##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 1-12014
 POWERSECURE INTERNATIONAL, INC.
  Delaware
    
    84-1169358(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1609 Heritage Commerce CourtWake Forest, North Carolina
    
    27587(Address of principal executive offices)
    
    (Zip code)
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



POWERSECURE INTERNATIONAL, INC.
 FORM 10-Q
For the Quarterly Period Ended March 31, 2011
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Consolidated Balance Sheets -
March 31, 2011 and December 31, 2010
    
    
    3Unaudited Consolidated Statements of Operations -
For the Three Months Ended March 31, 2011 and
March 31, 2010
    
    
    5Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2011 and
March 31, 2010
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    51Item 4. Controls and Procedures
    
    
    52PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    53Item 1A. Risk Factors
    
    
    53Item 6. Exhibits
    
    
    53Signatures
    
    
    54Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS

(unaudited)
 (in thousands, except share data)
 March 31,
    
    
    December 31,2011
    
    
    2010AssetsCurrent Assets:Cash and cash equivalents
    
    $
    14,890
    
    
    $
    8,202Trade receivables, net of allowance for doubtful accounts
of $256 and $415, respectively
    
    
    32,672
    
    
    
    29,290Assets of discontinued operations held for sale
    
    
    
    
    
    
    12,183Inventories
    
    
    29,863
    
    
    
    25,011Current deferred income taxes
    
    
    1,731
    
    
    
    1,731Prepaid expenses and other current assets
    
    
    928
    
    
    
    933Total current assets
    
    
    80,084
    
    
    
    77,350Property, plant and equipment:Equipment
    
    
    29,080
    
    
    
    24,946Furniture and fixtures
    
    
    280
    
    
    
    280Land, building and improvements
    
    
    5,735
    
    
    
    5,720Total property, plant and equipment, at cost
    
    
    35,095
    
    
    
    30,946Less accumulated depreciation and amortization
    
    
    6,481
    
    
    
    5,899Property, plant and equipment, net
    
    
    28,614
    
    
    
    25,047Other assets:Goodwill
    
    
    7,970
    
    
    
    7,970Deferred income taxes, net of current portion
    
    
    1,244
    
    
    
    1,244Restricted annuity contract
    
    
    2,324
    
    
    
    2,306Intangible rights and capitalized software costs, net of
accumulated amortization of $2,637 and $2,463, respectively
    
    
    1,959
    
    
    
    1,942Investment in unconsolidated affiliate
    
    
    4,732
    
    
    
    4,346Other assets
    
    
    299
    
    
    
    324Total other assets
    
    
    18,528
    
    
    
    18,132Total Assets
    
    $
    127,226
    
    
    $
    120,529
 See accompanying notes to consolidated financial statements.
  3




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share data)
 March 31,
    
    
    December 31,2011
    
    
    2010Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    9,392
    
    
    $
    8,438Accrued and other liabilities
    
    
    13,260
    
    
    
    10,986Liabilities of discontinued operations held for sale
    
    
    
    
    
    
    1,411Current income taxes payable
    
    
    139
    
    
    
    251Current unrecognized tax benefit
    
    
    954
    
    
    
    954Current portion of capital lease obligations
    
    
    807
    
    
    
    796Total current liabilities
    
    
    24,552
    
    
    
    22,836Long-term liabilites:Revolving line of credit
    
    
    5,000
    
    
    
    5,000Capital lease obligations, net of current portion
    
    
    3,441
    
    
    
    3,647Unrecognized tax benefit
    
    
    749
    
    
    
    749Deferred compensation
    
    
    1,136
    
    
    
    1,053Total long-term liabilities
    
    
    10,326
    
    
    
    10,449Commitments and contingencies (Notes 7 and 9)
    
    
    
    
    
    
    Stockholders Equity:PowerSecure International stockholders equity:Preferred stock  undesignated, $.01 par value; 2,000,000 shares
authorized; none issued and outstanding
    
    
    
    
    
    
    Preferred stock  Series C, $.01 par value; 500,000 shares
authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 25,000,000 shares
authorized; 18,807,044 and 18,701,614 shares issued
and outstanding, respectively
    
    
    188
    
    
    
    187Additional paid-in-capital
    
    
    115,342
    
    
    
    114,791Accumulated deficit
    
    
    (24,753
    )
    
    
    (29,489
    )Total PowerSecure International, Inc. stockholders equity
    
    
    90,777
    
    
    
    85,489Noncontrolling interest
    
    
    1,571
    
    
    
    1,755Total stockholders equity
    
    
    92,348
    
    
    
    87,244Total Liabilities and Stockholders Equity
    
    $
    127,226
    
    
    $
    120,529
 See accompanying notes to consolidated financial statements.
  4




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 Three Months EndedMarch 31,2011
    
    
    2010Revenues
    
    $
    23,713
    
    
    $
    20,460Cost of sales
    
    
    16,054
    
    
    
    12,351Gross profit
    
    
    7,659
    
    
    
    8,109Operating expenses:General and administrative
    
    
    7,919
    
    
    
    6,462Selling, marketing and service
    
    
    1,158
    
    
    
    1,046Depreciation and amortization
    
    
    806
    
    
    
    584Total operating expenses
    
    
    9,883
    
    
    
    8,092Operating income (loss)
    
