##### 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 September 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 1-12014
 POWERSECURE INTERNATIONAL, INC.
  Delaware
    
    84-1169358(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)1609 Heritage Commerce Court 
Wake 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




---



##### 



POWERSECURE INTERNATIONAL, INC.
 FORM 10-Q
For the Quarterly Period Ended September 30, 2010
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Consolidated Balance Sheets 
September 30, 2010 and December 31, 2009
    
    
    3Unaudited Consolidated Statements of Operations 
For the Three and Nine Months Ended September 30, 2010 and
September 30, 2009
    
    
    5Unaudited Consolidated Statements of Cash Flows 
For the Three and Nine Months Ended September 30, 2010 and
September 30, 2009
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    59Item 4. Controls and Procedures
    
    
    60PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    62Item 1A. Risk Factors
    
    
    62Item 6. Exhibits
    
    
    63Signatures
    
    
    64Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




---



##### 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)
 September 30,
    
    
    December 31,2010
    
    
    2009AssetsCurrent Assets:Cash and cash equivalents
    
    $
    14,668
    
    
    $
    20,169Trade receivables, net of allowance for doubtful accounts
of $428 and $299, respectively
    
    
    34,607
    
    
    
    28,332Inventories
    
    
    24,163
    
    
    
    21,632Deferred income taxes
    
    
    2,713
    
    
    
    2,713Prepaid expenses and other current assets
    
    
    903
    
    
    
    1,300Total current assets
    
    
    77,054
    
    
    
    74,146Property, plant and equipment:Equipment
    
    
    26,222
    
    
    
    22,252Furniture and fixtures
    
    
    683
    
    
    
    671Land, building and improvements
    
    
    4,904
    
    
    
    4,802Total property, plant and equipment, at cost
    
    
    31,809
    
    
    
    27,725Less accumulated depreciation and amortization
    
    
    7,019
    
    
    
    5,413Property, plant and equipment, net
    
    
    24,790
    
    
    
    22,312Other assets:Goodwill
    
    
    13,201
    
    
    
    7,256Restricted annuity contract
    
    
    2,287
    
    
    
    2,220Intangible rights and capitalized software costs, net of
accumulated amortization of $2,298 and $1,890, respectively
    
    
    1,998
    
    
    
    1,320Investment in unconsolidated affiliate
    
    
    4,129
    
    
    
    3,974Other assets
    
    
    166
    
    
    
    249Total other assets
    
    
    21,781
    
    
    
    15,019Total Assets
    
    $
    123,625
    
    
    $
    111,477
 See accompanying notes to consolidated financial statements.
  3




---



##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share data)
 September 30,
    
    
    December 31,2010
    
    
    2009Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    5,262
    
    
    $
    4,116Accrued and other liabilities
    
    
    17,476
    
    
    
    20,379Restructuring charges payable
    
    
    
    
    
    
    325Current income taxes payable
    
    
    5
    
    
    
    Current unrecognized tax benefit
    
    
    954
    
    
    
    327Current portion of capital lease obligations
    
    
    787
    
    
    
    756Total current liabilities
    
    
    24,484
    
    
    
    25,903Long-term liabilites:Revolving line of credit
    
    
    7,500
    
    
    
    Capital lease obligations, net of current portion
    
    
    3,851
    
    
    
    4,445Unrecognized tax benefit
    
    
    692
    
    
    
    1,169Deferred compensation
    
    
    970
    
    
    
    721Total long-term liabilities
    
    
    13,013
    
    
    
    6,335Commitments and contingencies (Note 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; 18,700,614 and 17,241,650 shares issued
and outstanding, respectively
    
    
    187
    
    
    
    172Additional paid-in-capital
    
    
    113,939
    
    
    
    110,911Accumulated deficit
    
    
    (29,920
    )
    
    
    (32,951
    )Total PowerSecure International, Inc. stockholders equity
    
    
    84,206
    
    
    
    78,132Noncontrolling interest
    
    
    1,922
    
    
    
    1,107Total stockholders equity
    
    
    86,128
    
    
    
    79,239Total Liabilities and Stockholders Equity
    
    $
    123,625
    
    
    $
    111,477
 See accompanying notes to consolidated financial statements.
  4




---



##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    31,406
    
    
    $
    27,721
    
    
    $
    90,394
    
    
    $
    72,576Cost of sales
    
    
    20,480
    
    
    
    17,469
    
    
    
    58,040
    
    
    
    48,195Gross profit
    
    
    10,926
    
    
    
    10,252
    
    
    
    32,354
    
    
    
    24,381Operating expenses:General and administrative
    
    
    8,768
    
    
    
    6,399
    
    
    
    25,101
    
    
    
    18,511Selling, marketing and service
    
    
    1,503
    
    
    
    997
    
    
    
    3,943
    
    
    
    2,797Depreciation and amortization
    
    
    832
    
    
    
    657
    
    
    
    2,232
    
    
    
    1,762Total operating expenses
    
    
    11,103
    
    
    
    8,053
    
    
    
    31,276
    
    
    
    23,070Operating income (loss)
    
    
    (177
    )
    
    
    2,199
    
    
    
    1,078
    
    
    
    1,311Other income and (expenses):Equity income
    
    
    598
    
    
    
    429
    
    
    
    2,435
    
    
    
    1,307Management fees
    
    
    136
    
    
    
    106
    
    
    
    432
    
    
    
    309Interest income and other income
    
    
    30
    
    
    
    36
    
    
    
    86
    
    
    
    127Interest expense
    
    
    (177
    )
    
    
    (144
    )
    
    
    (457
    )
    
    
    (463
    )Income before income taxes
    
    
    410
    
    
    
    2,626
    
    
    
    3,574
    
    
    
    2,591Income tax provision
    
    
    (52
    )
    
    
    (423
    )
    
    
    (528
    )
    
    
    (473
    )Net income
    
    
    358
    
    
    
    2,203
    
    
    
    3,046
    
    
    
    2,118Less: Net income attributable to
noncontrolling interest
    
    
    132
    
    
    
    (549
    )
    
    
    (15
    )
    
    
    (914
    )Net income attributable to PowerSecure
International, Inc.
    
