon a 1 for 7 basis.  All share amountsstated herein have been retroactively restated to reflect these reverse splits.

 

***Note 25 — Stock Options***

 

On June 4, 2008, the Company’s stockholdersapproved the adoption of the 2008 Stock Incentive Plan (the “2008 Plan”), whichreplaced the 2001 Stock Incentive Plan, as amended.  The 2008 Plan provided that up to 280,000shares of the Company’s common stock could bedelivered under the Plan to certain employees of the Company or any of itssubsidiaries and to consultants and directors who are not employees.  In addition, the 2008 Plan originallyprovided for an additional number of shares of the Company’s common stock to bereserved for issuance under the plan on January 1st of each succeedingyear, beginning January 1, 2009, in an amount equal to 100,000shares.  On November 26, 2008, theCompany’s Compensation Committee approved amendments the 2008 Plan to i)increase the maximum number of shares of Common Stock authorized for issuanceunder the 2008 Plan by 350,000 shares, from 280,000 shares to 630,000 shares,and (ii) raise the automatic increases in the number of shares availablefor awards by 150,000 shares, from 100,000 to 250,000, each year beginning in2009.  The holders of a majority of theCompany’s outstanding capital stock approved the Plan Amendment pursuant to aconsent dated November 26, 2008.

 

The awards granted under the 2008 Plan may be incentivestock options or non-qualified stock options. The exercise price for any incentive stock option (“ISO”) may not beless than 100% of the fair market value of the stock on the date the option isgranted, except that with respect to a participant who owns more than 10% ofthe common stock the exercise price must be not less than 110% of fair marketvalue. The exercise price of any non-qualified option shall be in the solediscretion of the Compensation Committee or the Board. To qualify as an ISO theaggregate fair market value of the shares (determined on the grant date) 

 

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Lime Energy Co.

Notes toConsolidated Financial Statements

 

underoptions granted to any participant may not exceed $100,000 in the first yearthat they can be exercised. There is no comparable limitation with respect tonon-qualified stock options.  The term ofall options granted under the 2008 Plan will be determined by the CompensationCommittee or the Board in their sole discretion, provided, however, that theterm of each ISO shall not exceed 10 years from the date of grant thereof.

 

In addition to the ISOs and non-qualified options, the 2008 Planpermits the Compensation Committee, consistent with the purposes of the Plan,to grant stock appreciation rights and/or shares of Common Stock to non-employeedirectors and such employees (including officers and directors who areemployees) of, or consultants to, the Company or any of its Subsidiaries, asthe Committee may determine, in its sole discretion. Under applicable tax laws,however, ISO’s may only be granted to employees.

 

The 2008 Plan is administered by the Board, which is authorized tointerpret the 2008 Plan, to prescribe, amend and rescind rules andregulations relating to the 2008 Plan and to determine the individuals to whom,and the time, terms and conditions under which, options and awards aregranted.  The Board may also amend,suspend or terminate the 2008 Plan in any respect at any time. However, noamendment may (i) adversely affect the rights of a participant under anaward theretofore granted without the consent of such participant, (ii) increasethe number of shares reserved under the 2008 Plan, (iii) modify therequirements for participation in the 2008 Plan, or (iv) modify the 2008Plan in any way that would require stockholder approval under the rules andregulations under the Exchange Act or the rules of any stock exchange ormarket on which the Common Stock is listed (unless such stockholder approval isobtained).

 

As of December 31, 2009, there were approximately170 employees of the Company eligible to participate in the 2008 Plan, and560,080 shares of common stock reserved under the 2008 Plan.

 

Effective April 1, 2000, the Company adopted astock option plan for all independent directors, which is separate and distinctfrom the 2008 Stock Incentive Plan described above.    The Directors Plan was amended on July 11,2006 to provide that eligible directors receive an initial option grant uponbeing appointed to the Company’s Board of Directors to purchase 14,286 sharesof its common stock, and a grant of options to purchase an additional 7,143shares on the first day of January beginning on the second January followingthe date the Director became an eligible director.  These options have anexercise price equal to the closing price of the Company’s common stock on thegrant date and a term of ten years.  Theinitial options vest on the first day of January following the initialgrant date or six months following the initial grant date, whichever is later,if the individual is still a director on the vesting date.  All future grants vest in two equal amounts,one amount on the grant date and the balance on the anniversary of the grantdate, if the individual is still a member of the Board of Directors on suchanniversary date.