    
    (2,224
    )
    
    
    17Other income and (expenses):Equity income from unconsolidated affiliate
    
    
    1,011
    
    
    
    1,030Management fees
    
    
    168
    
    
    
    154Interest income and other income
    
    
    20
    
    
    
    30Interest expense
    
    
    (142
    )
    
    
    (141
    )Income (loss) before income taxes
    
    
    (1,167
    )
    
    
    1,090Income tax benefit (provision)
    
    
    83
    
    
    
    (205
    )Income (loss) from continuing operations
    
    
    (1,084
    )
    
    
    885Discontinued operations (Note 5):Income from operations, net of tax
    
    
    
    
    
    
    519Gain on disposal, net of tax
    
    
    5,636
    
    
    
    Income from discontinued operations, net of tax
    
    
    5,636
    
    
    
    519Net income
    
    
    4,552
    
    
    
    1,404Less: Net (income) loss attributable to noncontrolling interest
    
    
    184
    
    
    
    (187
    )Net income attributable to PowerSecure International, Inc.
    
    $
    4,736
    
    
    $
    1,217Amounts attributable to PowerSecure International, Inc.
common stockholders:Income (loss) from continuing operations, net of tax
    
    $
    (900
    )
    
    $
    698Income from discontinued operations, net of tax
    
    
    5,636
    
    
    
    519Net income
    
    $
    4,736
    
    
    $
    1,217Basic earnings per share attributable to PowerSecure International, Inc. common stockholders:Income (loss) from continuing operations
    
    $
    (0.05
    )
    
    $
    0.04Income from discontinued operations
    
    
    0.30
    
    
    
    0.03Net income attributable to PowerSecure International, Inc. common stockholders
    
    $
    0.25
    
    
    $
    0.07Diluted earnings per share attributable to PowerSecure International, Inc. common stockholders:Income (loss) from continuing operations
    
    $
    (0.05
    )
    
    $
    0.04Income from discontinued operations
    
    
    0.30
    
    
    
    0.03Net income attributable to PowerSecure International, Inc. common stockholders
    
    $
    0.25
    
    
    $
    0.07
 See accompanying notes to consolidated financial statements.
  5




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
 (in thousands)
 Three MonthsEnded March 31,2011
    
    
    2010Cash flows from operating activities:Net income
    
    $
    4,552
    
    
    $
    1,404Adjustments to reconcile net income to net cash
used in operating activities:Income from discontinued operations
    
    
    (5,636
    )
    
    
    (519
    )Depreciation and amortization
    
    
    806
    
    
    
    584Stock compensation expense
    
    
    480
    
    
    
    494Distributions to noncontrolling shareholder
    
    
    
    
    
    
    (598
    )Equity in income of unconsolidated affiliate
    
    
    (1,011
    )
    
    
    (1,030
    )Distributions from unconsolidated affiliate
    
    
    607
    
    
    
    809Changes in operating assets and liabilities, net of
effect of aquisitons:Trade receivables, net
    
    
    (3,382
    )
    
    
    (1,222
    )Inventories
    
    
    (4,852
    )
    
    
    (4,375
    )Other current assets and liabilities
    
    
    (106
    )
    
    
    357Other noncurrent assets
    
    
    25
    
    
    
    35Accounts payable
    
    
    954
    
    
    
    5,304Restructuring charges
    
    
    
    
    
    
    (248
    )Accrued and other liabilities
    
    
    2,166
    
    
    
    (3,453
    )Deferred compensation obligation
    
    
    83
    
    
    
    83Restricted annuity contract
    
    
    (18
    )
    
    
    (22
    )Net cash used by continuing operations
    
    
    (5,332
    )
    
    
    (2,397
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    592Net cash used in operating activities
    
    
    (5,332
    )
    
    
    (1,805
    )Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (4,180
    )
    
    
    (1,102
    )Additions to intangible rights and software development
    
    
    (192
    )
    
    
    (286
    )Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    5Proceeds from sale of discontinued operations
    
    
    16,515
    
    
    
    Discontinued operations investing activities
    
    
    
    
    
    
    (21
    )Net cash provided by (used in) investing activities
    
    
    12,143
    
    
    
    (1,404
    )Cash flows from financing activities:Borrowings (payments) on revolving line of credit
    
    
    
    
    
    
    Payments on capital lease obligations
    
    
    (195
    )
    
    
    (185
    )Proceeds from stock option and warrant exercises, net of shares tendered
    
    
    72
    
    
    
    (162
    )Net cash used in financing activities
    
    
    (123
    )
    
    
    (347
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    6,688
    
    
    
    (3,556
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    8,202
    
    
    
    20,169CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    14,890
    
    
    $
    16,613
 See accompanying notes to consolidated financial statements.
  6




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Notes to Unaudited Consolidated Financial Statements
    1. Description of Business and Basis of Presentation
 Description of Business
      7




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Basis of Presentation
 Organization
   Principles of Consolidation
 Noncontrolling Interest
   Noncontrolling InterestEfficientLights
    
    
    IES
    
    
    TotalBalance, December 31, 2010
    
    $
    
    
    
    $
    1,755
    
    
    $
    1,755Income (loss)
    
    
    
    
    
    
    (184
    )
    
    
    (184
    )Distributions
    
    
    
    
    
    
    
    
    
