##### 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, 2008
 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 CourtWake Forest, North Carolina
    
    27587(Address of principal executive offices)
    
    (Zip code)
 
 þ o
  Large accelerated filer
o

  
  Accelerated filer
þ

  
  Non-accelerated filer
o
(Do not check if a smaller reporting company)

  
  Smaller reporting company
o
 o þ




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##### 



POWERSECURE INTERNATIONAL, INC.
 FORM 10-Q
For the Quarterly Period Ended March 31, 2008
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Consolidated Balance Sheets -
March 31, 2008 and December 31, 2007
    
    3Unaudited Consolidated Statements of Operations -
For the Three Months Ended March 31, 2008 and
March 31, 2007
    
    5Unaudited Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 2008 and
March 31, 2007
    
    6Notes to Unaudited Consolidated Financial Statements
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    44Item 4. Controls and Procedures
    
    45PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    47Item 1A. Risk Factors
    
    47Item 5. Other Information
    
    48Item 6. Exhibits
    
    49Signatures
    
    51EX-10.8EX-10.9EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 (unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    21,511,577
    
    
    $
    28,709,688Trade receivables, net of allowance for doubtful accounts
of $247,200 and $262,547, respectively
    
    
    35,214,596
    
    
    
    36,753,399Other receivables
    
    
    2,577,531
    
    
    
    376,198Inventories
    
    
    18,411,422
    
    
    
    20,785,549Deferred income taxes
    
    
    2,463,986
    
    
    
    2,528,636Prepaid expenses and other current assets
    
    
    805,819
    
    
    
    1,091,498Assets of discontinued operations held for sale (Note 3)
    
    
    
    
    
    
    2,399,589Total current assets
    
    
    80,984,931
    
    
    
    92,644,557PROPERTY, PLANT AND EQUIPMENT:Equipment
    
    
    10,391,444
    
    
    
    6,488,695Vehicles
    
    
    289,973
    
    
    
    174,825Furniture and fixtures
    
    
    618,711
    
    
    
    614,589Land, building and improvements
    
    
    4,391,130
    
    
    
    1,013,022Total property, plant and equipment, at cost
    
    
    15,691,258
    
    
    
    8,291,131Less accumulated depreciation and amortization
    
    
    2,899,784
    
    
    
    2,640,424Property, plant and equipment, net
    
    
    12,791,474
    
    
    
    5,650,707OTHER ASSETS:Goodwill
    
    
    7,255,710
    
    
    
    7,255,710Restricted annuity contract
    
    
    2,036,310
    
    
    
    2,001,204Intangible rights and capitalized software costs, net of
accumulated amortization of $1,123,200 and $947,550,
respectively
    
    
    1,562,847
    
    
    
    1,660,676Investment in unconsolidated affiliate (Note 2)
    
    
    4,057,004
    
    
    
    3,652,251Other assets
    
    
    81,394
    
    
    
    158,363Total other assets
    
    
    14,993,265
    
    
    
    14,728,204TOTAL
    
    $
    108,769,670
    
    
    $
    113,023,468
 See accompanying notes to consolidated financial statements.
 3




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    11,498,247
    
    
    $
    11,321,639Accrued and other liabilities
    
    
    26,794,079
    
    
    
    35,156,946Restructuring charges payable
    
    
    3,890,182
    
    
    
    4,047,849Note payable (Note 4)
    
    
    129,200
    
    
    
    Liabilities of discontinued operations held for sale (Note 3)
    
    
    
    
    
    
    754,589Current unrecognized tax benefit
    
    
    83,987
    
    
    
    83,987Capital lease obligations
    
    
    1,418
    
    
    
    1,392Total current liabilities
    
    
    42,397,113
    
    
    
    51,366,402LONG-TERM NOTES PAYABLE (Note 4)
    
    
    2,454,800
    
    
    
    NON-CURRENT UNRECOGNIZED TAX BENEFIT
    
    
    674,173
    
    
    
    674,173NON-CURRENT RESTRUCTURING CHARGES
    
    
    1,284,883
    
    
    
    1,682,543DEFERRED COMPENSATION OBLIGATION
    
    
    138,600
    
    
    
    55,440NON-CURRENT CAPITAL LEASE OBLIGATIONS
    
    
    4,962
    
    
    