 

During 2007, certain directors, officers andkey employees of the Company were granted options to acquire 701,723 shares ofcommon stock at exercise prices ranging from $6.30 to $13.30 per share.  These options vest over periods through December 2010.

 

During 2008, certain directors, officers andkey employees of the Company were granted options to acquire 516,424 shares ofcommon stock at exercise prices ranging from $3.50 to $11.69 per share.  These options vest over periods through December 2011.

 

During 2009, certain directors, officers andkey employees of the Company were granted options to acquire 105,001 shares ofcommon stock at exercise prices ranging from $3.70 to $8.30 per share.  These options vest over periods through December 2012.

 

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Tableof Contents

 

Lime Energy Co.

Notes toConsolidated Financial Statements

 

On March 3, 2009, the Company completeda value-for-value stock option exchange program which was approved by theCompany’s stockholders on November 26, 2008. Pursuant to the optionexchange, 238,697 eligible options were canceled and replaced with 109,073replacement stock options. The exchange ratio was calculated such that thevalue of the replacement options would approximate the value of the canceledoptions, determined in accordance with the Black-Scholes option valuationmodel.

 

Aspart of the acquisition of Advanced Biotherapy, Inc. (“ADVB”) the Companyagreed to exchange existing ADVB options for options to purchase the number ofshares of its stock each holder would have received had he or she exercised theoption in full prior to the acquisition, with the same aggregate price andexpiration date.  ADVB option holdershave until May 5, 2009 to accept the Company’s exchange offer.  The Company had issued options to acquire213,451 shares of its stock to former holders of ADVB options with an averageexercise price of $4.86 per share and average term of 5.4 years.

 

The following table summarizes the optionsgranted, exercised and outstanding as of December 31, 2009:

 

| ** **                                     | ** ** | **Shares**    | ** ** | **Exercise******** Price Per******** Share** | ** ** | **Weighted********Average********Exercise******** Price** | ** ** |
|------------------------------------------------|------------|---------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Outstanding  at December 31, 2006         | ** ** | **1,529,563** | ** ** | **$6.72  - $1,363.95**                                 | ** ** | **$**                                                          | **33.25**  | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Granted                                        | ** ** | **701,723**   | ** ** | **$6.30  - $13.30**                                    | ** ** | **$**                                                          | **10.58**  | ** ** |
| Exercised                                      | ** ** | **(35,086**   | **)**      | **$6.30  - $7.14**                                     | ** ** | **$**                                                          | **7.05**   | ** ** |
| Forfeited                                      | ** ** | **(25,852**   | **)**      | **$6.30  - $247.80**                                   | ** ** | **$**                                                          | **31.55**  | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Outstanding  at December 31, 2007         | ** ** | **2,170,348** | ** ** | **$6.30  - $1,363.95**                                 | ** ** | **$**                                                          | **23.31**  | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Granted                                        | ** ** | **516,424**   | ** ** | **$3.50  - $11.69**                                    | ** ** | **$**                                                          | **5.11**   | ** ** |
| Exercised                                      | ** ** | **(13,414**   | **)**      | **$7.14  - $7.35**                                     | ** ** | **$**                                                          | **7.18**   | ** ** |
| Forfeited                                      | ** ** | **(184,701**  | **)**      | **$6.13  - $183.75**                                   | ** ** | **$**                                                          | **36.94**  | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Outstanding  at December 31, 2008         | ** ** | **2,488,657** | ** ** | **$3.50  - $1,363.95**                                 | ** ** | **$**                                                          | **18.61**  | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Granted                                        | ** ** | **105,001**   | ** ** | **$3.70  - $8.30**                                     | ** ** | **$**                                                          | **4.82**   | ** ** |
| Exercised                                      | ** ** | **(30,487**   | **)**      | **$3.66  - $7.00**                                     | ** ** | **$**                                                          | **4.03**   | ** ** |
| Forfeited                                      | ** ** | **(205,654**  | **)**      | **$3.50  - $813.75**                                   | ** ** | **$**                                                          | **97.56**  | ** ** |
| ADVB  tender offer                             | ** ** | **213,451**   | ** ** | **$3.29  - $196.88**                                   | ** ** | **$**                                                          | **4.86**   | ** ** |
| Tendered  for exchange                         | ** ** | **(238,697**  | **)**      | **$8.26  - $215.25**                                   | ** ** | **$**                                                          | **18.76**  | ** ** |
| Replacements  issued for tendered              | ** ** | **109,073**   | ** ** | **$3.66**                                              | ** ** | **$**                                                          | **3.66**   | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Outstanding  at December 31, 2009         | ** ** | **2,441,344** | ** ** | **$3.29  - $1,363.95**                                 | ** ** | **$**                                                          | **9.66**   | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Options  exercisable at December 31, 2009 | ** ** | **1,938,527** | ** ** | **$3.29  – 1,363.95**                             | ** ** | **$**                                                          | **10.61**  | ** ** |
| Options  exercisable at December 31, 2008 | ** ** | **1,618,415** | ** ** | **$6.30  – 1,363.95**                             | ** ** | **$**                                                          | **24.55**  | ** ** |
| ** **                                     | ** ** | ** **    | ** ** | ** **                                             | ** ** | ** **                                                     | ** ** |
| Options  exercisable at December 31, 2007 | ** ** | **1,095,512** | ** ** | **$6.30-$1,363.95**                                    | ** ** | **$**                                                          | **36.86**  | ** ** |

