##### 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 June 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 CourtWake Forest, North Carolina
    
    27587(Address of principal executive offices)
    
    (Zip code)
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



POWERSECURE INTERNATIONAL, INC.
 FORM 10-Q
For the Quarterly Period Ended June 30, 2010
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Consolidated Balance Sheets -
June 30, 2010 and December 31, 2009
    
    
    3Unaudited Consolidated Statements of Operations -
For the Three and Six Months Ended June 30, 2010 and
June 30, 2009
    
    
    5Unaudited Consolidated Statements of Cash Flows -
For the Three and Six Months Ended June 30, 2010 and
June 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
    
    
    60Item 4. Controls and Procedures
    
    
    61PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    62Item 1A. Risk Factors
    
    
    62Item 6. Exhibits
    
    
    63Signatures
    
    
    64Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I.
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS (unaudited)
 (in thousands, except share data)
 June 30,
    
    
    December 31,2010
    
    
    2009AssetsCurrent Assets:Cash and cash equivalents
    
    $
    3,974
    
    
    $
    20,169Trade receivables, net of allowance for doubtful accounts
of $330 and $299, respectively
    
    
    37,711
    
    
    
    28,332Inventories
    
    
    27,334
    
    
    
    21,632Deferred income taxes
    
    
    2,713
    
    
    
    2,713Prepaid expenses and other current assets
    
    
    866
    
    
    
    1,300Total current assets
    
    
    72,598
    
    
    
    74,146Property, plant and equipment:Equipment
    
    
    25,114
    
    
    
    22,252Furniture and fixtures
    
    
    676
    
    
    
    671Land, building and improvements
    
    
    4,838
    
    
    
    4,802Total property, plant and equipment, at cost
    
    
    30,628
    
    
    
    27,725Less accumulated depreciation and amortization
    
    
    6,484
    
    
    
    5,413Property, plant and equipment, net
    
    
    24,144
    
    
    
    22,312Other assets:Goodwill
    
    
    13,395
    
    
    
    7,256Restricted annuity contract
    
    
    2,265
    
    
    
    2,220Intangible rights and capitalized software costs, net of
accumulated amortization of $2,117 and $1,890, respectively
    
    
    1,947
    
    
    
    1,320Investment in unconsolidated affiliate
    
    
    4,156
    
    
    
    3,974Other assets
    
    
    191
    
    
    
    249Total other assets
    
    
    21,954
    
    
    
    15,019Total Assets
    
    $
    118,696
    
    
    $
    111,477
 See accompanying notes to consolidated financial statements.
  3




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS (unaudited)
 (in thousands, except share data)
 June 30,
    
    
    December 31,2010
    
    
    2009Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    7,044
    
    
    $
    4,116Accrued and other liabilities
    
    
    20,003
    
    
    
    20,379Restructuring charges payable
    
    
    
    
    
    
    325Current income taxes payable
    
    
    144
    
    
    
    Current unrecognized tax benefit
    
    
    327
    
    
    
    327Current portion of capital lease obligations
    
    
    776
    
    
    
    756Total current liabilities
    
    
    28,294
    
    
    
    25,903Long-term
liabilities:Revolving line of credit
    
    
    
    
    
    
    Capital lease obligations, net of current portion
    
    
    4,052
    
    
    
    4,445Unrecognized tax benefit
    
    
    1,169
    
    
    
    1,169Deferred compensation
    
    
    887
    
    
    
    721Total long-term liabilities
    
    
    6,108
    
    
    
    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; 18,329,780 and 17,241,650 shares issued
and outstanding, respectively
    
    
    183
    
    
    
    172Additional paid-in-capital
    
    
    112,466
    
    
    
    110,911Accumulated deficit
    
    
    (30,410
    )
    
    
    (32,951
    )Total PowerSecure International, Inc. stockholders equity
    
    
    82,239
    
    
    
    78,132Noncontrolling interest
    
    
    2,055
    
    
    
    1,107Total stockholders equity
    
    
    84,294
    
    
    
    79,239Total Liabilities and Stockholders Equity
    
    $
    118,696
    
    
    $
    111,477
 See accompanying notes to consolidated financial statements.
  4




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    34,314
    
    
    $
    25,135
    
    
    $
    58,988
    
    
    $
    44,855Cost of sales
    
    
    22,477
    
    
    
    16,880
    
    
    
    37,560
    
    
    
    30,726Gross profit
    
    
    11,837
    
    
    