    $
    490
    
    
    $
    1,654
    
    
    $
    3,031
    
    
    $
    1,204Earnings per share attributable to
PowerSecure International, Inc. common
stockholders:Basic
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.17
    
    
    $
    0.07Diluted
    
    $
    0.03
    
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.07Weighted average common shares outstanding:Basic
    
    
    18,640
    
    
    
    17,218
    
    
    
    17,942
    
    
    
    17,158Diluted
    
    
    19,028
    
    
    
    17,467
    
    
    
    18,447
    
    
    
    17,174
 See accompanying notes to consolidated financial statements.
  5




---



##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
 Nine MonthsEnded September 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    3,046
    
    
    $
    2,118Adjustments to reconcile net income (loss) to net cash
used in operating activities:Depreciation and amortization
    
    
    2,232
    
    
    
    1,762Stock compensation expense
    
    
    1,270
    
    
    
    1,202Distributions to noncontrolling shareholder
    
    
    (877
    )
    
    
    (Gain) loss on disposal of miscellaneous assets
    
    
    37
    
    
    
    32Equity in income of unconsolidated affiliate
    
    
    (2,435
    )
    
    
    (1,307
    )Distributions from unconsolidated affiliate
    
    
    2,225
    
    
    
    1,618Changes in operating assets and liabilities, net of
effect of aquisitons:Trade receivables, net
    
    
    (5,927
    )
    
    
    (4,842
    )Inventories
    
    
    (2,249
    )
    
    
    (5,234
    )Other current assets and liabilities
    
    
    402
    
    
    
    631Other noncurrent assets
    
    
    97
    
    
    
    53Accounts payable
    
    
    169
    
    
    
    (539
    )Restructuring charges
    
    
    (325
    )
    
    
    (1,096
    )Accrued and other liabilities
    
    
    (2,938
    )
    
    
    (3,526
    )Unrecognized tax benefits
    
    
    150
    
    
    
    188Deferred compensation obligation
    
    
    249
    
    
    
    249Restricted annuity contract
    
    
    (67
    )
    
    
    (65
    )Net cash used in operating activities
    
    
    (4,941
    )
    
    
    (8,756
    )Cash flows from investing activities:Acquisitons
    
    
    (4,413
    )
    
    
    (800
    )Purchases of property, plant and equipment
    
    
    (3,850
    )
    
    
    (2,202
    )Additions to intangible rights and software development
    
    
    (518
    )
    
    
    (442
    )Proceeds from sale of property, plant and equipment
    
    
    21
    
    
    
    12Net cash used in investing activities
    
    
    (8,760
    )
    
    
    (3,432
    )Cash flows from financing activities:Borrowings (payments) on revolving line of credit
    
    
    7,500
    
    
    
    Payments on capital lease obligations
    
    
    (563
    )
    
    
    (534
    )Proceeds from stock option and warrant exercises, net of shares tendered
    
    
    1,263
    
    
    
    298Net cash provided by (used in) financing activities
    
    
    8,200
    
    
    
    (236
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (5,501
    )
    
    
    (12,424
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    20,169
    
    
    
    24,316CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    14,668
    
    
    $
    11,892
 See accompanying notes to consolidated financial statements.
  6




---



##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Notes to Unaudited Consolidated Financial Statements
 1. Description of Business and Basis of Presentation
 Description of Business
  
    
    Interactive Distributed Generation,
    
    Utility Infrastructure,
    
    Energy Efficiency, and
    
    Energy Services.
     7




---



##### Table of Contents



Basis of Presentation
 Organization
   Principles of Consolidation
 Noncontrolling Interest
   8




---



##### Table of Contents



Noncontrolling InterestEfficientLights
    
    
    IES
    
    
    TotalBalance, December 31, 2009
    
    $
    1,107
    
    
    $
    
    
    
    $
    1,107Capital Contributions
    
    
    
    
    
    
    2,187
    
    
    
    2,187Income (loss)
    
    
    280
    
    
    
    (265
    )
    
    
    15Distributions
    
    
    (877
    )
    
    
    
    
    
    
    (877
    )Acqusition of noncontrolling interest
    
    
    (510
    )
    
    
    
    
    
    
    (510
    )Balance, September 30, 2010
    
    $
    
    
    
    $
    1,922
    
    
    $
    1,922
  Noncontrolling InterestEfficientLights
    
    
    IES
    
    
    TotalBalance, December 31, 2008
    
    $
    
    
    
    $
    
    
    
    $
    Capital Contributions
    
    
    
    
    
    
    
    
    
    
    Income (loss)
    
    
    914
    
    
    
    
    
    
    
    914Distributions
    
    
    
    
    
    
    
    
    
    
    Acqusition of noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    Balance, September 30, 2009
    
    $
    914
    
    
    $
    
    
    
    $
    914
 Use of Estimates
 Reclassifications
 2. Summary of Significant Accounting Policies and Recent Accounting Standards
 Revenue Recognition
  9




---



##### Table of Contents



10




---



##### Table of Contents



Cash and Cash Equivalents
 Concentration of Credit Risk
  Warranty Reserve
 Share-Based Compensation
   11




---



##### Table of Contents



Income Taxes
  Subsequent
Events
 Recent Accounting Pronouncements
 Accounting
for Transfers of Financial Assets Transfers
and Servicing
 Variable
Interest Entities Consolidation
  12