 

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Lime Energy Co.

Notes toConsolidated Financial Statements

 

Theintrinsic value of options exercised was $96,000, $96,000 and $193,000 duringthe years ended December 31, 2009, 2008 and 2007, respectively.

 

TheCompany historically used a modified Black-Scholes option pricing model tovalue its employee options, but beginning October 1, 2008 it began usingan Enhanced Hull-White Trinomial model. The weighted-average, grant-date fairvalue of stock options granted to employees during the year, and the weighted-averagesignificant assumptions used to determine those fair values, using the modifiedBlack-Scholes option pricing model and Enhanced Hull-White Trinomial model forstock options under ASC 718, are as follows:

 
| **Year  ended December 31,**                | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted  average fair value per options granted | ** ** | **$**      | **2.33**   | ** ** | **$**      | **3.75**   | ** ** | **$** | **8.12** | ** ** |
|                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Significant  assumptions (weighted average):     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free  interest rate at grant date           | ** ** | **0.12**   | **%**      | **1.44**   | **%**      | **4.06**   | **%**      |
| Expected  stock price volatility                 | ** ** | **83**     | **%**      | **86**     | **%**      | **88**     | **%**      |
| Expected  dividend payout                        | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Expected  option life (years) (1)                | ** ** | **5.6**    | ** ** | **5.8**    | ** ** | **6.1**    | ** ** |
| Expected  turn-over rate (2)                     | ** ** | **8.46**   | **%**      | **5.78**   | **%**      | **—** | ** ** |
| Expected  exercise multiple (2)                  | ** ** | **2.2**    | ** ** | **2.2**    | ** ** | **—** | ** ** |
|                                                  |            |            |            |            |            |            |            |  |  |  |

 

----

(1)          The company continues to use the simplified method toestimate expected term due to the historical structural changes to its businesssuch that historical exercise data may no longer provide a reasonable basis onwhich to estimate expected term.

(2)          These assumptions are used with the EnhancedHull-White Trinomial model which the Company began using on October 1,2008.

 

The risk-free interest rate is based on the U.S. Treasury Bill rates atthe time of grant. The dividend reflects the fact that the Company has neverpaid a dividend on its common stock and does not expect to in the foreseeablefuture. The Company estimated the volatility of its common stock at the date ofgrant based on the historical volatility of its stock. The expected term of theoptions is based on the simplified method as described in the Staff AccountingBulletin.  The expected turn-over raterepresents the expected forfeitures due to employee turnover and is based onhistorical rates experienced by the Company. The expected exercise multiple represents the mean ratio of the stockprice to the exercise price at which employees are expected to exercise theiroptions and is based on an empirical study completed by S. Huddart and M. Lang(1996).