    8,255
    
    
    
    21,428
    
    
    
    14,129Operating expenses:General and administrative
    
    
    9,007
    
    
    
    6,072
    
    
    
    16,333
    
    
    
    12,112Selling, marketing and service
    
    
    1,387
    
    
    
    969
    
    
    
    2,440
    
    
    
    1,800Depreciation and amortization
    
    
    743
    
    
    
    563
    
    
    
    1,400
    
    
    
    1,105Total operating expenses
    
    
    11,137
    
    
    
    7,604
    
    
    
    20,173
    
    
    
    15,017Operating income (loss)
    
    
    700
    
    
    
    651
    
    
    
    1,255
    
    
    
    (888
    )Other income and (expenses):Equity income
    
    
    807
    
    
    
    401
    
    
    
    1,837
    
    
    
    878Management fees
    
    
    142
    
    
    
    98
    
    
    
    296
    
    
    
    203Interest income and other income
    
    
    24
    
    
    
    38
    
    
    
    56
    
    
    
    91Interest expense
    
    
    (139
    )
    
    
    (145
    )
    
    
    (280
    )
    
    
    (319
    )Income (loss) before income taxes
    
    
    1,534
    
    
    
    1,043
    
    
    
    3,164
    
    
    
    (35
    )Income tax provision
    
    
    (250
    )
    
    
    (26
    )
    
    
    (476
    )
    
    
    (50
    )Net income (loss)
    
    
    1,284
    
    
    
    1,017
    
    
    
    2,688
    
    
    
    (85
    )Less: Net income attributable to noncontrolling interest
    
    
    40
    
    
    
    (331
    )
    
    
    (147
    )
    
    
    (365
    )Net income (loss) attributable to PowerSecure International, Inc.
    
    $
    1,324
    
    
    $
    686
    
    
    $
    2,541
    
    
    $
    (450
    )Earnings (loss) per share attributable to
PowerSecure International, Inc. common stockholders:Basic
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.14
    
    
    $
    (0.03
    )Diluted
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.14
    
    
    $
    (0.03
    )Weighted average common shares outstanding:Basic
    
    
    17,933
    
    
    
    17,159
    
    
    
    17,587
    
    
    
    17,127Diluted
    
    
    18,566
    
    
    
    17,159
    
    
    
    18,136
    
    
    
    17,127
 See accompanying notes to consolidated financial statements.
  5




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS 
(unaudited)(in thousands)
 Six MonthsEnded June 30,2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    2,688
    
    
    $
    (85
    )Adjustments to reconcile net income (loss) to net cash
used in operating activities:Depreciation and amortization
    
    
    1,400
    
    
    
    1,105Stock compensation expense
    
    
    988
    
    
    
    787Distributions to noncontrolling shareholder
    
    
    (877
    )
    
    
    (Gain) loss on disposal of miscellaneous assets
    
    
    (1
    )
    
    
    30Equity in income of unconsolidated affiliate
    
    
    (1,837
    )
    
    
    (878
    )Distributions from unconsolidated affiliate
    
    
    1,618
    
    
    
    1,093Changes in operating assets and liabilities, net of
effect of acquisitions:Trade receivables, net
    
    
    (9,031
    )
    
    
    (1,378
    )Inventories
    
    
    (5,440
    )
    
    
    (3,024
    )Other current assets and liabilities
    
    
    578
    
    
    
    189Other noncurrent assets
    
    
    73
    
    
    
    14Accounts payable
    
    
    1,952
    
    
    
    1,492Restructuring charges
    
    
    (325
    )
    
    
    (814
    )Accrued and other liabilities
    
    
    (411
    )
    
    
    (1,494
    )Deferred compensation obligation
    
    
    166
    
    
    
    166Restricted annuity contract
    
    
    (46
    )
    
    
    (43
    )Net cash used in operating activities
    
    
    (8,505
    )
    
    
    (2,840
    )Cash flows from investing activities:Acquisitions
    
    
    (4,413
    )
    
    
    (800
    )Purchases of property, plant and equipment
    
    
    (2,560
    )
    
    
    (1,612
    )Additions to intangible rights and software development
    
    
    (432
    )
    
    
    (134
    )Proceeds from sale of property, plant and equipment
    
    
    19
    
    
    
    10Net cash used in investing activities
    
    
    (7,386
    )
    
    
    (2,536
    )Cash flows from financing activities:Borrowings (payments) on revolving line of credit
    
    
    
    
    
