##### 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, 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
(State or other jurisdiction of 
incorporation or organization)
    
    84-1169358
(I.R.S. Employer
Identification No.)1609 Heritage Commerce Court 
Wake Forest, North Carolina
(Address of principal executive offices)
    
    27587
(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, 2010
 TABLE OF CONTENTS
  
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Consolidated Balance Sheets  March 31, 2010 and December 31, 2009
    
    
    3Unaudited Consolidated Statements of Operations  For the Three Months Ended March 31, 2010 and March 31, 2009
    
    
    5Unaudited Consolidated Statements of Cash Flows  For the Three Months Ended March 31, 2010 and March 31, 2009
    
    
    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
    
    
    50Item 4. Controls and Procedures
    
    
    51PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    53Item 1A. Risk Factors
    
    
    53Item 5. Other Information
    
    
    53Item 6. Exhibits
    
    
    53Signatures
    
    
    54EX-31.1EX-31.2EX-32.1EX-32.2
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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,Assets
    
    2010
    
    
    2009Current Assets:Cash and cash equivalents
    
    $
    16,613
    
    
    $
    20,169Trade receivables, net of allowance for
doubtful accounts
of $281 and $299, respectively
    
    
    29,554
    
    
    
    28,332Inventories
    
    
    26,007
    
    
    
    21,632Deferred income taxes
    
    
    2,713
    
    
    
    2,713Prepaid expenses and other current assets
    
    
    1,050
    
    
    
    1,300Total current assets
    
    
    75,937
    
    
    
    74,146Property, plant and equipment:Equipment
    
    
    23,328
    
    
    
    22,252Furniture and fixtures
    
    
    668
    
    
    
    671Land, building and improvements
    
    
    4,813
    
    
    
    4,802Total property, plant and equipment, at cost
    
    
    28,809
    
    
    
    27,725Less accumulated depreciation and amortization
    
    
    5,909
    
    
    
    5,413Property, plant and equipment, net
    
    
    22,900
    
    
    
    22,312Other assets:Goodwill
    
    
    7,256
    
    
    
    7,256Restricted annuity contract
    
    
    2,242
    
    
    
    2,220Intangible rights and capitalized software
costs, net of
accumulated amortization of $1,999 and
$1,890, respectively
    
    
    1,498
    
    
    
    1,320Investment in unconsolidated affiliate
    
    
    4,177
    
    
    
    3,974Other assets
    
    
    213
    
    
    
    249Total other assets
    
    
    15,386
    
    
    
    15,019Total Assets
    
    $
    114,223
    
    
    $
    111,477
 See accompanying notes to consolidated financial statements.
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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share data)
 March 31,
    
    
    December 31,Liabilities and Stockholders Equity
    
    2010
    
    
    2009Current liabilities:Accounts payable
    
    $
    9,420
    
    
    $
    4,116Accrued and other liabilities
    
    
    16,926
    
    
    
    20,379Restructuring charges payable
    
    
    77
    
    
    
    325Current income taxes payable
    
    
    107
    
    
    
    Current unrecognized tax benefit
    
    
    327
    
    
    
    327Current portion of capital lease obligations
    
    
    766
    
    
    
    756Total current liabilities
    
    
    27,623
    
    
    
    25,903Long-term liabilites:Revolving line of credit
    
    
    
    
    
    
    Capital lease obligations, net of current portion
    
    
    4,250
    
    
    
    4,445Unrecognized tax benefit
    
    
    1,169
    
    
    
    1,169Deferred compensation
    
    
    804
    
    
    
    721Total long-term liabilities
    
    
    6,223
    
    
    
    6,335Commitments and contingencies (Note 8)
    
    
    
    
    
    
    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; 17,222,464 and 17,241,650 shares issued
and outstanding, respectively
    
    
    172
    
    
    
    172Additional paid-in-capital
    
    
    111,243
    
    
    
    110,911Accumulated deficit
    
    
    (31,734
    )
    
    
    (32,951
    )Total PowerSecure International, Inc. stockholders equity
    
    
    79,681
    
    
    
    78,132Noncontrolling interest
    
    
    696
    
    
    