---



##### Table of Contents



Revenue Recognition  Milestone Method Revenue Recognition  Milestone Method (Topic 605): Milestone Method
of Revenue Recognition
 Improving Disclosures about Fair Value Measurements Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements
 Multiple Deliverable Revenue Arrangements Multiple Deliverable Revenue Arrangements  A Consensus of the FASB Emerging Issues Task Force (Topic 605) Revenue Recognition
 Software Elements in Revenue Arrangements Certain Revenue Arrangements That Include Software Elements (Topic 985): Software
 3. Earnings (Loss) per Share
   13




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    490
    
    
    $
    1,654
    
    
    $
    3,031
    
    
    $
    1,204Basic weighted-average common
shares outstanding in period
    
    
    18,640
    
    
    
    17,218
    
    
    
    17,942
    
    
    
    17,158Add dilutive effects of stock
options and warrants
    
    
    388
    
    
    
    249
    
    
    
    505
    
    
    
    16Diluted weighted-average common
shares outstanding in period
    
    
    19,028
    
    
    
    17,467
    
    
    
    18,447
    
    
    
    17,174Basic earnings (loss) per common share:
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.17
    
    
    $
    0.07Diluted earnings (loss) per common share:
    
    $
    0.03
    
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.07
 4. Acquisitions
 Acquisition of IES 
   14




---



##### Table of Contents



Accounts receivable
    
    $
    349Inventory
    
    
    281Equipment
    
    
    427Deposits
    
    
    14Intangible rights
    
    
    596Goodwill
    
    
    5,945Accounts payable
    
    
    (977
    )Accrued and other liabilities
    
    
    (35
    )Non-controlling interest
    
    
    (2,187
    )Net assets acquired
    
    $
    4,413
   Acquisition of Noncontrolling Interest in EfficientLights 
 5. Investment in Unconsolidated Affiliate
   15




---



##### Table of Contents



September 30,
    
    
    December 31,2010
    
    
    2009Total current assets
    
    $
    2,865
    
    
    $
    2,942Property, plant and equipment, net
    
    
    9,432
    
    
    
    8,879Total other assets
    
    
    5
    
    
    
    6Total assets
    
    $
    12,302
    
    
    $
    11,827Total current liabilities
    
    $
    2,025
    
    
    $
    1,433Long-term note payable
    
    
    2,113
    
    
    
    2,749Total shareholders equity
    
    
    8,164
    
    
    
    7,645Total liabilities and shareholders equity
    
    $
    12,302
    
    
    $
    11,827
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Total revenues
    
    $
    4,221
    
    
    $
    3,034
    
    
    $
    13,552
    
    
    $
    8,707Total costs and expenses
    
    
    2,743
    
    
    
    1,973
    
    
    
    7,532
    
    
    
    5,477Net income
    
    $
    1,478
    
    
    $
    1,061
    
    
    $
    6,020
    
    
    $
    3,230
 6. Debt
 Line
of Credit
     16




---



##### Table of Contents



17




---



##### Table of Contents



7. Capital Lease Obligations
      18




---



##### Table of Contents



8. Share-Based Compensation
  Stock Plans
  Stock Options
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2009
    
    
    1,627
    
    
    $
    5.18Granted
    
    
    71
    
    
    
    9.64Exercised
    
    
    (434
    )
    
    
    3.35Expired
    
    
    (5
    )
    
    
    17.38Forfeited
    
    
    (13
    )
    
    
    9.55Balance, September 30, 2010
    
    
    1,246
    
    
    $
    5.97
    
    
    
    5.14
    
    
    $
    3.29Exercisable, September 30, 2010
    
    
    945
    
    
    $
    5.87
    
    
    
    4.15
    
    
    $
    3.39
  19




---



##### Table of Contents



WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2008
    
    
    1,708
    
    
    $
    5.21Granted
    
    
    20
    
    
    
    4.57Exercised
    
    
    (39
    )
    
    
    2.11Expired
    
    
    (6
    )
    
    
    6.88Forfeited
    
    
    (54
    )
    
    
    10.62Balance, September 30, 2009
    
    
    1,629
    
    
    $
    5.10
    
    
    
    5.03
    
    
    $
    1.68Exercisable, September 30, 2009
    
    
    1,311
    
    
    $
    4.83
    
    
    
    4.25
    
    
    $
    1.95
  September 30,2010
    
    
    2009Expected stock price volatilility
    
    
    49.2
    %
    
    
    54.3
    %Risk Free interest rate
    
    
    2.02
    %
    
    
    2.65
    %Annual dividends
    
    $
    
    
    
    $
    Expected life  employee options
    
    
    5 years
    
    
    
    5 yearsExpected life  director options
    
    
    na
    
    
    
    na
    Restricted Stock Awards
  20




---



##### Table of Contents



WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2009
    
    
    561
    
    
    $
    10.36Granted
    
    
    21
    
    
    
    9.56Vested
    
    
    (95
    )
    
    
    7.27Forfeited
    
    
    
    
    
    
    Balance, September 30, 2010
    
    
    487
    
    
    $
    10.93
  WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2008
    
    
    628
    
    
    $
    12.06Granted
    
    
    43
    
    
    
    4.65Vested
    
    
    (90
    )
    
    
    10.86Forfeited
    
    
    (6
    )
    
    
    8.50Balance, September 30, 2009
    
    
    575
    
    
    $
    11.73
    21




---



##### Table of Contents



9. Commitments and Contingencies
     22




---



##### Table of Contents



10. Income Taxes
  11. Segment Information
  Energy and Smart Grid Solutions
 Energy Services
  23




---



##### Table of Contents



Three Months Ended September 30, 2010Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    26,316
    
    
    $
    5,090
    
    
    $
    
    
    
    $
    31,406Cost of sales
    
    
    16,753
    
    
    
    3,727
    
    
    
    
    
    
    
    20,480Gross profit
    
    
    9,563
    
    
    