 

F-38

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Table of Contents

 

Lime Energy Co.

Notes toConsolidated Financial Statements

 

The Company recognized $1,719,000, $3,784,000 and $3,727,000 of sharebased compensation expense related to stock options during 2009, 2008 and 2007,respectively.  The following tablesummarizes the expense for these years:

 
| ** **                 | ** ** | **2009**           | ** ** | **2008**     | ** ** | **2007**   | ** ** |
|----------------------------|------------|--------------------|------------|--------------|------------|------------|------------|
| ** **                 | ** ** | **Cost of  Sales** | ** ** | **SG&A** | ** ** | **Total**  | ** ** | **Cost of  Sales** | ** ** | **SG&A** | ** ** | **Total** | ** ** | **Cost of  Sales** | ** ** | **SG&A** | ** ** | **Total** | ** ** |
|                       |       |               |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Energy efficiencyservices  | ** ** | **$**              | **98**     | ** **   | **$**      | **677**    | ** ** | **$** | **775** | ** ** | **$** | **184** | ** ** | **$** | **1,250** | ** ** | **$** | **1,434** | ** ** | **$** | **130** | ** ** | **$** | **592** | ** ** | **$** | **722** | ** ** |
| ** **                 | ** ** | ** **         | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate overhead         | ** ** | **—**         | ** ** | **944**      | ** ** | **944**    | ** ** | **—** | ** ** | **2,253** | ** ** | **2,253** | ** ** | **—** | ** ** | **2,461** | ** ** | **2,461** | ** ** |
| ** **                 | ** ** | ** **         | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total continuingoperations | ** ** | **98**             | ** ** | **1,621**    | ** ** | **1,719**  | ** ** | **184** | ** ** | **3,503** | ** ** | **3,687** | ** ** | **130** | ** ** | **3,053** | ** ** | **3,183** | ** ** |
| ** **                 | ** ** | ** **         | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discontinuedoperations     | ** ** | **—**         | ** ** | **—**   | ** ** | **—** | ** ** | **—** | ** ** | **97** | ** ** | **97** | ** ** | **—** | ** ** | **544** | ** ** | **544** | ** ** |
| ** **                 | ** ** | ** **         | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total                      | ** ** | **$**              | **98**     | ** **   | **$**      | **1,621**  | ** ** | **$** | **1,719** | ** ** | **$** | **184** | ** ** | **$** | **3,600** | ** ** | **$** | **3,784** | ** ** | **$** | **130** | ** ** | **$** | **3,597** | ** ** | **$** | **3,727** | ** ** |

 

TheCompany recognizes compensation expense for stock options on a straight-linebasis over the requisite service period, which is generally equal to thevesting period of the option.  Thesubject stock options expire ten years after the date of grant.

 

The following table summarizes information about stock optionsoutstanding at December 31, 2009:

 
| ** **          | ** ** | **Options Outstanding**                             | ** ** | **Options Exercisable**                             | ** ** |
|---------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Exercise  Price** | ** ** | **Number  Outstanding at  December 31,  2008** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable at  December 31,  2008** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $3.29  - $4.00      | ** ** | **651,217**                                         | ** ** | **7.2  years**                                      | ** ** | **$** | **3.48** | ** ** | **372,215** | ** ** | **$** | **3.43** | ** ** |
| $4.01  - $6.00      | ** ** | **57,001**                                          | ** ** | **9.3  years**                                      | ** ** | **4.80** | ** ** | **17,860** | ** ** | **4.65** | ** ** |
| $6.01  - $8.00      | ** ** | **1,332,764**                                       | ** ** | **6.8  years**                                      | ** ** | **7.07** | ** ** | **1,271,098** | ** ** | **7.03** | ** ** |
| $8.01  - $10.00     | ** ** | **20,969**                                          | ** ** | **8.2  years**                                      | ** ** | **9.11** | ** ** | **15,337** | ** ** | **9.15** | ** ** |
| $10.01  - $20.00    | ** ** | **359,035**                                         | ** ** | **7.8  years**                                      | ** ** | **11.15** | ** ** | **241,659** | ** ** | **11.15** | ** ** |
| $20.01-$1,363.95    | ** ** | **20,358**                                          | ** ** | **1.5  years**                                      | ** ** | **364,99** | ** ** | **20,358** | ** ** | **364.99** | ** ** |
| ** **          | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                | ** ** | **2,441,344**                                       | ** ** | **7.2  years**                                      | ** ** | **$** | **9.66** | ** ** | **1,938,527** | ** ** | **$** | **10.61** | ** ** |