    
    Balance, March 31, 2011
    
    $
    
    
    
    $
    1,571
    
    
    $
    1,571
  8




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Noncontrolling InterestEfficientLights
    
    
    IES
    
    
    TotalBalance, December 31, 2009
    
    $
    1,107
    
    
    $
    
    
    
    $
    1,107Income (loss)
    
    
    187
    
    
    
    
    
    
    
    187Distributions
    
    
    (598
    )
    
    
    
    
    
    
    (598
    )Balance, March 31, 2010
    
    $
    696
    
    
    $
    
    
    
    $
    696
 Use of Estimates
 Reclassifications 
 2. Summary of Significant Accounting Policies and Recent Accounting Standards
 Revenue Recognition
    9




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10




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Cash and Cash Equivalents
 Accounts Receivable
 Concentration of Credit Risk
  Warranty Reserve
 Share-Based Compensation
  Income Taxes
  11




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Subsequent Events
 Recent Accounting Pronouncements
 Revenue RecognitionMilestone Method
 Improving Disclosures about Fair Value Measurements
 Multiple Deliverable Revenue Arrangements
  12




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3. Earnings (Loss) per Share
   Three Months EndedMarch 31,2011
    
    
    2010Income from continuing operations
    
    $
    (900
    )
    
    $
    698Income from discontinued operations
    
    
    5,636
    
    
    
    519Net income
    
    $
    4,736
    
    
    $
    1,217Basic weighted-average common
shares outstanding in period
    
    
    18,719
    
    
    
    17,237Add dilutive effects of stock
options and warrants
    
    
    
    
    
    
    455Diluted weighted-average common
shares outstanding in period
    
    
    18,719
    
    
    
    17,692Basic earnings per common share:Income from continuing operations
    
    $
    (0.05
    )
    
    $
    0.04Income from discontinued operations
    
    
    0.30
    
    
    
    0.03Basic earnings per common share
    
    $
    0.25
    
    
    $
    0.07Diluted earnings per common share:Income from continuing operations
    
    $
    (0.05
    )
    
    $
    0.04Income from discontinued operations
    
    
    0.30
    
    
    
    0.03Diluted earnings per common share
    
    $
    0.25
    
    
    $
    0.07
  13




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4. Discontinued Operations
  Three Months EndedMarch 31,2011
    
    
    2010Total revenues
    
    $
    
    
    
    $
    4,214Operating expenses
    
    
    
    
    
    
    3,674Income before income taxes
    
    
    
    
    
    
    540Income tax provision
    
    
    
    
    
    
    (21
    )Income from operations
    
    
    
    
    
    
    519Gain on disposal
    
    
    5,538
    
    
    
    Income tax benefit on disposal
    
    
    98
    
    
    
    Income from discontinued operations
    
    $
    5,636
    
    
    $
    519
  December 31,2010Cash and cash equivalents
    
    $
    250Trade receivables, net of allowance for doubtful accounts
    
    
    3,427Inventories
    
    
    2,182Prepaid expenses and other current assets
    
    
    169Property, Plant and equipment, net
    
    
    922Goodwill
    
    
    5,231Other assets
    
    
    2Assets of discontinued operations held for sale
    
    $
    12,183Accounts payable
    
    
    519Accrued and other liabilities
    
    
    871Current income taxes payable
    
    
    19Capital lease obligations
    
    
    2Liabilities of discontinued operations held for sale
    
    $
    1,411
  14




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5. Investment in Unconsolidated Affiliate
   March 31,
    
    
    December 31,2011
    
    
    2010Total current assets
    
    $
    3,767
    
    
    $
    3,753Property, plant and equipment, net
    
    
    12,904
    
    
    
    11,616Total other assets
    
    
    14
    
    
    
    4Total assets
    
    $
    16,685
    
    
    $
    15,373Total current liabilities
    
    $
    3,189
    
    
    $
    2,462Long-term note payable
    
    
    3,686
    
    
    
    4,100Total shareholders equity
    
    
    9,810
    
    
    
    8,811Total liabilities and shareholders equity
    
    $
    16,685
    
    
    $
    15,373
 Three Months EndedMarch 31,2011
    
    
    2010Total revenues
    
    $
    5,412
    
    
    $
    4,892Total costs and expenses
    
    
    2,913
    
    
    
    2,346Net income
    
    $
    2,499
    
    
    $
    2,546
 6. Debt
 Line of Credit
   15




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16




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7. Capital Lease Obligations
     8. Share-Based Compensation
   17




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Stock Plans
  Stock Options
 A summary of option activity for the three months ended March 31, 2011 is as follows:
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2010
    
    
    1,247
    
    
    $
    5.98Granted
    
    
    10
    
    
    
    6.21Exercised
    
    
    (135
    )
    
    
    2.34Expired
    
    
    
    
    
    
    Forfeited
    
    
    (13
    )
    
    
    3.56Balance, March 31, 2011
    
    
    1,109
    
    
    $
    6.45
    
    
    
    5.03
    
    
    $
    2.15Exercisable, March 31, 2011
    
    
    866
    
    
    $
    6.31
    
    
    
    4.14
    
    
    $
    2.29
  18




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WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2009
    
    
    1,627
    
    
    $
    5.18Granted
    
    
    
    
    
    
    Exercised
    
    
    (1
    )
    