    5,326COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN SUBSIDIARIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITY:Preferred stock  undesignated, $.01 par value; 2,000,000 shares
authorized; none issued and outstandingPreferred stock  Series C, $.01 par value; 500,000 shares
authorized; none issued and outstandingCommon stock, $.01 par value; 25,000,000 shares
authorized; 16,908,165 and 16,860,267 shares issued
and outstanding, respectively
    
    
    169,082
    
    
    
    168,602Additional paid-in-capital
    
    
    106,172,511
    
    
    
    105,472,838Accumulated deficit
    
    
    (44,526,454
    )
    
    
    (46,401,856
    )Total stockholders equity
    
    
    61,815,139
    
    
    
    59,239,584TOTAL
    
    $
    108,769,670
    
    
    $
    113,023,468
 See accompanying notes to consolidated financial statements.
 4




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 (unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Revenues
    
    $
    33,575,035
    
    
    $
    25,416,027Cost of sales
    
    
    23,554,663
    
    
    
    18,047,671Gross profit
    
    
    10,020,372
    
    
    
    7,368,356Operating expenses:General and administrative
    
    
    7,242,915
    
    
    
    5,441,183Selling, marketing and service
    
    
    1,324,659
    
    
    
    618,618Depreciation and amortization
    
    
    457,244
    
    
    
    332,541Research and development
    
    
    19,212
    
    
    
    17,524Total operating expenses
    
    
    9,044,030
    
    
    
    6,409,866Operating income
    
    
    976,342
    
    
    
    958,490Other income and (expenses):Management fees
    
    
    149,333
    
    
    
    101,646Interest and other income
    
    
    226,487
    
    
    
    502,209Interest and finance charges
    
    
    (51,128
    )
    
    
    (6,322
    )Equity income
    
    
    963,822
    
    
    
    648,560Litigation settlements
    
    
    
    
    
    
    278,334Minority interest
    
    
    
    
    
    
    Income before income taxes
    
    
    2,264,856
    
    
    
    2,482,917Income tax provision
    
    
    (311,286
    )
    
    
    (306,137
    )Income from continuing operations
    
    
    1,953,570
    
    
    
    2,176,780Discontinued operationsMetretek FloridaLoss on disposal
    
    
    (42,278
    )
    
    
    Income (loss) from operations
    
    
    (35,890
    )
    
    
    56,576Income (loss) from discontinued operations
    
    
    (78,168
    )
    
    
    56,576Net income
    
    $
    1,875,402
    
    
    $
    2,233,356PER SHARE AMOUNTS (NOTE 1):Income from continuing operations:Basic
    
    $
    0.12
    
    
    $
    0.14Diluted
    
    $
    0.11
    
    
    $
    0.13Net incomeBasic
    
    $
    0.11
    
    
    $
    0.14Diluted
    
    $
    0.11
    
    
    $
    0.13WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:Basic
    
    
    16,317,178
    
    
    
    15,830,475Diluted
    
    
    17,261,066
    
    
    
    17,020,123
 See accompanying notes to consolidated financial statements.
 5




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash flows
 (unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,875,402
    
    
    $
    2,233,356Adjustments to reconcile net income to net cash
used in operating activities:Depreciation and amortization
    
    
    457,244
    
    
    
    342,924Minority interest in subsidiary
    
    
    
    
    
    
    Deferred income taxes
    
    
    64,650
    
    
    
    (509,250
    )Loss on disposal of property, plant and equipment
    
    
    5,410
    
    
    
    63,806Equity in income of unconsolidated affiliate
    
    
    (963,822
    )
    
    
    (648,560
    )Distributions from unconsolidated affiliate
    
    
    543,944
    
    
    
    543,944Stock compensation expense
    
    
    614,412
    
    
    
    208,910Changes in operating assets and liabilities, net of
effect of aquisitons:Trade receivables, net
    
    
    1,538,803
    
    
    
    8,005,610Inventories
    
    
    2,374,127
    
    
    
    (3,352,361
    )Other current assets
    
    
    (1,915,654
    )
    
    
    75,782Assets of discontinued operations held for sale
    
    
    2,399,589
    
    
    
    Other noncurrent assets
    
    
    76,969
    
    
    