 

The aggregate intrinsic value of the outstanding options (thedifference between the closing stock price on the last trading day of 2009 of$4.65 per share and the exercise price, multiplied by the number ofin-the-money options) that would have been received by the option holders had alloption holders exercised their options on December 31, 2009 was $613,000.The aggregate intrinsic value of the exercisable options as of December 31,2009 was $367,000. These amounts will change based on changes in the fairmarket value of the Company’s common stock.

 

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Table of Contents

 

Lime Energy Co.

Notes to ConsolidatedFinancial Statements

 

As of December 31, 2009, $775,000 of total unrecognizedcompensation cost related to outstanding stock options, unadjusted forpotential forfeitures, is expected to be recognized over a weighted-averageperiod of 1.2 years, as follows:

 
| **Year  ending December 31,** | ** ** | ** ** | ** **  |
|------------------------------------|------------|------------|-------------|
| 2010                               | ** ** | **$**      | **696,000** | ** ** |
| 2011                               | ** ** | **75,000** | ** **  |
| 2012                               | ** ** | **4,000**  | ** **  |
| Total                              | ** ** | **$**      | **775,000** | ** ** |

 

***Note 26 - Employee Stock Purchase Plan***

 

The Company implemented an Employee StockPurchase Plan during the first quarter of 2009, with the first offering periodcommencing on March 1, 2009 and ending on May 31, 2009.  Subsequent offering periods have terms of sixmonths and the Plan will terminate when all of the 300,000 shares authorizedunder the plan are purchased, or November 30, 2011, whichever isearlier.  A total of 27,090 shares of theCompany’s common stock were purchased under the Employee Stock Purchase Planduring 2009 and 272,910 shares remain available as of December 31, 2009for issuance under the 2008 Purchase Plan. The Company recorded compensationexpense related to the Employee Stock Purchase Plan of $84,000 for the twelvemonth period ended December 31, 2009. As of December 31, 2009 there was approximately $45,000 ofunrecognized compensation cost related to the Employee Stock Purchase Planwhich is expected to be recognized over a 11 month period.

 

***Note 27 — Related Parties***

 

OnAugust 10, 2009, the Company and Mr. Kiphart entered into a $2million revolving bridge line to meet any potential liquidity needs the Companymight have prior to the completion of its follow-on public offering of commonstock.  The Company issued Mr. Kipharttwo warrants in connection with the issuance of the revolving bridge line ofcredit.  The first warrant gives Mr. Kiphartthe right to purchase 75,000 shares of the Company’s common stock at $6.40 pershare any time prior to August 10, 2013. The second warrant gave Mr. Kiphart the right to purchase 62,500shares of the Company’s common stock at $6.40 per share any time prior to February 20,2014, but this right only vested if the Company failed to repay any outstandingbalance on the bridge line at maturity. The Company completed its follow-on offering of common stock in September 2009and terminated the bridge line on October 2, 2009.  The line was never utilized.  Upon termination, it paid Mr. Kiphart a$70,000 termination fee and terminated the warrant to purchase 62,500 shares ofits common stock.  Please refer to Note12 for additional information regarding this transaction.

 

As is more fully described in Note 5 above, in March 2009, theCompany acquired all of the outstanding shares of Advanced Biotherapy, Inc.,a company in which Mr. Kiphart, the Company’s Chairman and largestindividual stockholder, owned approximately 80% of the common stock and servedas the chairman of its board of directors. Mr. David Valentine, one of the Company’s directors, was also adirector and stockholder of Advanced Biotherapy.