    
    6.88Expired
    
    
    (5
    )
    
    
    17.38Forfeited
    
    
    
    
    
    
    Balance, March 31, 2010
    
    
    1,621
    
    
    $
    5.14
    
    
    
    4.70
    
    
    $
    2.74Exercisable, March 31, 2010
    
    
    1,351
    
    
    $
    4.91
    
    
    
    4.00
    
    
    $
    2.97
  March 31,2011
    
    
    2010Expected stock price volatilility
    
    
    52.2
    %
    
    
    n/aRisk Free interest rate
    
    
    2.00
    %
    
    
    n/aAnnual dividends
    
    $
    
    
    
    
    n/aExpected life  employee options
    
    5 years
    
    
    
    n/aExpected life  director options
    
    
    n/a
    
    
    
    n/a
   Restricted Stock Awards
  19




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WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2010
    
    
    478
    
    
    $
    11.00Granted
    
    
    
    
    
    
    Vested
    
    
    (70
    )
    
    
    8.09Forfeited
    
    
    
    
    
    
    Balance, March 31, 2011
    
    
    408
    
    
    $
    11.50
  WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2009
    
    
    561
    
    
    $
    10.36Granted
    
    
    
    
    
    
    Vested
    
    
    (75
    )
    
    
    7.50Forfeited
    
    
    
    
    
    
    Balance, March 31, 2010
    
    
    486
    
    
    $
    10.80
   9. Commitments and Contingencies
   20




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21




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10. Income Taxes
  11. Segment Information
  Energy and Smart Grid Solutions
 Energy Services
  22




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Three Months Ended March 31, 2011Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    23,713
    
    
    $
    
    
    
    $
    
    
    
    $
    23,713Cost of sales
    
    
    16,054
    
    
    
    
    
    
    
    
    
    
    
    16,054Gross profit
    
    
    7,659
    
    
    
    
    
    
    
    
    
    
    
    7,659Operating expenses:General and administrative
    
    
    6,722
    
    
    
    
    
    
    
    1,197
    
    
    
    7,919Selling, marketing and service
    
    
    1,158
    
    
    
    
    
    
    
    
    
    
    
    1,158Depreciation and amortization
    
    
    787
    
    
    
    18
    
    
    
    1
    
    
    
    806Total operating expenses
    
    
    8,667
    
    
    
    18
    
    
    
    1,198
    
    
    
    9,883Operating income (loss)
    
    
    (1,008
    )
    
    
    (18
    )
    
    
    (1,198
    )
    
    
    (2,224
    )Other income and (expenses):Equity income
    
    
    
    
    
    
    1,011
    
    
    
    
    
    
    
    1,011Management fees
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    168Interest income and other income
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Interest expense
    
    
    (90
    )
    
    
    
    
    
    
    (52
    )
    
    
    (142
    )Income (loss) before income taxes
    
    $
    (1,098
    )
    
    $
    1,161
    
    
    $
    (1,230
    )
    
    $
    (1,167
    )Total capital expenditures
    
    $
    4,372
    
    
    $
    0
    
    
    $
    0
    
    
    $
    4,372Total investment in unconsolidated affiliate
    
    $
    0
    
    
    $
    4,732
    
    
    $
    0
    
    
    $
    4,732Total goodwill
    
    $
    7,970
    
    
    $
    0
    
    
    $
    0
    
    
    $
    7,970Total assets
    
    $
    103,475
    
    
    $
    4,900
    
    
    $
    18,851
    
    
    $
    127,226
  23




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Three Months Ended March 31, 2010Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    20,460
    
    
    $
    
    
    
    $
    
    
    
    $
    20,460Cost of sales
    
    
    12,351
    
    
    
    
    
    
    
    
    
    
    
    12,351Gross profit
    
    
    8,109
    
    
    
    
    
    
    
    
    
    
    
    8,109Operating expenses:General and administrative
    
    
    5,135
    
    
    
    
    
    
    
    1,327
    
    
    
    6,462Selling, marketing and service
    
    
    1,046
    
    
    
    
    
    
    
    
    
    
    
    1,046Depreciation and amortization
    
    
    564
    
    
    
    19
    
    
    
    1
    
    
    
    584Total operating expenses
    
    
    6,745
    
    
    
    19
    
    
    
    1,328
    
    
    
    8,092Operating income (loss)
    
    
    1,364
    
    
    
    (19
    )
    
    
    (1,328
    )
    
    
    17Other income and (expenses):Equity income
    
    
    
    
    
    
    1,030
    
    
    
    
    
    
    
    1,030Management fees
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    154Interest income and other income
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    30Interest expense
    
    
    (70
    )
    
    
    
    
    
    
    (71
    )
    
    
    (141
    )Income (loss) before income taxes
    
    $
    1,294
    
    
    $
    1,165
    
    
    $
    (1,369
    )
    