    1,107Total stockholders equity
    
    
    80,377
    
    
    
    79,239Total Liabilities and Stockholders Equity
    
    $
    114,223
    
    
    $
    111,477
 See accompanying notes to consolidated financial statements.
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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 (in thousands, except per share data)
 Three Months EndedMarch 31,2010
    
    
    2009Revenues
    
    $
    24,674
    
    
    $
    19,720Cost of sales
    
    
    15,083
    
    
    
    13,846Gross profit
    
    
    9,591
    
    
    
    5,874Operating expenses:General and administrative
    
    
    7,326
    
    
    
    6,040Selling, marketing and service
    
    
    1,053
    
    
    
    831Depreciation and amortization
    
    
    657
    
    
    
    542Total operating expenses
    
    
    9,036
    
    
    
    7,413Operating income (loss)
    
    
    555
    
    
    
    (1,539
    )Other income and (expenses):Equity income
    
    
    1,030
    
    
    
    477Management fees
    
    
    154
    
    
    
    105Interest income and other income
    
    
    32
    
    
    
    53Interest expense
    
    
    (141
    )
    
    
    (174
    )Income (loss) before income taxes
    
    
    1,630
    
    
    
    (1,078
    )Income tax provision
    
    
    (226
    )
    
    
    (24
    )Net income (loss)
    
    
    1,404
    
    
    
    (1,102
    )Less: Net income attributable to noncontrolling interest
    
    
    (187
    )
    
    
    (34
    )Net income (loss) attributable to PowerSecure
International, Inc.
    
    $
    1,217
    
    
    $
    (1,136
    )Earnings (loss) per share attributable to
PowerSecure International, Inc. common stockholders:Basic
    
    $
    0.07
    
    
    $
    (0.07
    )Diluted
    
    $
    0.07
    
    
    $
    (0.07
    )Weighted average common shares outstanding:Basic
    
    
    17,237
    
    
    
    17,095Diluted
    
    
    17,692
    
    
    
    17,095
 See accompanying notes to consolidated financial statements.
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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 (in thousands)
 Three MonthsEnded March 31,2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    1,404
    
    
    $
    (1,102
    )Adjustments to reconcile net income (loss) to net cash
used in operating activities:Depreciation and amortization
    
    
    657
    
    
    
    542Stock compensation expense
    
    
    494
    
    
    
    354Noncontrolling interest  distributions to minority member
    
    
    (598
    )
    
    
    Loss on disposal of miscellaneous assets
    
    
    
    
    
    
    26Equity in income of unconsolidated affiliate
    
    
    (1,030
    )
    
    
    (477
    )Distributions from unconsolidated affiliate
    
    
    809
    
    
    
    607Changes in operating assets and liabilities, net of
effect of aquisitons:Trade receivables, net
    
    
    (1,222
    )
    
    
    4,855Inventories
    
    
    (4,375
    )
    
    
    (820
    )Other current assets and liabilities
    
    
    357
    
    
    
    606Other noncurrent assets
    
    
    35
    
    
    
    (11
    )Accounts payable
    
    
    5,304
    
    
    
    (2,059
    )Restructuring charges
    
    
    (248
    )
    
    
    (499
    )Accrued and other liabilities
    
    
    (3,453
    )
    
    
    (2,583
    )Deferred compensation obligation
    
    
    83
    
    
    
    83Restricted annuity contract
    
    
    (22
    )
    
    
    (21
    )Net cash used in operating activities
    
    
    (1,805
    )
    
    
    (499
    )Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (1,129
    )
    
    
    (582
    )Additions to intangible rights and software development
    
    
    (286
    )
    
    
    (72
    )Proceeds from sale of property, plant and equipment
    
    
    11
    
    
    
    6Net cash used in investing activities
    
    
    (1,404
    )
    
    
    (648
    )Cash flows from financing activities:Borrowings (payments) on revolving line of credit
    
    
    
    
    
    
    Payments on capital lease obligations
    
    
    (185
    )
    
    
    (175
    )Proceeds from stock option and warrant exercises, net of shares tendered
    
    
    (162
    )
    
    
    (41
    )Net cash used by financing activities
    
    
    (347
    )
    