 

On January 30, 2009, the Company closed on tranche B of theSubscription Agreements dated November 13, 2008 between the Company andseven investors affiliated with the Company. The investors in this private transaction included Richard Kiphart, theCompany’s Chairman, David Asplund, the Company’s Chief Executive Officer,Daniel Parke, the Company’s President, Jeffrey Mistarz, the 

 

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Table of Contents

 

Lime Energy Co.

Notes to ConsolidatedFinancial Statements

 

Company’sChief Financial Officer, and Gregory Barnum and David Valentine, members of theCompany’s Board of Directors.  Foradditional information regarding this transaction please refer to Note 22above.

 

***As is more fully described in Notes 12 and 16 above, in March 2008,the Company entered into a revolving credit note with Advanced Biotherapy, Inc.and Richard Kiphart.  This note wassubsequently amended on June 10, 2008, August 14, 2008 and October 31,2008 to increase the size of the note to $19 million.  On November 14, 2008, Mr. Kiphartconverted his $14.5 million note and accrued interest into 358,710 shares of Series A-1preferred stock. ***On August 10, 2009, Mr. Kiphartconverted all of his shares of Series A-1 Convertible Preferred Stock into3,777,705 shares of common stock.

*** ***

On July 11, 2008, the Company entered into an agreement withRichard Kiphart, whereby Mr. Kiphart agreed to cause the issuance ofcertain letters of credit in an amount not to exceed $10 million, to supportthe issuance of surety bonds required under certain customer contracts.  The obligation to continue to provide supportfor new letters of credit continued until the earlier of July 10, 2009 orthe date on which the Company completes an offering of at least $20million.  The Company has agreed to pay Mr. Kipharta fee equal to 3-5/8% per annum on the average outstanding balance on lettersof credit, or $300,000, whichever is greater. In addition, the Company has agreed to indemnify Mr. Kiphart forany claims under the letters of credit. As of December 31, 2009 there were approximately $7.3 millionoutstanding on letters of credit supported by Mr. Kiphart.  All of these outstanding letters of creditare scheduled to expire during 2010.

 

***As is more fully described in Note14, during the second quarter of 2007, eight investors, including Richard Kiphart,the Company’s chairman and largest individual stockholder (collectively the “Investors”),and the Company entered into a loan agreement under which the Investors lentthe Company $5 million in the form of subordinated convertible term notes.  Mr. Kiphart converted his $3.1 millionof Convertible Subordinated Notes into 484,375 shares of common stock on August 10,2009.***

*** ***

During 2007 the Companyretained Corporate Resource Development, a company owned by William Carey, one of the Company’sdirectors, to provide sales and marketing consulting services andtraining.  It paid CRD a total of $53,000for its services.

 

In January 2007, theCompany also entered into an agreement with Mr. Carey to provide it withsales and marketing leads and introductions. In exchange for these services the Company agreed to pay Mr. Careya commission of 1.5% on any sale that closed as a result of his work andgranted him a warrant to purchase 21,429 shares of its stock at $7.56 per shareand a term of three years.  As of December 31,2009, no commission had been paid pursuant to this agreement.

 

As part of the acquisition ofParke P.A.N.D.A. Corporation in June 2006, the Company assumed ParkeP.A.N.D.A.’s existing office lease for space in a building in GlendoraCalifornia owned by a company controlled by Daniel Parke who was one of theCompany’s directors at the time of the acquisition.  Mr. Parke remained a director followingthe acquisition and also assumed the position of the Company’s President.  The Company believes that the terms of thelease are fair as they are comparable to the terms of leases with other thirdparty tenants located in the building. See Note 18 for additional information regarding this lease.

 

Certain other related partytransactions are disclosed in Notes 13 and 18.

 

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Table of Contents

 

Lime Energy Co.