    1,363
    
    
    
    
    
    
    
    10,926Operating expenses:General and administrative
    
    
    7,326
    
    
    
    386
    
    
    
    1,056
    
    
    
    8,768Selling, marketing and service
    
    
    1,383
    
    
    
    120
    
    
    
    
    
    
    
    1,503Depreciation and amortization
    
    
    737
    
    
    
    94
    
    
    
    1
    
    
    
    832Total operating expenses
    
    
    9,446
    
    
    
    600
    
    
    
    1,057
    
    
    
    11,103Operating income (loss)
    
    
    117
    
    
    
    763
    
    
    
    (1,057
    )
    
    
    (177
    )Other income and (expenses):Equity income
    
    
    
    
    
    
    598
    
    
    
    
    
    
    
    598Management fees
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    136Interest income and other income
    
    
    
    
    
    
    6
    
    
    
    24
    
    
    
    30Interest expense
    
    
    (111
    )
    
    
    
    
    
    
    (66
    )
    
    
    (177
    )Income (loss) before income taxes
    
    $
    6
    
    
    $
    1,503
    
    
    $
    (1,099
    )
    
    $
    410Total capital expenditures
    
    $
    1,291
    
    
    $
    85
    
    
    $
    0
    
    
    $
    1,376Total investment in unconsolidated affiliate
    
    $
    0
    
    
    $
    4,129
    
    
    $
    0
    
    
    $
    4,129Total goodwill
    
    $
    7,970
    
    
    $
    5,231
    
    
    $
    0
    
    
    $
    13,201Total assets
    
    $
    97,865
    
    
    $
    16,857
    
    
    $
    8,903
    
    
    $
    123,625
  24




---



##### Table of Contents



Three Months Ended September 30, 2009Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    23,579
    
    
    $
    4,142
    
    
    $
    
    
    
    $
    27,721Cost of sales
    
    
    14,316
    
    
    
    3,153
    
    
    
    
    
    
    
    17,469Gross profit
    
    
    9,263
    
    
    
    989
    
    
    
    
    
    
    
    10,252Operating expenses:General and administrative
    
    
    4,802
    
    
    
    454
    
    
    
    1,143
    
    
    
    6,399Selling, marketing and service
    
    
    981
    
    
    
    16
    
    
    
    
    
    
    
    997Depreciation and amortization
    
    
    564
    
    
    
    92
    
    
    
    1
    
    
    
    657Total operating expenses
    
    
    6,347
    
    
    
    562
    
    
    
    1,144
    
    
    
    8,053Operating income (loss)
    
    
    2,916
    
    
    
    427
    
    
    
    (1,144
    )
    
    
    2,199Other income and (expenses):Equity income
    
    
    
    
    
    
    429
    
    
    
    
    
    
    
    429Management fees
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    106Interest income and other income
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    36Interest expense
    
    
    (75
    )
    
    
    
    
    
    
    (69
    )
    
    
    (144
    )Income (loss) before income taxes
    
    $
    2,841
    
    
    $
    962
    
    
    $
    (1,177
    )
    
    $
    2,626Total capital expenditures
    
    $
    804
    
    
    $
    94
    
    
    $
    0
    
    
    $
    898Total investment in unconsolidated affiliate
    
    $
    0
    
    
    $
    3,739
    
    
    $
    0
    
    
    $
    3,739Total goodwill
    
    $
    2,025
    
    
    $
    5,231
    
    
    $
    0
    
    
    $
    7,256Total assets
    
    $
    79,965
    
    
    $
    15,959
    
    
    $
    13,138
    
    
    $
    109,062
 Nine Months Ended September 30, 2010Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    76,509
    
    
    $
    13,885
    
    
    $
    
    
    
    $
    90,394Cost of sales
    
    
    47,793
    
    
    
    10,247
    
    
    
    
    
    
    
    58,040Gross profit
    
    
    28,716
    
    
    
    3,638
    
    
    
    
    
    
    
    32,354Operating expenses:General and administrative
    
    
    19,722
    
    
    
    1,620
    
    
    
    3,759
    
    
    
    25,101Selling, marketing and service
    
    
    3,777
    
    
    
    166
    
    
    
    
    
    
    
    3,943Depreciation and amortization
    
    
    1,952
    
    
    
    276
    
    
    
    4
    
    
    
    2,232Total operating expenses
    
    
    25,451
    
    
    
    2,062
    
    
    
    3,763
    
    
    
    31,276Operating income (loss)
    
    
    3,265
    
    
    
    1,576
    
    
    
    (3,763
    )
    
    
    1,078Other income and (expenses):Equity income
    
    
    
    
    
    
    2,435
    
    
    
    
    
    
    
    2,435Management fees
    
    
    
    
    
    
    432
    
    
    
    
    
    
    
    432Interest income and other income
    
    
    
    
    
    
    8
    
    
    
    78
    
    
    
    86Interest expense
    
    
    (248
    )
    
    
    
    
    
    
    (209
    )
    
    
    (457
    )Income (loss) before income taxes
    
    $
    3,017
    
    
    $
    4,451
    
    
    $
    (3,894
    )
    
    $
    3,574Total capital expenditures
    
    $
    4,212
    
    
    $
    155
    
    
    $
    1
    
    
    $
    4,368
  25




---



##### Table of Contents



Nine Months Ended September 30, 2009Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    59,465
    
    
    $
    13,111
    
    
    $
    
    
    
    $
    72,576Cost of sales
    
    
    38,386
    
    
    
    9,809
    
    
    
    
    
    
    
    48,195Gross profit
    
    
    21,079
    
    
    
    3,302
    
    
    
    
    
    
    
    24,381Operating expenses:General and administrative
    
    
    13,589
    
    
    
    1,469
    
    
    
    3,453
    
    
    