    (11,490
    )Accounts payable
    
    
    176,608
    
    
    
    (9,011,935
    )Accrued and other liabilities
    
    
    (8,362,867
    )
    
    
    1,633,271Liabilities of discontinued operations held for sale
    
    
    (754,589
    )
    
    
    Restructuring obligations
    
    
    (555,327
    )
    
    
    Deferred compensation obligation
    
    
    83,160
    
    
    
    Retirement annuity
    
    
    (35,106
    )
    
    
    Net cash used in operating activities
    
    
    (2,377,047
    )
    
    
    (425,993
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (7,413,096
    )
    
    
    (344,608
    )Additions to intangible rights and software development
    
    
    (77,821
    )
    
    
    (177,473
    )Proceeds from sale of property, plant and equipment
    
    
    450
    
    
    
    Net cash used in investing activities
    
    
    (7,490,467
    )
    
    
    (522,081
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from stock option exercises
    
    
    85,741
    
    
    
    202,877Proceeds from term loan
    
    
    2,584,000
    
    
    
    Payments on preferred stock redemptions
    
    
    
    
    
    
    (220,186
    )Payments on capital lease obligations
    
    
    (338
    )
    
    
    (2,314
    )Net cash provided by (used in) financing activities
    
    
    2,669,403
    
    
    
    (19,623
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (7,198,111
    )
    
    
    (967,697
    )CASH AND
CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    28,709,688
    
    
    
    15,916,460CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    21,511,577
    
    
    $
    14,948,763
 See accompanying notes to consolidated financial statements.
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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Notes to Unaudited Consolidated Financial Statements
 
 1. Summary of Significant Accounting Policies
 Organization 
   Principles of Consolidation 
 Use of Estimates 
 Basic and Diluted Earnings Per Share 
 7




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Three Months EndedMarch 31,2008
    
    
    2007Income from continuing operations
    
    $
    1,953,570
    
    
    $
    2,176,780Income (loss) from discontinued operations
    
    
    (78,168
    )
    
    
    56,576Net income
    
    $
    1,875,402
    
    
    $
    2,233,356Basic weighted-average common
shares outstanding in period
    
    
    16,317,178
    
    
    
    15,830,475Add dilutive effects of stock
options and warrants
    
    
    943,888
    
    
    
    1,189,648Diluted weighted-average common
shares outstanding in period
    
    
    17,261,066
    
    
    
    17,020,123Basic earnings (loss) per common share:Income from continuing operations
    
    $
    0.12
    
    
    $
    0.14Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    0.00Basic earnings per common share
    
    $
    0.11
    
    
    $
    0.14Diluted earnings (loss) per common share:Income from continuing operations
    
    $
    0.11
    
    
    $
    0.13Income (loss) from discontinued operations
    
    
    (0.00
    )
    
    
    0.00Diluted earnings per common share
    
    $
    0.11
    
    
    $
    0.13
 Cash and Cash Equivalents 
 Minority Interest 
 8




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Income Taxes
  Fair Value Measurements 
 Financial Assets and Financial Liabilities 
 Business Combinations 
 9




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Derivative Instruments and Hedging Activities 
 Reclassification
 2. Investment in Unconsolidated Affiliate
   10




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March 31,
    
    
    December 31,2008
    
    
    2007Total current assets
    
    $
    4,160,321
    
    
    $
    3,136,735Property, plant and equipment, net
    
    
    8,318,018
    
    
    
    8,366,745Total other assets
    
    
    11,272
    
    
    
    13,469Total assets
    
    $
    12,489,611
    
    
    $
    11,516,949Total current liabilities
    
    $
    1,320,670
    
    
    $
    1,362,482Long-term note payable
    
    
    2,229,410
    
    
    
    2,372,807Total shareholders equity
    
    
    8,939,531
    
    
    
    7,781,660Total liabilities and shareholders equity
    
    $
    12,489,611
    
    
    $
    11,516,949
 Three Months EndedMarch 31,2008
    
    
    2007Total revenues
    
    $
    4,889,321
    
    
    $
    3,145,449Total costs and expenses
    
    
    2,231,450
    
    
    
    1,356,957Net income
    
    $
    2,657,871
    
    
    $
    1,788,492
 3. Discontinued Operations
    11




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Three Months EndedMarch 31,2008
    