    
    (216
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,556
    )
    
    
    (1,363
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    20,169
    
    
    
    24,316CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    16,613
    
    
    $
    22,953
 See accompanying notes to consolidated financial statements.
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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
  
    
    Interactive Distributed Generation,
    
    Utility Infrastructure,
    
    Energy Efficiency, and
    
    Energy Services.
   7




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Basis of Presentation
 Organization
   Principles of Consolidation
 Noncontrolling Interest in EfficientLights
 Use of Estimates
 8




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Reclassifications
 2. Summary of Significant Accounting Policies and Recent Accounting Standards
 Revenue Recognition
     9




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Cash and Cash Equivalents
 Concentration of Credit Risk
  Warranty Reserve
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Share-Based Compensation
  Income Taxes
  Subsequent Events
 Recent Accounting Pronouncements
 Accounting for Transfers of Financial Assets Transfers and Servicing
 Variable Interest Entities Consolidation
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Multiple Deliverable Revenue Arrangements Multiple Deliverable Revenue Arrangements  A Consensus of the FASB Emerging Issues Task Force Revenue Recognition
 Software Elements in Revenue Arrangements Certain Revenue Arrangements That Include Software Elements Software
 3. Earnings (Loss) per Share
  12




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Three Months EndedMarch 31,2010
    
    
    2009Net income (loss)
    
    $
    1,217
    
    
    $
    (1,136
    )Basic weighted-average common
shares outstanding in period
    
    
    17,237
    
    
    
    17,095Add dilutive effects of stock
options and warrants
    
    
    455
    
    
    
    Diluted weighted-average common
shares outstanding in period
    
    
    17,692
    
    
    
    17,095Basic earnings (loss) per common share:
    
    $
    0.07
    
    
    $
    (0.07
    )Diluted earnings (loss) per common share:
    
    $
    0.07
    
    
    $
    (0.07
    )
 4. Investment in Unconsolidated Affiliate
   13




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March 31
    
    
    December 31,2010
    
    
    2009Total current assets
    
    $
    3,595
    
    
    $
    2,942Property, plant and equipment, net
    
    
    8,908
    
    
    
    8,879Total other assets
    
    
    5
    
    
    
    6Total assets
    
    $
    12,508
    
    
    $
    11,827Total current liabilities
    
    $
    1,777
    
    
    $
    1,433Long-term note payable
    
    
    2,541
    
    
    
    2,749Total shareholders equity
    
    
    8,190
    
    
    
    7,645Total liabilities and shareholders equity
    
    $
    12,508
    
    
    $
    11,827
 Three Months Ended March 31,2010
    
    
    2009Total revenues
    
    $
    4,892
    
    
    $
    2,986Total costs and expenses
    
    
    2,346
    
    
    
    1,808Net income
    
    $
    2,546
    
    
    $
    1,178
 5. Debt
 Line of Credit
    14




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6. Capital Lease Obligations
      7. Share-Based Compensation
  Stock Plans
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Stock Options
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2009
    
    
    1,627
    
    
    $
    5.18Granted-Directors
    
    
    
    
    
    
    Granted-Employees
    
    
    
    
    
    
    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
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WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2008
    
    
    1,708
    
    
    $
    5.21Granted-Directors
    
    
    
    
    
    
    Granted-Employees
    
    
    
    
    
    
    Exercised
    
    
    (30
    )
    
    
    1.50Expired
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Balance, March 31, 2009
    
    
    1,678
    
    
    $
    5.28
    
    
    
    5.52
    
    
    $
    (1.86
    )Exercisable, March 31, 2009
    
    
    1,306
    
    
    $
    4.68
    
    
    
    4.66
    
    
    $
    (1.26
    )
    Restricted Stock Awards
  18




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WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2009
    
    
    561
    
    
    $
    10.36Granted
    
    
    
    
    
    
    Vested
    
    
    (75
    )
    
    
    7.50Forfeited
    
    
    
    
    
    
    Balance, March 31, 2010
    
    
    486
    
    
    $
    10.80
 A summary of restricted stock award activity for the three months ended March 31, 2009
is as follows:
 WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2008
    