    18,511Selling, marketing and service
    
    
    2,764
    
    
    
    33
    
    
    
    
    
    
    
    2,797Depreciation and amortization
    
    
    1,501
    
    
    
    257
    
    
    
    4
    
    
    
    1,762Total operating expenses
    
    
    17,854
    
    
    
    1,759
    
    
    
    3,457
    
    
    
    23,070Operating income (loss)
    
    
    3,225
    
    
    
    1,543
    
    
    
    (3,457
    )
    
    
    1,311Other income and (expenses):Equity income
    
    
    
    
    
    
    1,307
    
    
    
    
    
    
    
    1,307Management fees
    
    
    
    
    
    
    309
    
    
    
    
    
    
    
    309Interest income and other income
    
    
    3
    
    
    
    
    
    
    
    124
    
    
    
    127Interest expense
    
    
    (260
    )
    
    
    
    
    
    
    (203
    )
    
    
    (463
    )Income (loss) before income taxes
    
    $
    2,968
    
    
    $
    3,159
    
    
    $
    (3,536
    )
    
    $
    2,591Total capital expenditures
    
    $
    2,270
    
    
    $
    374
    
    
    $
    0
    
    
    $
    2,644
   26




---



##### 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
recent downturn in the economy and the adverse effects of the difficult credit markets
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 or market share;
 
    
    our ability to successfully develop, operate, grow and diversify our operations and
businesses;
  27




---



##### Table of Contents




    
    our business plans, strategies, goals and objectives, and our ability to
successfully achieve them;
 
    
    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;
 
    
    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 and other claims and proceedings that arise from time to time.
   Overview
   28




---



##### Table of Contents



29




---



##### Table of Contents



30




---



##### Table of Contents



Recent Developments
 ® ®
   31




---



##### Table of Contents



32




---



##### Table of Contents



Backlog
  Revenue Backlog to be recognized after September 30, 2010
 Anticipated
    
    
    Estimated PrimaryDescription
    
    Revenue
    
    
    Recognition PeriodProject-based Revenue  Near term
    
    $
    42 Million
    
    
    4Q10 through 2Q11Project-based Revenue  Long term
    
    $
    35 Million
    
    
    3Q11 through 2Q13Recurring Revenue
    
    $
    61 Million
    
    
    4Q10 through 2019Revenue Backlog to be recognized after September 30, 2010
    
    $
    138 Million
 Note:
    
    Anticipated revenue and estimated primary recognition periods are subject to risks and
uncertanities as indicated in the Cautionary Note Regarding Forward-Looking Statements, above.
Consistent with past practice, these figures 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 Companys Southern
Flow business, engineering fees, and service revenue, among others. Numbers may not add due to
rounding.   33




---



##### Table of Contents



Operating Segments
  Energy and Smart Grid Solutions
  Energy Services
  Results of Operations
 Third Quarter 2010 Compared to Third Quarter 2009
 Revenues
  Quarter Ended,
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Revenues:Energy and Smart Grid Solutions
    
    $
    26,316
    
    
    $
    23,579
    
    
    $
    2,737
    
    
    
    11.6
    %Energy Services
    
    
    5,090
    
    
    
    4,142
    
    
    
    948
    
    
    
    22.9
    %Total
    
    $
    31,406
    
    
    $
    27,721
    
    
    $
    3,685
    
    
    
    13.3
    %
  34




---



##### Table of Contents



35




---



##### Table of Contents



Gross Profit and Gross Profit Margins
  Quarter Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Cost of Sales and Services:Energy and Smart Grid Solutions
    
    $
    16,753
    
    
    $
    14,316
    
    
    $
    2,437
    
    
    
    17.0
    %Energy Services
    
    
    3,727
    
    
    
    3,153
    
    
    
    574
    
    
    
    18.2
    %Total
    
    $
    20,480
    
    
    $
    17,469
    
    
    $
    3,011
    
    
    
    17.2
    %Segment Gross Profit:Energy and Smart Grid Solutions
    
    $
    9,563
    
    
    $
    9,263
    
    
    $
    300
    
    
    
    3.2
    %Energy Services
    
    
    1,363
    
    
    
    989
    
    
    
    374
    
    
    
    37.8
    %Total
    
    $
    10,926
    
    
    $
    10,252
    
    
    $
    674
    
    
    
    6.6
    %Segment Gross Profit Margins:Energy and Smart Grid Solutions
    
    
    36.3
    %
    
    
    39.3
    %Energy Services
    
    
    26.8
    %
    
    
    23.9
    %Total
    
    
    34.8
    %
    
    
    37.0
    %
     36




---



##### Table of Contents




    
    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;
 
    
    The mix of higher and lower margin projects, products and services;
 
    
    Our ability to manage our materials and labor costs;
 
    
    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;
 
    
    The selling price of products and services sold to customers, and the revenues we
expect to generate from recurring revenue projects;
 
    
    The price of oil and natural gas, the financial health of our customer base, and the
level of new oil and natural gas production activity in our operating geography;
 
    
    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-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Consolidated Operating Expenses:General and administrative
    
    $
    8,768
    
    
    $
    6,399
    
    
    $
    2,369
    
    
    
    37.0
    %Selling, marketing and service
    
    
    1,503
    
    
    
    997
    
    
    
    506
    
    
    
    50.8
    %Depreciation and amortization
    
    
    832
    
    
    
    657
    
    
    
    175
    
    
    
    26.6
    %Total
    
    $
    11,103
    
    
    $
    8,053
    
    
    $
    3,050
    
    
    
    37.9
    %
  37




---



##### Table of Contents



General and Administrative Expenses.
 Quarter Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment G&A Expenses:Energy and Smart Grid Solutions:Personnel costs
    
    $
    4,195
    
    
    $
    3,054
    
    
    $
    1,141
    
    
    