    
    2007Total revenues
    
    $
    1,284,576
    
    
    $
    959,346Operating expenses
    
    
    1,320,466
    
    
    
    902,770Income (loss) from operations
    
    
    (35,890
    )
    
    
    56,576Loss on disposal
    
    
    (42,278
    )
    
    
    Income (loss) from discontinued operations
    
    $
    (78,168
    )
    
    $
    56,576
  December 31,2007Inventories
    
    $
    1,189,437Prepaid expenses and other current assets
    
    
    195,159Property, plant and equipment, net
    
    
    162,618Goodwill
    
    
    770,558Intangible assets, less accumulated amortization
    
    
    47,530Other assets
    
    
    34,287Assets of discontinued operations held
for sale or liquidation
    
    $
    2,399,589Current liabilities
    
    $
    754,589Other
    
    
    Liabilities of discontinued operations held
for sale or liquidation
    
    $
    754,589
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4. Debt
 Line of Credit
     13




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14
    Table of Contents     5. Share-Based Compensation
  Stock Options
  15




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WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2007
    
    
    1,727,868
    
    
    $
    5.34Granted-Directors
    
    
    
    
    
    
    Granted-Employees
    
    
    20,000
    
    
    
    12.36Exercised
    
    
    (47,898
    )
    
    
    1.79Canceled
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Balance, March 31, 2008
    
    
    1,699,970
    
    
    $
    5.52
    
    
    
    5.82
    
    
    $
    6.32Exercisable, March 31, 2008
    
    
    1,347,720
    
    
    $
    4.12
    
    
    
    5.25
    
    
    $
    7.74
 16




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WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2006
    
    
    2,085,344
    
    
    $
    4.61Granted-Directors
    
    
    
    
    
    
    Granted-Employees
    
    
    Exercised
    
    
    (106,549
    )
    
    
    2.37Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (2,500
    )
    
    
    3.06Balance, March 31, 2007
    
    
    1,976,295
    
    
    $
    4.73
    
    
    
    6.45
    
    
    $
    8.61Exercisable, March 31, 2007
    
    
    1,502,045
    
    
    $
    3.28
    
    
    
    5.80
    
    
    $
    10.06
     Restricted Stock Awards
 17




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Weighted
    
    
    Balance ofUnvested
    
    
    Average
    
    
    UnamortizedRestricted
    
    
    Grant Date
    
    
    CompensationShares
    
    
    Fair Value
    
    
    ExpenseBalance, December 31, 2007
    
    
    640,500
    
    
    $
    12.49
    
    
    $
    6,936,912Granted
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    (60,000
    )
    
    
    12.34
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    Current period expense amortization
    
    
    
    
    
    
    
    
    
    
    (402,825
    )Balance, March 31, 2008
    
    
    580,500
    
    
    $
    12.49
    
    
    $
    6,534,087
  
    
    A total of 300,000 restricted shares will cliff vest in their entirety on August 15,
2012, provided the officer holding those shares remains employed by us on that date.
    
    A total of 22,500 restricted shares will cliff vest in their entirety on December
10, 2012, provided the officers holding those shares remain employed by us on that date.
    
    The remaining 258,000 restricted shares vest in four equal annual installments,
commencing when our annual report on Form 10-K for the year ended December 31, 2008 is
filed, based upon the achievement of performance targets each year relating to our income
from continuing operations for fiscal years 2008 through 2012.
    
    All restricted shares remaining to vest will automatically vest upon a change in
control.
  6. Commitments and Contingencies
  18




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7. Segment Information
  Distributed Generation and Energy Efficiency
 19




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Natural Gas Measurement Services
   20




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Summarized Segment Financial Information
 Three Months EndedMarch 31,2008
    
    
    2007Revenues:PowerSecure
    
    $
    29,106
    
    
    $
    21,516Southern Flow
    
    
    4,469
    
    
    
    3,900Total
    
    $
    33,575
    
    
    $
    25,416Gross profit:PowerSecure
    
    $
    8,803
    
    
    $
    6,316Southern Flow
    
    
    1,217
    
    
    
    1,052Total
    
    $
    10,020
    
    
    $
    7,368Segment profit (loss) (1):PowerSecure
    
    $
    1,599
    
    
    $
    1,290Southern Flow
    
    
    751
    
    
    