    
    Payments on capital lease obligations
    
    
    (373
    )
    
    
    (353
    )Proceeds from stock option and warrant exercises, net of shares tendered
    
    
    69
    
    
    
    274Net cash used by financing activities
    
    
    (304
    )
    
    
    (79
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (16,195
    )
    
    
    (5,455
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    20,169
    
    
    
    24,316CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    3,974
    
    
    $
    18,861
 See accompanying notes to consolidated financial statements.
  6




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




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Basis of Presentation
 Organization
   Principles of Consolidation
 Noncontrolling Interest (see Note 4)
   8




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Noncontrolling InterestEfficientLights
    
    
    IES
    
    
    TotalBalance, December 31, 2009
    
    $
    1,107
    
    
    $
    
    
    
    $
    1,107Capital Contributions
    
    
    
    
    
    
    2,188
    
    
    
    2,188Income (loss)
    
    
    280
    
    
    
    (133
    )
    
    
    147Distributions
    
    
    (877
    )
    
    
    
    
    
    
    (877
    )Acquisition of noncontrolling interest
    
    
    (510
    )
    
    
    
    
    
    
    (510
    )Balance, June 30, 2010
    
    $
    
    
    
    $
    2,055
    
    
    $
    2,055
  Noncontrolling InterestEfficientLights
    
    
    IES
    
    
    TotalBalance, December 31, 2008
    
    $
    
    
    
    $
    
    
    
    $
    Capital Contributions
    
    
    
    
    
    
    
    
    
    
    Income (loss)
    
    
    365
    
    
    
    
    
    
    
    365Distributions
    
    
    
    
    
    
    
    
    
    
    Acquisition of noncontrolling interest
    
    
    
    
    
    
    Balance, June 30, 2009
    
    $
    365
    
    
    $
    
    
    
    $
    365
 Use of Estimates
 Reclassifications
 2. Summary of Significant Accounting Policies and Recent Accounting Standards
 Revenue Recognition
  9




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10




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




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




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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




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    1,324
    
    
    $
    686
    
    
    $
    2,541
    
    
    $
    (450
    )Basic weighted-average common
shares outstanding in period
    
    
    17,933
    
    
    
    17,159
    
    
    
    17,587
    
    
    
    17,127Add dilutive effects of stock
options and warrants
    
    
    633
    
    
    
    
    
    
    
    549
    
    
    
    Diluted weighted-average common
shares outstanding in period
    
    
    18,566
    
    
    
    17,159
    
    
    
    18,136
    
    
    
    17,127Basic earnings (loss) per common share:
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.14
    
    
    $
    (0.03
    )Diluted earnings (loss) per common share:
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.14
    
    
    $
    (0.03
    )
 4. Acquisitions
 Acquisition of IES
   14




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Accounts receivable
    
    $
    349Inventory
    
    
    262Equipment
    
    
    427Deposits
    
    
    14Intangible rights
    
    
    422Goodwill
    
    
    6,139Accounts payable
    
    
    (977
    )Accrued and other liabilities
    
    
    (35
    )Non-controlling interest
    
    
    (2,188
    )Net assets acquired
    
    $
    4,413
   Acquisition of Noncontrolling Interest in EfficientLights
  15




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5. Investment in Unconsolidated Affiliate
   June 30,
    
    
    December 31,2010
    
    
    2009Total current assets
    
    $
    3,201
    
    
    $
    2,942Property, plant and equipment, net
    
    
    9,074
    
    
    
    8,879Total other assets
    
    
    5
    
    
    
    6Total assets
    
    $
    12,280
    
    
    $
    11,827Total current liabilities
    
    $
    1,765
    
    
    $
    1,433Long-term note payable
    
    
    2,329
    
    
    
    2,749Total shareholders equity
    
    
    8,186
    
    
    
    7,645Total liabilities and shareholders equity
    
    $
    12,280
    
    
    $
    11,827
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Total revenues
    
    $
    4,439
    
    
    $
    2,687
    
    
    $
    9,331
    
    
    $
    5,674Total costs and expenses
    
    
    2,443
    
    
    
    1,696
    
    
    
    4,790
    
    
    
    3,504Net income
    
    $
    1,996
    
    
    $
    991
    
    
    $
    4,541
    
    
    $
    2,170
 6. Debt
 Line of Credit
    16




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17




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7. Capital Lease Obligations
      18




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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
    
    
    60
    
    
    
    9.73Exercised
    
    
    (62
    )
    