    37.4
    %Vehicle lease and rental
    
    
    1,065
    
    
    
    545
    
    
    
    520
    
    
    
    95.4
    %Insurance
    
    
    416
    
    
    
    265
    
    
    
    151
    
    
    
    57.0
    %Rent-office and equipment
    
    
    248
    
    
    
    209
    
    
    
    39
    
    
    
    18.7
    %Professional fees and consulting
    
    
    241
    
    
    
    169
    
    
    
    72
    
    
    
    42.6
    %Development costs
    
    
    151
    
    
    
    18
    
    
    
    133
    
    
    
    738.9
    %Travel
    
    
    282
    
    
    
    189
    
    
    
    93
    
    
    
    49.2
    %Other
    
    
    728
    
    
    
    353
    
    
    
    375
    
    
    
    106.2
    %Energy Services
    
    
    386
    
    
    
    454
    
    
    
    (68
    )
    
    
    -15.0
    %Unallocated Corporate Costs
    
    
    1,056
    
    
    
    1,143
    
    
    
    (87
    )
    
    
    -7.6
    %Total
    
    $
    8,768
    
    
    $
    6,399
    
    
    $
    2,369
    
    
    
    37.0
    %
    38




---



##### Table of Contents



Selling, Marketing and Service Expenses.
 Quarter Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Selling, Marketing and Service:Energy and Smart Grid Solutions:Salaries
    
    $
    620
    
    
    $
    463
    
    
    $
    157
    
    
    
    33.9
    %Commission
    
    
    275
    
    
    
    271
    
    
    
    4
    
    
    
    1.5
    %Travel
    
    
    228
    
    
    
    136
    
    
    
    92
    
    
    
    67.6
    %Advertising and promotion
    
    
    146
    
    
    
    92
    
    
    
    54
    
    
    
    58.7
    %Bad debt expense (recovery)
    
    
    114
    
    
    
    19
    
    
    
    95
    
    
    
    500.0
    %Energy Services
    
    
    120
    
    
    
    16
    
    
    
    104
    
    
    
    650.0
    %Total
    
    $
    1,503
    
    
    $
    997
    
    
    $
    506
    
    
    
    50.8
    %
  Depreciation and Amortization Expenses.
  39




---



##### Table of Contents



Other Income and Expenses
  Quarter Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Other Segment Income and (Expenses):Energy and Smart Grid Solutions:Interest income and other income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    nmInterest expense
    
    
    (111
    )
    
    
    (75
    )
    
    
    (36
    )
    
    
    -48.0
    %Segment total
    
    
    (111
    )
    
    
    (75
    )
    
    
    (36
    )Energy Services:Equity income
    
    
    598
    
    
    
    429
    
    
    
    169
    
    
    
    39.4
    %Management fees
    
    
    136
    
    
    
    106
    
    
    
    30
    
    
    
    28.3
    %Interest income and other income
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    nmSegment total
    
    
    740
    
    
    
    535
    
    
    
    205Unallocated Corporate:Interest income and other income
    
    
    24
    
    
    
    36
    
    
    
    (12
    )
    
    
    -33.3
    %Interest expense
    
    
    (66
    )
    
    
    (69
    )
    
    
    3
    
    
    
    4.3
    %Income tax benefit (provision)
    
    
    (52
    )
    
    
    (423
    )
    
    
    371
    
    
    
    87.7
    %Segment total
    
    
    (94
    )
    
    
    (456
    )
    
    
    362Total
    
    $
    535
    
    
    $
    4
    
    
    $
    531
 Equity Income.
 Management Fees.
 Interest Income and Other Income.
  40




---



##### Table of Contents



Interest Expense.
 Income Taxes.
 Noncontrolling Interest
  41




---



##### Table of Contents



Nine Month Period 2010 Compared to Nine Month Period 2009
 Revenues
  Nine Months Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Revenues:Energy and Smart Grid Solutions
    
    $
    76,509
    
    
    $
    59,465
    
    
    $
    17,044
    
    
    
    28.7
    %Energy Services
    
    
    13,885
    
    
    
    13,111
    
    
    
    774
    
    
    
    5.9
    %Total
    
    $
    90,394
    
    
    $
    72,576
    
    
    $
    17,818
    
    
    
    24.6
    %
     42




---



##### Table of Contents



Gross Profit and Gross Profit Margins
  Nine Months Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Cost of Sales and Services:Energy and Smart Grid Solutions
    
    $
    47,793
    
    
    $
    38,386
    
    
    $
    9,407
    
    
    
    24.5
    %Energy Services
    
    
    10,247
    
    
    
    9,809
    
    
    
    438
    
    
    
    4.5
    %Total
    
    $
    58,040
    
    
    $
    48,195
    
    
    $
    9,845
    
    
    
    20.4
    %Segment Gross Profit:Energy and Smart Grid Solutions
    
    $
    28,716
    
    
    $
    21,079
    
    
    $
    7,637
    
    
    
    36.2
    %Energy Services
    
    
    3,638
    
    
    
    3,302
    
    
    
    336
    
    
    
    10.2
    %Total
    
    $
    32,354
    
    
    $
    24,381
    
    
    $
    7,973
    
    
    
    32.7
    %Segment Gross Profit Margins:Energy and Smart Grid Solutions
    
    
    37.5
    %
    
    
    35.4
    %Energy Services
    
    
    26.2
    %
    
    
    25.2
    %Total
    
    
    35.8
    %
    
    
    33.6
    %
     43




---



##### Table of Contents



Operating Expense
  Nine Months Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Consolidated Operating Expenses:General and administrative
    
    $
    25,101
    
    
    $
    18,511
    
    
    $
    6,590
    
    
    
    35.6
    %Selling, marketing and service
    
    
    3,943
    
    
    
    2,797
    
    
    
    1,146
    
    
    