    620Other
    
    
    (1,374
    )
    
    
    (952
    )Total
    
    $
    976
    
    
    $
    958Capital expenditures:PowerSecure
    
    $
    7,449
    
    
    $
    337Southern Flow
    
    
    42
    
    
    
    166Other
    
    
    
    
    
    
    19Total
    
    $
    7,491
    
    
    $
    522Depreciation and amortization:PowerSecure
    
    $
    398
    
    
    $
    283Southern Flow
    
    
    42
    
    
    
    32Other
    
    
    17
    
    
    
    18Total
    
    $
    457
    
    
    $
    333
 March 31,2008
    
    
    2007Total assets:PowerSecure
    
    $
    67,317
    
    
    $
    53,550Southern Flow
    
    
    12,599
    
    
    
    12,799Other
    
    
    28,854
    
    
    
    17,885Total
    
    $
    108,770
    
    
    $
    84,234
 
 (1)
    
    Segment profit (loss) represents operating income (loss). 21




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  Overview
     22




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Recent Developments
  23




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Operating Segments
  24




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Distributed Generation and Energy Efficiency
     Natural Gas Measurement Services
  25




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Results of Operations
  First Quarter 2008 Compared to First Quarter 2007
 Revenues
  Period-over-PeriodQuarter Ended March 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Segment Revenues:PowerSecure
    
    $
    29,106
    
    
    $
    21,516
    
    
    $
    7,590
    
    
    
    35.3
    %Southern Flow
    
    
    4,469
    
    
    
    3,900
    
    
    
    569
    
    
    
    14.6
    %Total
    
    $
    33,575
    
    
    $
    25,416
    
    
    $
    8,159
    
    
    
    32.1
    %
   26




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##### Table of Contents



Quarter Ended March 31,2008
    
    
    2007(In thousands)Revenues from Publix
    
    $
    13,866
    
    
    $
    14,501All other PowerSecure subsidiary revenues
    
    
    15,240
    
    
    
    7,014Total PowerSecure subsidiary revenues
    
    $
    29,106
    
    
    $
    21,515Publix as a percentage of total
PowerSecure subsidiary revenues
    
    
    47.6
    %
    
    
    67.4
    %
   Gross Profit and Gross Profit Margins
  27




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Period-over-PeriodQuarter Ended March 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Segment Cost of Sales
and Services:PowerSecure
    
    $
    20,303
    
    
    $
    15,199
    
    
    $
    5,104
    
    
    
    33.6
    %Southern Flow
    
    
    3,252
    
    
    
    2,849
    
    
    
    403
    
    
    
    14.1
    %Total
    
    $
    23,555
    
    
    $
    18,048
    
    
    $
    5,507
    
    
    
    30.5
    %Segment Gross Profit:PowerSecure
    
    $
    8,803
    
    
    $
    6,316
    
    
    $
    2,487
    
    
    
    39.4
    %Southern Flow
    
    
    1,217
    
    
    
    1,052
    
    
    
    165
    
    
    
    15.7
    %Total
    
    $
    10,020
    
    
    $
    7,368
    
    
    $
    2,652
    
    
    
    36.0
    %Segment Gross Profit Margins:PowerSecure
    
    
    30.2
    %
    
    
    29.4
    %Southern Flow
    
    
    27.2
    %
    
    
    27.0
    %Total
    
    
    29.8
    %
    
    
    29.0
    %
     
    
    Our ability to improve our operating efficiency and benefit from economies of scale;
    
    Our ability to manage our materials and labor costs;
    
    The geographic density of our projects;
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##### Table of Contents




    
    The mix of higher and lower margin products and services;
    
    The selling price of our products and services;
    
    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
  Period-over-PeriodQuarter Ended March 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Operating Expenses:General and administrative
    
    $
    7,243
    
    
    $
    5,441
    
    
    $
    1,802
    
    
    
    33.1
    %Selling, marketing and service
    
    
    1,325
    
    
    
    619
    
    
    
    706
    
    
    
    114.1
    %Depreciation and amortization
    
    
    457
    
    
    
    333
    
    
    
    124
    
    
    
    37.2
    %Research and development
    
    
    19
    
    
    
    17
    
    
    
    2
    
    
    