Notes toConsolidated Financial Statements

 

The Company does not have a written policy concerning transactionsbetween the Company or a subsidiary of the Company and any director orexecutive officer, nominee for director, 5% stockholder or member of theimmediate family of any such person. However, the Company’s practice is that such transactions shall bereviewed by the Company’s Board of Directors and found to be fair to theCompany prior to the Company (or a subsidiary) entering into any suchtransaction, except for (i) executive officers’ participation in employeebenefits which are available to all employees generally; (ii) transactionsinvolving routine goods or services which are purchased or sold by the Company(or a subsidiary) on the same terms as are generally available in arm’s lengthtransactions with unrelated parties (however, such transactions are stillsubject to approval by an authorized representative of the Company (or asubsidiary) in accordance with internal policies and procedures applicable tosuch transactions with unrelated third parties); and (iii) compensationdecisions with respect to executive officers other than the CEO, which are madeby the Compensation Committee pursuant to recommendations of the CEO.

 

***Note 28 — Business Segment Information***

*** ***

The Company hashistorically segregated its results into three distinct reporting segments: theEnergy Efficiency Services segment; the Energy Technology segment; and theFinancial Services segment.  As a resultof the sale of the Energy Technology segment, it has reported their operatingresults as discontinued operations.  TheFinancial Services segment, which was established in late 2007 to enable theCompany’s commercial and industrial customers to pay for service provided bythe Energy Efficiency Services segment has not reached the scale the Companyhad hoped it would when it was created. Since the Financial Services segment exists exclusively in support ofthe Energy Efficiency Services segment and does not represent a materialportion of the Company’s revenue or assets, management views the FinancialServices segment to be part of the Energy Efficiency Services segment,therefore all of its operations are part of one operating segment.

 

***Note 29 — Selected QuarterlyFinancial Data (unaudited)***

 

The following represents the Company’s unaudited quarterly results forfiscal 2009 and fiscal 2008. These quarterly results were prepared inaccordance with U.S. generally accepted accounting principles and reflect alladjustments (consisting solely of normal recurring adjustments) which, in theopinion of management, are necessary for a fair statement of the results.  All amounts, except per share data arepresented in thousands.

 

F-42

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Table of Contents

 

Lime Energy Co.

Notes to ConsolidatedFinancial Statements

 
| ** **                                     | ** ** | **Fiscal 2009 Quarters Ended** | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **March 31**              | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** | **Total** | ** ** |
| Revenue                                        |       | $                              | 13,725     |             | $          | 15,795 |   | $ | 21,003 |   | $ | 20,279 |   | $ | 70,802 |   |
| Gross  profit                                  |       | 2,805                          |       | 2,842            |       | 4,479 |   | 3,484 |   | 13,610 |   |
| Loss  from continuing operations               |       | (3,216                         | )          | (3,417           | )          | (3,495 | ) | (7,148 | ) | (17,276 | ) |
| Loss  from discontinued operations             |       | (392                           | )          | (637             | )          | (396 | ) | (361 | ) | (1,786 | ) |
| Net  loss                                      |       | (3,608                         | )          | (4,054           | )          | (3,891 | ) | (6,475 | ) | (18,028 | ) |
| Preferred  dividends                           |       | (556                           | )          | (646             | )          | (297 | ) | — |   | (1,499 | ) |
| Net  loss available to common shareholders     |       | (4,164                         | )          | (4,700           | )          | (4,188 | ) | (6,475 | ) | (19,527 | ) |
| Basic  and Diluted Loss Per Common Share From: |       |                           |       |             |       |   |   |   |   |   |   |
| Continuing  operations                         |       | $                              | (0.34      | )                | $          | (0.31 | ) | $ | (0.24 | ) | $ | (0.26 | ) | $ | (1.12 | ) |
| Discontinued  operations                       |       | (0.04                          | )          | (0.05            | )          | (0.02 | ) | (0.02 | ) | (0.11 | ) |
| Basic  and Diluted Loss Per Common Share       |       | $                              | (0.38      | )                | $          | (0.36 | ) | $ | (0.26 | ) | $ | (0.28 | ) | $ | (1.23 | ) |
| Weighted  averages shares                      |       | 11,018                         |       | 13,070           |       | 15,956 |   | 23,504 |   | 15,893 |   |