    $
    1,090Total capital expenditures
    
    $
    1,388
    
    
    $
    0
    
    
    $
    0
    
    
    $
    1,388Total investment in unconsolidated affiliate
    
    $
    0
    
    
    $
    4,177
    
    
    $
    0
    
    
    $
    4,177Total goodwill
    
    $
    2,025
    
    
    $
    0
    
    
    $
    0
    
    
    $
    2,025
   24




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##### Table of Contents



Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
 Introduction
  Cautionary Note Regarding Forward-Looking Statements
  
    
    our prospects, including our future business, revenues, expenses, net
income, margins, profitability, cash flow, cash position, liquidity, financial
condition and results of operations, our targeted growth rate and our expectations
about realizing the revenue in our backlog and in our sales pipeline;
 
    
    the effects on our business, financial condition and results of operations
of current and future economic, business, market and regulatory conditions, including
the current challenging economic and market conditions and their adverse effects on our
customers and their capital spending and ability to finance purchases of our products,
services, technologies and systems;
 
    
    the effects of fluctuations in sales on our business, revenues, expenses,
net income, margins, profitability, cash flow, liquidity, financial condition and
results of operations;
 
    
    our products, services, technologies and systems, including their quality
and performance in absolute terms and as compared to competitive alternatives, their
benefits to our customers and their ability to meet our customers requirements, and
our ability to successfully develop and market new products, services, technologies and
systems;
 
    
    our markets, including our market position and our market share;
 
    
    our ability to successfully develop, operate, grow and diversify our
operations and businesses;
 
    
    our business plans, strategies, goals and objectives, and our ability to
successfully achieve them;
 
    
    the effects on our financial condition, results of operations and impact
of the loss of income from the sale of our Southern Flow business and the ability to
effectively and profitably redeploy the proceeds of this sale in our core business, our
strategy to monetize other non-core assets where beneficial;
  25




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##### Table of Contents




    
    the sufficiency of our capital resources, including our cash and cash
equivalents, funds generated from operations, availability of borrowings under our
credit and financing arrangements and other capital resources, to meet our future
working capital, capital expenditure, lease and debt service and business growth needs;
 
    
    the value of our assets and businesses, including the revenues, profits
and cash flow they are capable of delivering in the future;
 
    
    industry trends and customer preferences and the demand for our products,
services, technologies and systems;
 
    
    the nature and intensity of our competition, and our ability to
successfully compete in our markets;
 
    
    fluctuations in our effective tax rates;
 
    
    business acquisitions, combinations, sales, alliances, ventures and other
similar business transactions and relationships; and
 
    
    the effects on our business, financial condition and results of operations
of litigation, warranty claims and other claims and proceedings that arise from time to
time.
    26




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Overview
    Interactive Distributed Generation
    27




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##### Table of Contents



Utility Infrastructure
    28




---



##### Table of Contents



Energy Efficiency
   
  29




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##### Table of Contents



Energy Services Business
   Recent Developments
 TM
 ® ®
   30




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##### Table of Contents



Financial Results Highlights
      31




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##### Table of Contents



Backlog
  Revenue Backlog to be recognized after March 31, 2011
 Anticipated
    
    
    Estimated PrimaryDescription
    
    Revenue
    
    
    Recognition PeriodProject-based Revenue  Near term
    
    $
    60 Million
    
    
    2Q11 through 4Q11Project-based Revenue  Long term
    
    $
    17 Million
    
    
    1Q12 through 2013Recurring Revenue
    
    $
    69 Million
    
    
    2Q11 through 2019Revenue Backlog to be recognized
after March 31, 2011
    
    $
    146 Million
 Note:
    
    Anticipated revenue and estimated
primary recognition periods are subject
to risks and uncertanities as indicated
in Cautionary Note Regarding
Forward-Looking Statements above.
Consistent with past practice, these
amounts are not intended to constitute
the Companys total revenue over the
indicated time periods, as the Company
has additional, regular on-going
revenues. Examples of additional,
regular recurring revenues include
revenues from the engineering fees, and
service revenue, among others. Numbers
may not add due to rounding.   32




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##### Table of Contents



Operating Segments
  Energy and Smart Grid Solutions
  Energy Services
  Results of Operations
  First Quarter 2011 Compared to First Quarter 2010
 Revenues
  Quarter Ended
    
    
    Period-over-PeriodMarch 31,
    
    
    Difference2011
    
    
    2010
    
    
    $
    
    
    %Energy and SmartGrid Solutions:Interactive Distributed Generation
    
    $
    11,202
    
    
    $
    10,420
    
    
    $
    782
    
    
    
    7.5
    %Utility Infrastructure
    
    
    7,578
    
    
    
    5,370
    
    
    
    2,208
    
    
    
    41.1
    %Energy Efficiency
    
    
    4,933
    
    
    
    4,670
    
    
    
    263
    
    
    
    5.6
    %Total
    
    $
    23,713
    
    
    $
    20,460
    
    
    $
    3,253
    
    
    
    15.9
    %
  33




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34




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Gross Profit and Gross Profit Margin
  Quarter Ended
    
    
    Period-over-PeriodMarch 31,
    
    
    Difference2011
    
    
    2010
    
    
    $
    
    
    %Energy and Smart Grid Solutions:Cost of Sales
    
    $
    16,054
    
    
    $
    12,351
    
    
    $
    3,703
    
    
    
    30.0
    %Gross Profit
    
    $
    7,659
    
    
    $
    8,109
    
    
    $
    (450
    )
    
    
    -5.5
    %Gross Profit Margin
    
    
    32.3
    %
    
    
    39.6
    %
    
    
    The absolute level of revenue achieved in any particular period, given that portions
of our cost of sales are relatively fixed over the near-term, the most significant of
which is personnel and equipment costs;
 