    
    628
    
    
    $
    12.06Granted
    
    
    
    
    
    
    Vested
    
    
    (69
    )
    
    
    12.11Forfeited
    
    
    
    
    
    
    Balance, March 31, 2009
    
    
    559
    
    
    $
    12.05
   8. Commitments and Contingencies
  19




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9. Income Taxes
  20




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10. Subsequent Events
 Acquisition of IES 
     21




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Acquisition of Noncontrolling Interest in EfficientLights 
 11. Segment Information
  Energy and Smart Grid Solutions
 Energy Services
  22




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Three Months Ended March 31, 2010Energy and
    
    
    
    
    
    
    UnallocatedSmartgrid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    20,460
    
    
    $
    4,214
    
    
    $
    
    
    
    $
    24,674Cost of sales
    
    
    11,907
    
    
    
    3,176
    
    
    
    
    
    
    
    15,083Gross profit
    
    
    8,553
    
    
    
    1,038
    
    
    
    
    
    
    
    9,591Operating expenses:General and administrative
    
    
    5,579
    
    
    
    420
    
    
    
    1,327
    
    
    
    7,326Selling, marketing and service
    
    
    1,047
    
    
    
    6
    
    
    
    
    
    
    
    1,053Depreciation and amortization
    
    
    564
    
    
    
    92
    
    
    
    1
    
    
    
    657Total operating expenses
    
    
    7,190
    
    
    
    518
    
    
    
    1,328
    
    
    
    9,036Operating income (loss)
    
    
    1,363
    
    
    
    520
    
    
    
    (1,328
    )
    
    
    555Other income and (expenses):Equity income
    
    
    
    
    
    
    1,030
    
    
    
    
    
    
    
    1,030Management fees
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    154Interest income and other income
    
    
    
    
    
    
    2
    
    
    
    30
    
    
    
    32Interest expense
    
    
    (70
    )
    
    
    
    
    
    
    (71
    )
    
    
    (141
    )Income (loss) before income taxes
    
    $
    1,293
    
    
    $
    1,706
    
    
    $
    (1,369
    )
    
    $
    1,630Total capital expenditures
    
    $
    1,387
    
    
    $
    28
    
    
    $
    
    
    
    $
    1,415Total investment in unconsolidated affiliate
    
    $
    
    
    
    $
    4,177
    
    
    $
    
    
    
    $
    4,177Total assets
    
    $
    80,985
    
    
    $
    17,012
    
    
    $
    16,226
    
    
    $
    114,223
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Three Months Ended March 31, 2009Energy and
    
    
    
    
    
    
    UnallocatedSmartgrid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    15,215
    
    
    $
    4,505
    
    
    $
    
    
    
    $
    19,720Cost of sales
    
    
    10,441
    
    
    
    3,405
    
    
    
    
    
    
    
    13,846Gross profit
    
    
    4,774
    
    
    
    1,100
    
    
    
    
    
    
    
    5,874Operating expenses:General and administrative
    
    
    4,413
    
    
    
    514
    
    
    
    1,113
    
    
    
    6,040Selling, marketing and service
    
    
    826
    
    
    
    5
    
    
    
    
    
    
    
    831Depreciation and amortization
    
    
    461
    
    
    
    80
    
    
    
    1
    
    
    
    542Total operating expenses
    
    
    5,700
    
    
    
    599
    
    
    
    1,114
    
    
    
    7,413Operating income (loss)
    
    
    (926
    )
    
    
    501
    
    
    
    (1,114
    )
    
    
    (1,539
    )Other income and (expenses):Equity income
    
    
    
    
    
    
    477
    
    
    
    
    
    
    
    477Management fees
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    105Interest income and other income
    
    
    3
    
    
    
    
    
    
    
    50
    
    
    
    53Interest expense
    
    
    (107
    )
    
    
    
    
    
    
    (67
    )
    
    
    (174
    )Income (loss) before income taxes
    
    $
    (1,030
    )
    
    $
    1,083
    
    
    $
    (1,131
    )
    
    $
    (1,078
    )Total capital expenditures
    
    $
    541
    
    
    $
    113
    
    
    $
    
    
    