 
| ** **                                     | ** ** | **Fiscal 2008 Quarters Ended** | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **March 31**              | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** | **Total** | ** ** |
| Revenue                                        |       | $                              | 2,247      |             | $          | 6,378 |   | $ | 17,709 |   | $ | 28,641 |   | $ | 54,975 |   |
| Gross  profit                                  |       | 34                             |       | 903              |       | 4,321 |   | 6,436 |   | 11,694 |   |
| Loss  from continuing operations               |       | (3,403                         | )          | (3,724           | )          | (2,721 | ) | (707 | ) | (10,555 | ) |
| Loss  from discontinued operations             |       | (830                           | )          | (806             | )          | (418 | ) | (426 | ) | (2,480 | ) |
| Net  loss                                      |       | (4,233                         | )          | (4,530           | )          | (3,139 | ) | (1,133 | ) | (13,035 | ) |
| Preferred  dividends                           |       | —                         |       | —           |       | — |   | (288 | ) | (288 | ) |
| Net  loss available to common shareholders     |       | (4,233                         | )          | (4,530           | )          | (3,139 | ) | (1,421 | ) | (13,323 | ) |
| Basic  and Diluted Loss Per Common Share From: |       |                           |       |             |       |   |   |   |   |   |   |
| Continuing  operations                         |       | $                              | (0.44      | )                | $          | (0.47 | ) | $ | (0.31 | ) | $ | (0.11 | ) | $ | (1.29 | ) |
| Discontinued  operations                       |       | (0.11                          | )          | (0.10            | )          | (0.05 | ) | (0.05 | ) | (0.30 | ) |
| Basic  and Diluted Loss Per Common Share       |       | $                              | (0.55      | )                | $          | (0.57 | ) | $ | (0.36 | ) | $ | (0.16 | ) | $ | (1.59 | ) |
| Weighted  averages shares                      |       | 7,732                          |       | 7,953            |       | 8,684 |   | 9,146 |   | 8,382 |   |

 

F-43

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Table of Contents

 

LIME ENERGY CO.

Schedule II — Valuation andQualifying Accounts

(in thousands)

 
| ** **                           | ** ** | **Balance at  beginning of  period** | ** ** | **Additions/  (recoveries)  charged to  costs and  expenses** | ** ** | **Deductions****Amounts  written-off** | ** ** | **Other  adjustments** | ** ** | **Balance at end  of period** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|-------------------------------|------------|
|                                 |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
| **Allowance for doubtful accounts:** |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
|                                 |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
| Year  ended December 31, 2007   |       | $                                    | 366        |                                                          | $          | 126                                    |       | $                      | (341       | )                             | $          | — |   | $ | 151 |   |
|                                 |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
| Year  ended December 31, 2008   |       | $                                    | 151        |                                                          | $          | 128                                    |       | $                      | (502       | )                             | $          | 386 |   | $ | 163 |   |
|                                 |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
| Year  ended December 31, 2009   |       | $                                    | 163        |                                                          | $          | 304                                    |       | $                      | (145       | )                             | $          | — |   | $ | 322 |   |

 

Other adjustment in 2008resulted from the acquisition of Applied Energy Management, Inc.

 
| ** **                          | ** ** | **Balance at  beginning of  period** | ** ** | **Additions/  (recoveries)  charged to  costs and  expenses** | ** ** | **Deductions****Amounts  written-off** | ** ** | **Other  adjustments** | ** ** | **Balance at end  of period** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|-------------------------------|------------|
|                                |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
| **Reserve for obsolete inventory:** |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
|                                |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
| Year  ended December 31, 2007  |       | $                                    | 597        |                                                          | $          | —                                 |       | $                      | (597       | )                             | $          | 2 |   | $ | 2 |   |
|                                |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
| Year  ended December 31, 2008  |       | $                                    | 2          |                                                          | $          | —                                 |       | $                      | —     |                          | $          | — |   | $ | 2 |   |
|                                |       |                                 |       |                                                          |       |                                   |       |                   |       |                          |       |
| Year  ended December 31, 2009  |       | $                                    | 2          |                                                          | $          | —                                 |       | $                      | (2         | )                             | $          | — |   | $ | — |   |

 

Other adjustment of$2,000 in 2007 resulted from the acquisition of Texas Energy Products, Inc.

 

F-44

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