    11.8
    %Total
    
    $
    9,044
    
    
    $
    6,410
    
    
    $
    2,634
    
    
    
    41.1
    %
  General and Administrative Expenses.
 29




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##### Table of Contents



Period-over-PeriodMarch Ended March 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)PowerSecure G&A Expense:Personnel costs
    
    $
    3,473
    
    
    $
    2,884
    
    
    $
    589
    
    
    
    20.4
    %Vehicle lease and rental
    
    
    479
    
    
    
    341
    
    
    
    138
    
    
    
    40.5
    %Insurance
    
    
    199
    
    
    
    203
    
    
    
    (4
    )
    
    
    -2.0
    %Rent-office and equipment
    
    
    234
    
    
    
    119
    
    
    
    115
    
    
    
    96.6
    %Professional fees and consulting
    
    
    227
    
    
    
    154
    
    
    
    73
    
    
    
    47.4
    %Travel
    
    
    206
    
    
    
    106
    
    
    
    100
    
    
    
    94.3
    %Other
    
    
    647
    
    
    
    303
    
    
    
    344
    
    
    
    113.5
    %Southern Flow G&A Expense
    
    
    421
    
    
    
    397
    
    
    
    24
    
    
    
    6.0
    %Corporate Overhead Expense
    
    
    1,357
    
    
    
    934
    
    
    
    423
    
    
    
    45.3
    %Total
    
    $
    7,243
    
    
    $
    5,441
    
    
    $
    1,802
    
    
    
    33.1
    %
    Selling, Marketing and Service Expenses.
 30




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##### Table of Contents



Period-over-PeriodMarch Ended March 31,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)PowerSecure Selling and
Marketing Expense:Salaries
    
    $
    536
    
    
    $
    262
    
    
    $
    274
    
    
    
    104.6
    %Commission
    
    
    507
    
    
    
    281
    
    
    
    226
    
    
    
    80.4
    %Travel
    
    
    169
    
    
    
    69
    
    
    
    100
    
    
    
    144.9
    %Other business development costs
    
    
    113
    
    
    
    7
    
    
    
    106
    
    
    
    1514.3
    %Total
    
    $
    1,325
    
    
    $
    619
    
    
    $
    706
    
    
    
    114.1
    %
  Depreciation and Amortization Expenses.
 Research and Development Expenses.
 Other Income and Expenses
  31




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Period-over-PeriodPeriod Ended March 31,
    
    Difference2008
    
    2007
    
    $
    
    %(In thousands)Other Income and (Expenses):Management fees
    
    $
    149
    
    
    $
    102
    
    
    $
    47
    
    
    
    46.1
    %Interest and other income
    
    
    226
    
    
    
    502
    
    
    
    (276
    )
    
    
    -55.0
    %Interest and finance charges
    
    
    (51
    )
    
    
    (6
    )
    
    
    (45
    )
    
    
    -750.0
    %Equity income
    
    
    964
    
    
    
    649
    
    
    
    315
    
    
    
    48.5
    %Litigation settlements
    
    
    
    
    
    
    278
    
    
    
    (278
    )
    
    
    -100.0
    %Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    *Income tax benefit (provision)
    
    
    (311
    )
    
    
    (306
    )
    
    
    (5
    )
    
    
    -1.6
    %
 
 *
    
    Not meaningful. Management Fees.
 Interest and Other Income.
 Interest and Finance Charges.
 Equity Income.
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##### Table of Contents



Litigation Settlements.
 Minority Interest.
 Income Taxes.
 Fluctuations
  
    
    the size, timing and terms of sales and orders, including large customer orders, such
as the recent significant Publix orders, as well as the effects of customers delaying,
deferring or canceling purchase orders or making smaller purchases than expected;
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##### Table of Contents




    
    our ability to obtain adequate supplies of key components and materials for our
products on a timely and cost-effective basis;
    
    our ability to implement our business plans and strategies and the timing of such
implementation;
    
    the pace of development of our new businesses and the 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 product and service implementation process;
    
    changes in the mix of products and services having differing margins;
    
    the effects of severe weather conditions, such as hurricanes, on the demand
requirements of our customers;
    
    the life cycles of our products and services;
    
    budgeting cycles of utilities and other major customers;
    
    changes and uncertainties in the lead times required to obtain the necessary permits
and other governmental and regulatory approvals for projects;
    
    economic conditions in the energy industry, especially in the natural gas and
electricity sectors including the effect of cyclical changes in energy prices;
    
    changes in the prices charged by our suppliers;
    
    the effects of governmental regulations and regulatory changes in our markets;
    
    general economic and political conditions;
    
    the effects of litigation, claims and other proceedings;
    
    our ability to make and obtain the expected benefits from acquisitions of technology or
businesses, and the costs related to such acquisitions;
    
    changes in our operating expenses; and
    
    changes in our valuation allowance for our net deferred tax asset.
    