    41.0
    %Depreciation and amortization
    
    
    2,232
    
    
    
    1,762
    
    
    
    470
    
    
    
    26.7
    %Total
    
    $
    31,276
    
    
    $
    23,070
    
    
    $
    8,206
    
    
    
    35.6
    %
  General and Administrative Expenses.
 Nine Months Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment G&A Expenses:Energy and Smart Grid Solutions:Personnel costs
    
    $
    11,561
    
    
    $
    8,748
    
    
    $
    2,813
    
    
    
    32.2
    %Vehicle lease and rental
    
    
    2,586
    
    
    
    1,318
    
    
    
    1,268
    
    
    
    96.2
    %Insurance
    
    
    1,120
    
    
    
    806
    
    
    
    314
    
    
    
    39.0
    %Rent-office and equipment
    
    
    682
    
    
    
    570
    
    
    
    112
    
    
    
    19.6
    %Professional fees and consulting
    
    
    689
    
    
    
    314
    
    
    
    375
    
    
    
    119.4
    %Development costs
    
    
    235
    
    
    
    104
    
    
    
    131
    
    
    
    126.0
    %Travel
    
    
    822
    
    
    
    544
    
    
    
    278
    
    
    
    51.1
    %Other
    
    
    2,027
    
    
    
    1,185
    
    
    
    842
    
    
    
    71.1
    %Energy Services
    
    
    1,620
    
    
    
    1,469
    
    
    
    151
    
    
    
    10.3
    %Unallocated Corporate Costs
    
    
    3,759
    
    
    
    3,453
    
    
    
    306
    
    
    
    8.9
    %Total
    
    $
    25,101
    
    
    $
    18,511
    
    
    $
    6,590
    
    
    
    35.6
    %
  44




---



##### Table of Contents



Selling, Marketing and Service Expenses.
 Nine Months Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Selling, Marketing
and Service:Energy and Smart Grid Solutions:Salaries
    
    $
    1,703
    
    
    $
    1,368
    
    
    $
    335
    
    
    
    24.5
    %Commission
    
    
    870
    
    
    
    770
    
    
    
    100
    
    
    
    13.0
    %Travel
    
    
    575
    
    
    
    392
    
    
    
    183
    
    
    
    46.7
    %Advertising and promotion
    
    
    439
    
    
    
    208
    
    
    
    231
    
    
    
    111.1
    %Bad debt expense (recovery)
    
    
    190
    
    
    
    26
    
    
    
    164
    
    
    
    630.8
    %Energy Services
    
    
    166
    
    
    
    33
    
    
    
    133
    
    
    
    403.0
    %Total
    
    $
    3,943
    
    
    $
    2,797
    
    
    $
    1,146
    
    
    
    41.0
    %
   45




---



##### Table of Contents



Depreciation and Amortization Expenses.
 Other Income and Expenses
  Nine Months Ended
    
    
    Period-over-PeriodSeptember 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Other Segment Income and (Expenses):Energy and Smart Grid Solutions:Interest income and other income
    
    $
    
    
    
    $
    3
    
    
    $
    (3
    )
    
    
    -100.0
    %Interest expense
    
    
    (248
    )
    
    
    (260
    )
    
    
    12
    
    
    
    4.6
    %Segment total
    
    
    (248
    )
    
    
    (257
    )
    
    
    9Energy Services:Equity income
    
    
    2,435
    
    
    
    1,307
    
    
    
    1,128
    
    
    
    86.3
    %Management fees
    
    
    432
    
    
    
    309
    
    
    
    123
    
    
    
    39.8
    %Interest income and other income
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    nmSegment total
    
    
    2,875
    
    
    
    1,616
    
    
    
    1,259Unallocated Corporate:Interest income and other income
    
    
    78
    
    
    
    124
    
    
    
    (46
    )
    
    
    -37.1
    %Interest expense
    
    
    (209
    )
    
    
    (203
    )
    
    
    (6
    )
    
    
    -3.0
    %Income tax benefit (provision)
    
    
    (528
    )
    
    
    (473
    )
    
    
    (55
    )
    
    
    -11.6
    %Segment total
    
    
    (659
    )
    
    
    (552
    )
    
    
    (107
    )Total
    
    $
    1,968
    
    
    $
    807
    
    
    $
    1,161
 Equity Income.
 Management Fees.
  46




---



##### Table of Contents



Interest Income and Other Income.
 Interest Expense.
 Income Taxes.
 Noncontrolling Interest
 Fluctuations
  
    
    the effects of general economic conditions, including the recent significant
downturn in the economy and financial crisis in the capital and credit markets, and the
continuing potential of on-going and future economic and market challenges negatively
impacting our business and our revenues and profit, including the negative impact these
conditions will have on the timing of and amounts of orders from our customers, and on
our access to capital to finance our business;
 
    
    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, 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, 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;
  47




---



##### Table of Contents




    
    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;
 
    
    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 ownership of the systems;
 
    
    our ability to access significant capital resources on a timely basis in order to
fulfill large customer orders and finance capital required for recurring revenue
projects;
 
    
    our ability to implement our business plans and strategies and the timing of such
implementation;
 
    
    the pace of revenue and profit realization from our new businesses and the
development and growth of their markets;
 
    
    the timing, pricing and market acceptance of our new products and services;
 
    
    changes in our pricing policies and those of our competitors;
 
    
    variations in the length of our sales cycle and product and service delivery and
construction process;
 
    
    changes in the mix of projects, products and services having differing margins;
 
    
    changes in our operating expenses, including prices for materials, labor, and other
components of our products and services, warranty expense, fuel prices (including
diesel, natural gas, and gasoline, among others) and our ability to hedge our fuel
cost, exchange rates, as well as unforeseen or unanticipated expenses;
 