    
    Our ability to improve our operating efficiency and benefit from economies of scale;
 
    
    Our level of investments in our businesses, particularly for anticipated or new or
business awards;
 
    
    Improvements in technology and manufacturing methods and processes;
 
    
    The mix of higher and lower margin projects, products and services, and the impact
of new products and technologies on our pricing and volumes;
 
    
    Our ability to manage our materials and labor costs, including any future
inflationary pressures;
 
    
    The costs to maintain and operate distributed generation systems we own in
conjunction with recurring revenue contracts, including the price of fuel, as well as
their operating performance;
 
    
    The geographic density of our projects;
  35




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
    
    The selling price of products and services sold to customers, and the revenues we
expect to generate from recurring revenue projects;
 
    
    The rate of growth of our new businesses, which tend to incur costs in excess of
revenues in their earlier phases and then become profitable and more efficient over
time if they are successful; and
 
    
    Other factors described below under Fluctuations.
  Operating Expense
  Quarter Ended
    
    
    Period-over-PeriodMarch 31,
    
    
    Difference2011
    
    
    2010
    
    
    $
    
    
    %Consolidated Operating Expenses:General and administrative
    
    $
    7,919
    
    
    $
    6,462
    
    
    $
    1,457
    
    
    
    22.5
    %Selling, marketing and service
    
    
    1,158
    
    
    
    1,046
    
    
    
    112
    
    
    
    10.7
    %Depreciation and amortization
    
    
    806
    
    
    
    584
    
    
    
    222
    
    
    
    38.0
    %Total
    
    $
    9,883
    
    
    $
    8,092
    
    
    $
    1,791
    
    
    
    22.1
    %
   36




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General and Administrative Expenses.
 Quarter Ended
    
    
    Period-over-PeriodMarch 31,
    
    
    Difference2011
    
    
    2010
    
    
    $
    
    
    %Segment G&A Expenses:Energy and Smart Grid Solutions:Personnel costs
    
    $
    4,498
    
    
    $
    3,178
    
    
    $
    1,320
    
    
    
    41.5
    %Vehicle lease and rental
    
    
    510
    
    
    
    389
    
    
    
    121
    
    
    
    31.1
    %Insurance
    
    
    148
    
    
    
    211
    
    
    
    (63
    )
    
    
    -29.9
    %Rent-office and equipment
    
    
    230
    
    
    
    199
    
    
    
    31
    
    
    
    15.6
    %Professional fees and consulting
    
    
    218
    
    
    
    166
    
    
    
    52
    
    
    
    31.3
    %Travel
    
    
    287
    
    
    
    252
    
    
    
    35
    
    
    
    13.9
    %Development costs
    
    
    161
    
    
    
    19
    
    
    
    142
    
    
    
    747.4
    %Other
    
    
    670
    
    
    
    721
    
    
    
    (51
    )
    
    
    -7.1
    %Energy Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/mUnallocated Corporate Costs
    
    
    1,197
    
    
    
    1,327
    
    
    
    (130
    )
    
    
    -9.8
    %Total
    
    $
    7,919
    
    
    $
    6,462
    
    
    $
    1,457
    
    
    
    22.5
    %
    37




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##### Table of Contents



Selling, Marketing and Service Expenses.
 Quarter Ended
    
    
    Period-over-PeriodMarch 31,
    
    
    Difference2011
    
    
    2010
    
    
    $
    
    
    %Segment Selling, Marketing and
Service:Energy and Smart Grid Solutions:Salaries
    
    $
    658
    
    
    $
    499
    
    
    $
    159
    
    
    
    31.9
    %Commission
    
    
    231
    
    
    
    286
    
    
    
    (55
    )
    
    
    -19.2
    %Travel
    
    
    175
    
    
    
    165
    
    
    
    10
    
    
    
    6.1
    %Advertising and promotion
    
    
    98
    
    
    
    116
    
    
    
    (18
    )
    
    
    -15.5
    %Bad debt expense (recovery)
    
    
    (4
    )
    
    
    (20
    )
    
    
    16
    
    
    
    -80.0
    %Energy Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/mTotal
    
    $
    1,158
    
    
    $
    1,046
    
    
    $
    112
    
    
    
    10.7
    %
  Depreciation and Amortization Expenses.
  38




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Other Income and Expenses
  Quarter Ended
    
    
    Period-over-PeriodMarch 31,
    
    
    Difference2011
    
    
    2010
    
    
    $
    
    
    %Other Segment Income and (Expenses):Energy and Smart Grid Solutions:Interest income and other income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    n/mInterest expense
    
    
    (90
    )
    
    
    (70
    )
    
    
    (20
    )
    
    
    -28.6
    %Segment total
    
    
    (90
    )
    
    
    (70
    )
    
    
    (20
    )Energy Services:Equity income
    
    
    1,011
    
    
    
    1,030
    
    
    
    (19
    )
    
    
    -1.8
    %Management fees
    
    
    168
    
    
    
    154
    
    
    
    14
    
    
    
    9.1
    %Segment total
    
    
    1,179
    
    
    
    1,184
    
    
    
    (5
    )Unallocated Corporate:Interest income and other income
    
    
    20
    
    
    
    30
    
    
    
    (10
    )
    