    the development and maintenance of business relationships with strategic partners.
   34




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##### Table of Contents



Liquidity and Capital Resources
 Overview
  
    
    operations;
    
    inventory;
    
    accounts receivable;
    
    property and equipment acquisitions, including investments in recurring
revenue projects;
    
    software purchases or development;
    
    debt service requirements;
    
    restructuring obligations;
    
    deferred compensation obligations; and
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##### Table of Contents




    
    business and technology acquisitions and other growth transactions.
 Working Capital
  Cash Flows
  Quarter Ended March 31,2008
    
    
    2007(In thousands)Net cash flows used in operating activities
    
    $
    (2,377
    )
    
    $
    (426
    )Net cash flows used in investing activities
    
    
    (7,490
    )
    
    
    (522
    )Net cash provided by (used in) financing activities
    
    
    2,669
    
    
    
    (20
    )Net decrease in cash and cash equivalents
    
    $
    (7,198
    )
    
    $
    (968
    )
 Cash Flows Used in Operating Activities
   36




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##### Table of Contents



Cash Used in Investing Activities
  Cash Provided by (Used in) Financing Activities
  Capital Spending
  37




---



##### Table of Contents



Indebtedness
 Restructuring Obligations.
 Working Capital Credit Facility.
   38




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##### Table of Contents



Preferred Stock Redemption
 Contractual Obligations and Commercial Commitments
  39




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##### Table of Contents



Payments Due by Period (1)Remainder of
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    2008
    
    
    1 - 3 Years
    
    
    4 - 5 Years
    
    
    5 YearsContractual ObligationsLine of credit facility (2)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Term credit facility
    
    
    2,584,000
    
    
    
    97,000
    
    
    
    258,000
    
    
    
    258,000
    
    
    
    1,971,000Restructuring obligations
    
    
    5,175,000
    
    
    
    3,493,000
    
    
    
    1,682,000
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    7,000
    
    
    
    1,000
    
    
    
    4,000
    
    
    
    2,000
    
    
    
    Operating leases
    
    
    2,893,000
    
    
    
    667,000
    
    
    
    1,268,000
    
    
    
    615,000
    
    
    
    343,000Deferred compensation (3)
    
    
    2,578,000
    
    
    
    250,000
    
    
    
    666,000
    
    
    
    666,000
    
    
    
    996,000Series B preferred stock
    
    
    104,000
    
    
    
    104,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    13,341,000
    
    
    $
    4,612,000
    
    
    $
    3,878,000
    
    
    $
    1,541,000
    
    
    $
    3,310,000
 
 (1)
    
    Does not include interest that may become due and payable on such obligations in any future
period.(2)
    
    Total repayments are based upon borrowings outstanding as of March 31, 2008, not actual or
projected borrowings after such date.(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
  40




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##### 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;
 41




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##### Table of Contents




    
    costs of exit or disposal activities and similar nonrecurring charges; and
    
    stock-based compensation.
  Recent Accounting Pronouncements
     42




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##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements
  
    
    our prospects, including our future revenues, expenses, net income, margins,
profitability, cash flow, liquidity, financial condition and results of operations;
    
    our products and services and our markets, including market position, market share,
market demand and benefits of our products and services to customers;
    
    our ability to successfully develop, operate and grow 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, available borrowings under our credit arrangements and other
capital resources, to meet our future working capital, capital expenditure, debt service
and business growth needs;
    
    industry trends and customer preferences;
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##### Table of Contents




    
    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;
    
    the effects on our business, financial condition and results of operations of litigation
and other claims and proceedings that arise from time to time; and
    
    future economic, business, market and regulatory conditions.
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
 44