    $
    654Total investment in unconsolidated affiliate
    
    $
    
    
    
    $
    3,957
    
    
    $
    
    
    
    $
    3,957Total assets
    
    $
    69,340
    
    
    $
    15,709
    
    
    $
    19,627
    
    
    $
    104,676
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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 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;
    
    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
  25




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26




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27




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Recent Developments
    28




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29




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Backlog
  Revenue Backlog to be recognized after March 31, 2010
 Anticipated
    
    Estimated PrimaryDescription
    
    Revenue
    
    Recognition PeriodProject-based Revenue Near term
    
    $52 Million
    
    2Q10 through 4Q10Project-based Revenue Long term
    
    $13 Million
    
    1Q11 through 2Q12Recurring Revenue
    
    $52 Million
    
    2Q10 through 2019Revenue Backlog to be recognized after March 31, 2010
    
    $117 Million
 Note: Anticipated revenue and estimated primary recognition periods are estimates
subject to risks and uncertainties and subject to change. 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.
  30




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Operating Segments
  Energy and Smart Grid Solutions
  Energy Services
  Results of Operations
 First Quarter 2010 Compared to First Quarter 2009
 Revenues
  Quarter Ended March 31,
    
    
    Period-over-Period Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Revenues:Energy and Smart Grid Solutions
    
    $
    20,460
    
    
    $
    15,215
    
    
    $
    5,245
    
    
    
    34.5
    %Energy Services
    
    
    4,214
    
    
    
    4,505
    
    
    
    (291
    )
    
    
    -6.5
    %Total
    
    $
    24,674
    
    
    $
    19,720
    
    
    $
    4,954
    
    
    
    25.1
    %
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Gross Profit and Gross Profit Margins
  32




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Quarter Ended March 31,
    
    
    Period-over-Period Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Cost of Sales and Services:Energy and Smart Grid Solutions
    
    $
    11,907
    
    
    $
    10,441
    
    
    $
    1,466
    
    
    
    14.0
    %Energy Services
    
    
    3,176
    
    
    
    3,405
    
    
    
    (229
    )
    
    
    -6.7
    %Total
    
    $
    15,083
    
    
    $
    13,846
    
    
    $
    1,237
    
    
    
    8.9
    %Segment Gross Profit:Energy and Smart Grid Solutions
    
    $
    8,553
    
    
    $
    4,774
    
    
    $
    3,779
    
    
    
    79.2
    %Energy Services
    
    
    1,038
    
    
    
    1,100
    
    
    
    (62
    )
    
    
    -5.6
    %Total
    
    $
    9,591
    
    
    $
    5,874
    
    
    $
    3,717
    
    
    
    63.3
    %Segment Gross Profit Margins:Energy and Smart Grid Solutions
    
    
    41.8
    %
    
    
    31.4
    %Energy Services
    
    
    24.6
    %
    
    
    24.4
    %Total
    
    
    38.9
    %
    
    
    29.8
    %
     33




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
    
    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;
 
    
    Our ability to improve our operating efficiency and benefit from economies of scale;
 
    
    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;
 
    
    The geographic density of our projects;
 
    
    The mix of higher and lower margin products and services;
 
    
    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 March 31,
    
    
    Period-over-Period Difference2010
    
    
    2009
    
    
    $
    
    
    %Consolidated Operating Expenses:General and administrative
    
    $
    7,326
    
    
    $
    6,040
    
    
    $
    1,286
    
    
    
    21.3
    %Selling, marketing and service
    
    
    1,053
    
    
    
    831
    
    
    
    222
    
    
    
    26.7
    %Depreciation and amortization
    
    
    657
    
    
    
    542
    
    
    
    115
    
    
    
    21.2
    %Total
    
    $
    9,036
    
    
    $
    7,413
    
    
    $
    1,623
    
    
    
    21.9
    %
  34




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General and Administrative Expenses.
 Quarter Ended March 31,
    
    
    Period-over-Period Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment G&A Expenses:Energy and Smart Grid Solutions:Personnel costs
    
    $
    3,450
    
    
    $
    2,922
    
    
    $
    528
    
    
    