    
    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 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 the difficult
capital markets and their impact 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 and on-going sales with
strategic partners, including utilities and large customers, and our ability to
continue to expand our customer base in each of our business areas due to being
dependent on a relatively small number of customers;
 
    
    economic conditions in the energy industry, especially in the natural gas and
electricity sectors including the effect 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;
  48




---



##### Table of Contents




    
    the effects of litigation, claims and other proceedings; and
 
    
    our ability to make and obtain the expected benefits from acquisitions of technology
or businesses, and the costs related to such acquisitions.
       49




---



##### Table of Contents



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;
 
    
    restructuring obligations;
 
    
    deferred compensation obligations; and
 
    
    business and technology acquisitions and other growth transactions.
 Working Capital
   50




---



##### Table of Contents



Cash Flows
  Nine Months Ended September 30,2010
    
    
    2009Net cash flows used in operating activities
    
    $
    (4,941
    )
    
    $
    (8,756
    )Net cash flows used in investing activities
    
    
    (8,760
    )
    
    
    (3,432
    )Net cash provided by (used in) financing activities
    
    
    8,200
    
    
    
    (236
    )Net decrease in cash and cash equivalents
    
    $
    (5,501
    )
    
    $
    (12,424
    )
 Cash Used in Operating Activities
   
    
    our net income of $3.0 million;
 
    
    non-cash charges of $2.2 million in depreciation and amortization;
 
    
    stock-based compensation expense of $1.3 million;
 
    
    cash distributions to the noncontrolling member of EfficientLights of $0.9 million;
 
    
    non-cash equity income from our WaterSecure operations of $2.4 million partially
offset by cash distributions from those operations of $2.2 million;
 
    
    an increase of $5.9 million in accounts receivable;
 
    
    an increase of $2.2 million in inventories;
 
    
    a decrease of $0.8 million in other assets and liabilities
 
    
    an increase of $0.2 million of accounts payable;
 
    
    a decrease of $2.9 million of accrued expenses; and
 
    
    cash payments of $0.3 million on our restructuring obligations.
  
    
    our net income of $2.1 million;
 
    
    non-cash charges of $1.8 million in depreciation and amortization;
 
    
    non-cash stock-based compensation expense of $1.2 million;
 
    
    cash distributions from our WaterSecure operations of $1.6 million partially offset
by non-cash equity income from those operations of $1.3 million;
 
    
    an increase of $4.8 million in accounts receivable;
 
    
    an increase of $5.2 million in inventories;
 
    
    a decrease of $1.0 million in other assets and liabilities;
 
    
    a decrease of $0.5 million of accounts payable;
 
    
    a decrease of $3.5 million of accrued expenses; and
 
    
    cash payments of $1.1 million on our restructuring obligations.
  51




---



##### Table of Contents



Cash Used in Investing Activities
  Cash Used in Financing Activities
  Capital Spending
   Indebtedness
 Line of Credit .
   52




---



##### Table of Contents



53




---



##### Table of Contents



Capital Lease Obligations.
     54




---



##### Table of Contents



Restructuring Obligations.
 Preferred Stock Redemption
 Contractual Obligations and Commercial Commitments
  Payments Due by PeriodRemainder
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    of 2010
    
    
    1 - 3 Years
    
    
    4 - 5 Years
    
    
    5 YearsContractual ObligationsCredit facility (1)
    
    $
    7,500
    
    
    $
    
    
    
    $
    7,500
    
    
    $
    
    
    
    $
    Capital lease obligations (2)
    
    
    5,334
    
    
    
    255
    
    
    
    2,033
    
    
    
    2,031
    
    
    
    1,015Operating leases
    
    
    3,792
    
    
    
    316
    
    
    
    1,936
    
    
    
    1,352
    
    
    
    188Deferred compensation (3)
    
    
    2,661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,661Non-compete agreement
    
    
    500
    
    
    
    
    
    
    
    200
    
    
    
    200
    
    
    
    100Series B preferred stock
    
    
    104
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    19,891
    
    
    $
    675
    
    
    $
    11,669
    
    
    $
    3,583
    
    
    $
    3,964
 
 (1)
    
    Total repayments are based upon borrowings outstanding as of September 30, 2010, 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.  55




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Liquidity
    56




---



##### Table of Contents



Critical Accounting Policies
   
    
    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.
   57




---



##### Table of Contents



Recent Accounting Pronouncements
 Accounting
for Transfers of Financial Assets Transfers and Servicing
 Variable
Interest Entities Consolidation
 Revenue
Recognition  Milestone Method Revenue Recognition  Milestone Method (Topic 605): Milestone Method
of Revenue Recognition
 Improving
Disclosures about Fair Value Measurements Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements
  58




---



##### Table of Contents



Multiple Deliverable Revenue Arrangements Multiple Deliverable Revenue Arrangements    A Consensus of the FASB Emerging Issues Task Force (Topic 605) Revenue Recognition
 Software Elements in Revenue Arrangements Certain Revenue Arrangements That Include Software Elements (Topic 985): Software
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
   59




---



##### Table of Contents



Commodity Price Risk
 Foreign Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
   60




---



##### Table of Contents



Limitations in Control Systems
   61




---



##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  The quality and performance of our products are, in part, dependent on the quality of their
component parts that we obtain from various suppliers, as well as the specific design and purpose
for which the parts are incorporated into our systems, which makes us susceptible to performance
issues that arise from time to time that could materially and adversely affect our business,
reputation and financial results.
   62




---



##### Table of Contents



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.)
  63




---



##### Table of Contents



SIGNATURES
  POWERSECURE INTERNATIONAL, INC.Date: November 4, 2010
    By:
    /s/ Sidney HintonSidney HintonPresident and Chief Executive OfficerDate: November 4, 2010
    By:
    /s/ Christopher T. HutterChristopher T. HutterExecutive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary  64