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##### Table of Contents



Commodity Price Risk
 Foreign Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  45




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  Limitations in Control Systems
  46




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Our management of the WaterSecure operations, a private energy program, presents risks to
us.
  
    
    material adverse changes in the business, results of operations and financial
condition of the program due to events, conditions and factors outside of our control,
such as changes in the price of oil and other general and local conditions affecting
the oil and gas market generally, which could reduce the revenues and net income of the
program and, accordingly, our results of operations;
    
    potential new market entrants and competition resulting from the current oil and gas
market generally and the specific oil and gas market served by our WaterSecure
operations, which could adversely affect the financial results of our WaterSecure
operations and, accordingly, our results of operations;
    
    lawsuits by investors in this program who become dissatisfied with the results of
the program;
    
    hazards of oil production water disposal facilities, including fires and
environmental hazards, such as the 2008 fires, that can result in loss of life,
personal injuries,
 47




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##### Table of Contents



damages to facilities that may not be insured and lost business, revenues, net income
and cash flows due to the interruptions caused by such hazards;
 
    
    risks inherent in managing a program and taking significant actions that affect its
investors;
    
    changes in the regulatory environment relating to the program;
    
    reliance upon significant suppliers and customers by the program; and
    
    changes in technology.
  The recent downturn in general economic and market conditions could materially and adversely
affect our business.
    
 Item 5. Other Information
  48




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##### Table of Contents



Item 6. Exhibits
 (10.1)
    
    Term Credit Agreement, dated as of January 17, 2008, among Registrant, the
financial institutions from time to time parties thereto as lenders, and
Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed January 23, 2008.)(10.2)
    
    Form of First Amendment to Security Agreement, dated as of January 17, 2008,
by each of Registrant and its active subsidiaries in favor of Citibank, N.A.,
as administrative agent, as secured party. (Incorporated by reference to
Exhibit 10.4 to Registrants Current Report on Form 8-K filed January 23,
2008.)(10.3)
    
    Guaranty, dated as of January 17, 2008, by the active subsidiaries of
Registrant in favor of Citibank, N.A., as administrative agent. (Incorporated
by reference to Exhibit 10.5 to Registrants Current Report on Form 8-K filed
January 23, 2008.)(10.4)
    
    First Amendment to Credit Agreement, dated as of January 17, 2008, among
Registrant, the financial institutions from time to time parties thereto as
lenders, and Citibank, N.A., as administrative agent. (Incorporated by
reference to Exhibit 10.6 to Registrants Current Report on Form 8-K filed
January 23, 2008.)(10.5)
    
    Real Estate Purchase Agreement, dated as of January 16, 2008, between
PowerSecure, Inc. and H & C Holdings, LLC. (Incorporated by reference to
Exhibit 10.1 to Registrants Current Report on Form 8-K filed January 23,
2008.)(10.6)
    
    Asset Purchase Agreement, dated as of March 14, 2008, between Registrant,
Metretek, Incorporated and Mercury Instruments LLC. (Incorporated by reference
to Exhibit 10.38 to Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2007.)(10.7)
    
    Amendment to Asset Purchase Agreement, dated as of March 31, 2008, among
PowerSecure International, Inc., Metretek, Incorporated and
 49




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##### Table of Contents



Mercury
Instruments LLC (Incorporated by reference to Exhibit 10.2 to
Registrants Current Report on Form 8-K filed April 3, 2008.)
 (10.8)
    
    Second Amendment to Credit Agreement, dated as of May 5, 2008, among
Registrant, the financial institutions from time to time parties thereto as
lenders, and Citibank, N.A., as administrative agent. (Filed herewith)(10.9)
    
    First Amendment to Term Credit Agreement, dated as of May 5, 2008, among
Registrant, the financial institutions from time to time parties thereto as
lenders, and Citibank, N.A., as administrative agent. (Filed herewith)(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.)
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##### Table of Contents



SIGNATURES
  POWERSECURE INTERNATIONAL, INC.Date: May 8, 2008
    By:
    /s/ Sidney HintonSidney HintonPresident and Chief Executive OfficerDate: May 8, 2008
    By:
    /s/ Christopher T. HutterChristopher T. HutterVice President, Chief Financial Officer,

Treasurer and Assistant Secretary 51