    18.1
    %Vehicle lease and rental
    
    
    561
    
    
    
    323
    
    
    
    238
    
    
    
    73.7
    %Insurance
    
    
    211
    
    
    
    266
    
    
    
    (55
    )
    
    
    -20.7
    %Rent-office and equipment
    
    
    199
    
    
    
    168
    
    
    
    31
    
    
    
    18.5
    %Professional fees and consulting
    
    
    166
    
    
    
    43
    
    
    
    123
    
    
    
    286.0
    %Development costs
    
    
    19
    
    
    
    20
    
    
    
    (1
    )
    
    
    -5.0
    %Travel
    
    
    252
    
    
    
    186
    
    
    
    66
    
    
    
    35.5
    %Other
    
    
    721
    
    
    
    485
    
    
    
    236
    
    
    
    48.7
    %Energy Services
    
    
    420
    
    
    
    514
    
    
    
    (94
    )
    
    
    -18.3
    %Unallocated Corporate Costs
    
    
    1,327
    
    
    
    1,113
    
    
    
    214
    
    
    
    19.2
    %Total
    
    $
    7,326
    
    
    $
    6,040
    
    
    $
    1,286
    
    
    
    21.3
    %
   35




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Selling, Marketing and Service Expenses.
 Quarter Ended March 31,
    
    
    Period-over-Period Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Selling, Marketing and Service:Energy and Smart Grid Solutions:Salaries
    
    $
    499
    
    
    $
    456
    
    
    $
    43
    
    
    
    9.4
    %Commission
    
    
    286
    
    
    
    219
    
    
    
    67
    
    
    
    30.6
    %Travel
    
    
    165
    
    
    
    129
    
    
    
    36
    
    
    
    27.9
    %Advertising and promotion
    
    
    117
    
    
    
    37
    
    
    
    80
    
    
    
    216.2
    %Bad debt expense (recovery)
    
    
    (20
    )
    
    
    (15
    )
    
    
    (5
    )
    
    
    33.3
    %Energy Services
    
    
    6
    
    
    
    5
    
    
    
    1
    
    
    
    20.0
    %Total
    
    $
    1,053
    
    
    $
    831
    
    
    $
    222
    
    
    
    26.7
    %
  Depreciation and Amortization Expenses.
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Other Income and Expenses
  Quarter Ended March 31,
    
    
    Period-over-Period Difference2010
    
    
    2009
    
    
    $
    
    
    %Other Segment Income and (Expenses):Energy and Smart Grid Solutions:Interest income and other income
    
    $
    
    
    
    $
    3
    
    
    $
    (3
    )
    
    
    -100.0
    %Interest expense
    
    
    (70
    )
    
    
    (107
    )
    
    
    37
    
    
    
    34.6
    %Segment total
    
    
    (70
    )
    
    
    (104
    )
    
    
    34Energy Services:Equity income
    
    
    1,030
    
    
    
    477
    
    
    
    553
    
    
    
    115.9
    %Management fees
    
    
    154
    
    
    
    105
    
    
    
    49
    
    
    
    46.7
    %Interest income and other income
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    nmSegment total
    
    
    1,186
    
    
    
    582
    
    
    
    604Unallocated Corporate:Interest income and other income
    
    
    30
    
    
    
    50
    
    
    
    (20
    )
    
    
    -40.0
    %Interest expense
    
    
    (71
    )
    
    
    (67
    )
    
    
    (4
    )
    
    
    -6.0
    %Income tax benefit (provision)
    
    
    (226
    )
    
    
    (24
    )
    
    
    (202
    )
    
    
    -841.7
    %Segment total
    
    
    (267
    )
    
    
    (41
    )
    
    
    (226
    )Total
    
    $
    849
    
    
    $
    437
    
    
    $
    412
 Equity Income.
 Management Fees.
 Interest Income and Other Income.
 37




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Interest Expense.
 Income Taxes.
 Noncontrolling Interest
 Fluctuations
  
    
    the effects of general economic conditions, including the current
significant downturn in the economy and financial crisis in the capital and credit
markets, and the strong likelihood of continuing future economic and market challenges
negatively impacting our business and our
 38




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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;
 