    
    -33.3
    %Interest expense
    
    
    (52
    )
    
    
    (71
    )
    
    
    19
    
    
    
    26.8
    %Income tax benefit (provision)
    
    
    83
    
    
    
    (205
    )
    
    
    288
    
    
    
    140.5
    %Segment total
    
    
    51
    
    
    
    (246
    )
    
    
    297Total
    
    $
    1,140
    
    
    $
    868
    
    
    $
    272
 Equity Income.
 Management Fees.
 Interest Income and Other Income.
 Interest Expense.
  39




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##### Table of Contents



Income Taxes.
 Noncontrolling Interest
  Fluctuations
  
    
    the effects of general economic and financial conditions, including the
ongoing challenges in the economy and the difficult capital and credit markets, and the
potential for such economic and market challenges to continue or recur in the future,
negatively impacting our business operations and our revenues and net income, including
the negative impact these conditions could have on the timing of and amounts of orders
from our customers, and the potential these factors have to negatively impact our
access to capital to finance our business;
  40




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
    
    the size, timing and terms of sales and orders, including large customer
orders, as well as the effects of the timing of project phases of completion, and
customers delaying, deferring or canceling purchase orders or making smaller purchases
than expected;
 
    
    our ability to increase our revenues through long-term recurring revenue
projects, recognizing that increasing revenues from recurring revenue projects will
require significant up-front capital expenditures and will protract revenue and profit
recognition, while increasing our gross margins over the long-term, as well as our
ability to sell, complete, and recognize satisfactory levels of quarterly revenue and
profits related to our project-based sales and product and service revenue, in order to
maintain current profits, cash flow, and to satisfy our financial covenants in our debt
facilities and successfully finance the recurring portion of our business model;
 
    
    our ability to maintain and grow our utility infrastructure revenues, and
maintain and increase pricing, utilization rates, and productivity rates, given the
significant levels of vehicles, tools, and labor in which we have invested and is
required to serve utilities in this business area;
 
    
    the recent sale of our Southern Flow business, and the associated loss of
revenues, cash flow
and income from that business, and our ability to redeploy the proceeds from the sale
productively and profitably;
 
    
    our ability to obtain adequate supplies of key components and materials of
suitable quality for our products on a timely and cost-effective basis, including the
impact of potential supply line constraints, substandard parts, and fluctuations in the
cost of raw materials and commodity prices, including without limitation with respect
to our Energy Efficiency business unit in relation to third party manufacturing
arrangements we have with vendors in China, and other component parts which have their
origins in Japan;
 
    
    the performance of our products, services and technologies, and the
ability of our systems to meet the performance standards they are designed and built to
deliver to our customers, including but not limited to our recurring revenue projects
for which we retain the on-going risks associated with the performance and ownership of
the systems;
 
    
    our ability to access significant capital resources on a timely basis in
order to fund working capital requirements, fulfill large customer orders, and finance
capital required for recurring revenue projects and equipment for our utility
infrastructure business;
 
    
    our ability to implement our business plans and strategies and the
development of new products and services the timing of such implementation;
 
    
    the pace of revenue and profit realization from our new businesses and the
development and growth of their markets, including the timing, pricing and market
acceptance of our new products and services;
 
    
    changes in our pricing policies and those of our competitors, including
the introduction of lower cost competing technologies and the potential for them to
impact our pricing and our profit margins;
 
    
    variations in the length of our sales cycle and product and service
delivery and construction process;
 
    
    changes in the mix of products and services having differing margins;
 
    
    changes in our operating expenses, including prices for materials
including but not limited to copper, aluminum, and other raw materials, labor costs,
and other components of our products and services, fuel prices including diesel,
natural gas, oil and gasoline, and our ability or inability to hedge or otherwise
manage these prices to protect our costs and revenues, minimize the impact of volatile
exchange rates and mitigate unforeseen or unanticipated expenses;
  41




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
    
    changes in our valuation allowance for our net deferred tax asset, and the
resulting impact on current tax expense, future tax expense, and balance sheet account
balances;
 
    
    the effects of severe weather conditions, such as hurricanes, on the
business operations of our customers, and the potential effect of such conditions on
our results of operations;
 
    
    the life cycles of our products and services, and competitive alternatives
in the marketplace;
 
    
    budgeting cycles of utilities and other industrial, commercial, and
institutional customers, including impacts of the current downturn in the economy and
difficult capital market conditions on capital projects and other spending items;
 
    
    changes and uncertainties in the lead times required to obtain the
necessary permits and other governmental and regulatory approvals for projects;
 
    
    the development and maintenance of business relationships with strategic
partners such as utilities and large customers;
 
    
    economic conditions and regulations in the energy industry, especially in
the electricity, natural gas and oil sectors, including the effects of changes in
energy prices and electricity pricing and utility tariffs;
 
    
    changes in the prices charged by our suppliers;
 
    
    the effects of governmental regulations and regulatory changes in our
markets;
 
    
    the effects of litigation, claims and other proceedings; and
 
    
    our ability to make and obtain the expected benefits from the development
of or acquisition of technology or businesses, and the costs related to such
development or acquisitions.
     42