    
    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 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,
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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;
 
    
    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.
     40




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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;
 
    
    restructuring obligations;
 
    
    deferred compensation obligations; and
 
    
    business and technology acquisitions and other growth transactions.
 Working Capital
  41




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Cash Flows
  Quarter Ended March 31,2010
    
    
    2009Net cash flows used in operating activities
    
    $
    (1,805
    )
    
    $
    (499
    )Net cash flows used in investing activities
    
    
    (1,404
    )
    
    
    (648
    )Net cash used in financing activities
    
    
    (347
    )
    
    
    (216
    )Net decrease in cash and cash equivalents
    
    $
    (3,556
    )
    
    $
    (1,363
    )
 Cash Used in Operating Activities
   
    
    our net income of $1.4 million;
 
    
    non-cash charges of $0.7 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 $0.4million in other current assets and liabilities
 
    
    an increase of $5.3 million of accounts payable;
 
    
    a decrease of $3.5 million of accrued expenses; and
 
    
    cash payments of $0.2 million on our restructuring obligations.
  
    
    our net loss of $1.1 million;
 
    
    non-cash charges of $0.5 million in depreciation and amortization;
 
    
    stock-based compensation expense of $0.4 million;
 42




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##### Table of Contents




    
    cash distributions from our WaterSecure operations of $0.6 million partially offset
by non-cash equity income from those operations of $0.5 million;
 
    
    a decrease of $4.9 million in accounts receivable;
 
    
    an increase of $0.8 million in inventories;
 
    
    a decrease of $0.6 million in other current assets and liabilities
 
    
    a decrease of $2.0 million of accounts payable;
 
    
    a decrease of $2.6 million of accrued expenses; and
 
    
    cash payments of $0.5 million on our restructuring obligations.
 Cash Used in Investing Activities
  Cash Used in Financing Activities
  Capital Spending
   43




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Indebtedness
 Line of Credit .
      44




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Capital Lease Obligations.
   45




---



##### Table of Contents



Restructuring Obligations.
 Preferred Stock Redemption
 Contractual Obligations and Commercial Commitments
  46




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##### Table of Contents



Payments Due by PeriodRemainder
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    of 2010
    
    
    1 - 3 Years
    
    
    4 - 5 Years
    
    
    5 YearsContractual ObligationsCredit facility (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital lease obligations (2)
    
    
    5,843
    
    
    
    763
    
    
    
    2,033
    
    
    
    2,032
    
    
    
    1,015Operating leases
    
    
    4,423
    
    
    
    947
    
    
    
    1,936
    
    
    
    1,352
    
    
    
    188Deferred compensation (3)
    
    
    2,661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,661Non-compete agreement
    
    
    500
    
    
    
    
    
    
    
    200
    
    
    
    200
    
    
    
    100Restructuring obligations
    
    
    77
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    Series B preferred stock
    
    
    104
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    13,608
    
    
    $
    1,891
    
    
    $
    4,169
    
    
    $
    3,584
    
    
    $
    3,964
 
 (1)
    
    Total repayments are based upon borrowings outstanding as of March 31, 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. Off-Balance Sheet Arrangements
  Liquidity
  47




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Critical Accounting Policies
   48




---



##### 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
 Accounting for Transfers of Financial Assets Transfers and Servicing
 Variable Interest Entities Consolidation
 49




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##### Table of Contents



Multiple Deliverable Revenue Arrangements Multiple Deliverable Revenue Arrangements  A Consensus of the FASB Emerging Issues Task Force Revenue Recognition
 Software Elements in Revenue Arrangements Certain Revenue Arrangements That Include Software Elements Software
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
  Commodity Price Risk
 50




---



##### Table of Contents



Foreign Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  51




---



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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 5. Other Information
  
 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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SIGNATURES
  POWERSECURE INTERNATIONAL, INC.Date:    May 6, 2010
    By:
    /s/ Sidney HintonSidney HintonPresident and Chief Executive OfficerDate:    May 6, 2010
    By:
    /s/ Christopher T. HutterChristopher T. HutterExecutive Vice President, Chief Financial Officer,

Treasurer and Assistant Secretary 54