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Liquidity and Capital Resources
 Overview
  
    
    operations;
 
    
    inventory;
 
    
    accounts receivable;
 
    
    property and equipment expenditures, including capital expenditures related to
recurring revenue projects;
 
    
    additional equity investments in our WaterSecure operations;
 
    
    software purchases or development;
 
    
    debt service requirements;
 
    
    lease obligations;
 
    
    deferred compensation obligations; and
 
    
    business and technology acquisitions and other growth transactions.
 Working Capital
   43




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Cash Flows
  Three Months Ended March 31,2011
    
    
    2010Net cash flows used in operating activities
    
    $
    (5,332
    )
    
    $
    (1,805
    )Net cash flows provided by (used in) investing activities
    
    
    12,143
    
    
    
    (1,404
    )Net cash used in financing activities
    
    
    (123
    )
    
    
    (347
    )Net increase (decrease) in cash and cash equivalents
    
    $
    6,688
    
    
    $
    (3,556
    )
 Cash Used in Operating Activities
   
    
    our loss from continuing operations of $1.1 million;
 
    
    non-cash charges of $0.8 million in depreciation and amortization;
 
    
    stock-based compensation expense of $0.5 million;
 
    
    non-cash equity income from our WaterSecure operations of $1.0 million partially
offset by cash distributions from those operations of $0.6 million;
 
    
    an increase of $3.4 million in accounts receivable;
 
    
    an increase of $4.9 million in inventories;
 
    
    an increase of $0.1 million in other assets and liabilities
 
    
    an increase of $1.0 million of accounts payable; and
 
    
    an increase of $2.2 million of accrued expenses.
  
    
    our income from continuing operations of $0.9 million;
 
    
    non-cash charges of $0.6 million in depreciation and amortization;
 
    
    stock-based compensation expense of $0.5 million;
 
    
    cash distributions to the noncontrolling member of EfficientLights of $0.6 million;
 
    
    non-cash equity income from our WaterSecure operations of $1.0 million partially
offset by cash distributions from those operations of $0.8 million;
 
    
    an increase of $1.2 million in accounts receivable;
 
    
    an increase of $4.4 million in inventories;
 
    
    a decrease of $0.4 million in other current assets and liabilities
 
    
    an increase of $5.3 million of accounts payable;
 
    
    a decrease of $3.5 million of accrued expenses;
 
    
    cash payments of $0.2 million on our restructuring obligations; and
 
    
    cash provided by our discontinued operations of $0.6 million.
  44




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Cash Provided by (Used in) Investing Activities
  Cash Used in Financing Activities
  Capital Spending
   Indebtedness
 Line of Credit .
  45




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46




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##### Table of Contents



Capital Lease Obligations.
    Preferred Stock Redemption
  47




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Payments Due by PeriodRemainder
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    of 2011
    
    
    1 - 3 Years
    
    
    4 - 5 Years
    
    
    5 YearsContractual ObligationsCredit facility (1)
    
    $
    5,000
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    
    
    
    $
    Capital lease obligations (2)
    
    
    4,823
    
    
    
    762
    
    
    
    2,031
    
    
    
    2,030
    
    
    
    Operating leases
    
    
    7,273
    
    
    
    1,190
    
    
    
    2,824
    
    
    
    1,752
    
    
    
    1,507Deferred compensation (3)
    
    
    2,661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,661Non-compete agreement
    
    
    400
    
    
    
    
    
    
    
    200
    
    
    
    200
    
    
    
    Series B preferred stock
    
    
    104
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    20,261
    
    
    $
    2,056
    
    
    $
    10,055
    
    
    $
    3,982
    
    
    $
    4,168
 
 (1)
    
    Total repayments are based upon borrowings outstanding as of March 31, 2011, not actual
or projected borrowings after such date. Repayments do not include interest that may
become due and payable in any future period.(2)
    
    Repayment amounts include interest on the capital lease obligation.(3)
    
    Total amount represents our expected obligation on the deferred compensation
arrangement and does not include the value of the restricted annuity contract, or interest
earnings thereon, that we purchased to fund our obligation. Off-Balance Sheet Arrangements
   48




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##### Table of Contents



Liquidity
   Critical Accounting Policies
   49




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##### Table of Contents




    
    revenue recognition;
 
    
    allowance for doubtful accounts;
 
    
    inventories;
 
    
    warranty reserve;
 
    
    impairment of long-lived assets;
 
    
    deferred tax valuation allowance;
 
    
    uncertain tax positions;
 
    
    costs of exit or disposal activities and similar nonrecurring charges; and
 
    
    stock-based compensation.
  Recent Accounting Pronouncements
 Revenue RecognitionMilestone Method
 Improving Disclosures about Fair Value Measurements
  50




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##### Table of Contents



Multiple Deliverable Revenue Arrangements
 
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
  Commodity Price Risk
  51




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##### Table of Contents



Foreign Exchange Risk
  
 Item 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  Limitations in Control Systems
   52




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 6.
    
    Exhibits
 (31.1
    )
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)(31.2
    )
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)(32.1
    )
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)(32.2
    )
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)
 
  53




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##### Table of Contents



SIGNATURES
  POWERSECURE INTERNATIONAL, INC.Date:    May 5, 2011
    By:
    /s/ Sidney HintonSidney HintonPresident and Chief Executive OfficerDate:    May 5, 2011
    By:
    /s/ Christopher T. HutterChristopher T. HutterExecutive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary  54