    
    4.01Expired
    
    
    (5
    )
    
    
    17.38Forfeited
    
    
    
    
    
    
    Balance, June 30, 2010
    
    
    1,620
    
    
    $
    5.35
    
    
    
    4.79
    
    
    $
    3.74Exercisable, June 30, 2010
    
    
    1,315
    
    
    $
    5.12
    
    
    
    3.94
    
    
    $
    3.97
  19




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WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2008
    
    
    1,708
    
    
    $
    5.21Granted
    
    
    20
    
    
    
    4.57Exercised
    
    
    (33
    )
    
    
    1.62Expired
    
    
    (6
    )
    
    
    6.88Forfeited
    
    
    (49
    )
    
    
    11.19Balance, June 30, 2009
    
    
    1,640
    
    
    $
    5.09
    
    
    
    5.27
    
    
    $
    (0.83
    )Exercisable, June 30, 2009
    
    
    1,311
    
    
    $
    4.79
    
    
    
    4.46
    
    
    $
    (0.53
    )
  June 30,
    
    
    June 30,2010
    
    
    2009Expected stock price volatility
    
    
    48.8
    %
    
    
    54.3
    %Risk Free interest rate
    
    
    2.15
    %
    
    
    2.65
    %Annual dividends
    
    $
    
    
    
    $
    Expected life  employee options
    
    
    5 years
    
    
    
    5 yearsExpected life  director options
    
    
    na
    
    
    
    na
    Restricted Stock Awards
  20




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WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2009
    
    
    561
    
    
    $
    10.36Granted
    
    
    21
    
    
    
    9.56Vested
    
    
    (88
    )
    
    
    7.16Forfeited
    
    
    
    
    
    
    Balance, June 30, 2010
    
    
    494
    
    
    $
    10.89
  WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2008
    
    
    628
    
    
    $
    12.06Granted
    
    
    43
    
    
    
    4.65Vested
    
    
    (76
    )
    
    
    11.90Forfeited
    
    
    
    
    
    
    Balance, June 30, 2009
    
    
    595
    
    
    $
    11.54
    21




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9. Commitments and Contingencies
     22




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




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Three Months Ended June 30, 2010Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    29,733
    
    
    $
    4,581
    
    
    $
    
    
    
    $
    34,314Cost of sales
    
    
    19,133
    
    
    
    3,344
    
    
    
    
    
    
    
    22,477Gross profit
    
    
    10,600
    
    
    
    1,237
    
    
    
    
    
    
    
    11,837Operating expenses:General and administrative
    
    
    6,817
    
    
    
    813
    
    
    
    1,377
    
    
    
    9,007Selling, marketing and service
    
    
    1,348
    
    
    
    39
    
    
    
    
    
    
    
    1,387Depreciation and amortization
    
    
    651
    
    
    
    91
    
    
    
    1
    
    
    
    743Total operating expenses
    
    
    8,816
    
    
    
    943
    
    
    
    1,378
    
    
    
    11,137Operating income (loss)
    
    
    1,784
    
    
    
    294
    
    
    
    (1,378
    )
    
    
    700Other income and (expenses):Equity income
    
    
    
    
    
    
    807
    
    
    
    
    
    
    
    807Management fees
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    142Interest income and other income
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    24Interest expense
    
    
    (68
    )
    
    
    
    
    
    
    (71
    )
    
    
    (139
    )Income (loss) before income taxes
    
    $
    1,716
    
    
    $
    1,243
    
    
    $
    (1,425
    )
    
    $
    1,534Total capital expenditures
    
    $
    1,534
    
    
    $
    42
    
    
    $
    1
    
    
    $
    1,577Total investment in unconsolidated affiliate
    
    $
    
    
    
    $
    4,156
    
    
    $
    
    
    
    $
    4,156Total assets
    
    $
    95,462
    
    
    $
    17,513
    
    
    $
    5,721
    
    
    $
    118,696
  24




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Three Months Ended June 30, 2009Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    20,671
    
    
    $
    4,464
    
    
    $
    
    
    
    $
    25,135Cost of sales
    
    
    13,629
    
    
    
    3,251
    
    
    
    
    
    
    
    16,880Gross profit
    
    
    7,042
    
    
    
    1,213
    
    
    
    
    
    
    
    8,255Operating expenses:General and administrative
    
    
    4,374
    
    
    
    500
    
    
    
    1,198
    
    
    
    6,072Selling, marketing and service
    
    
    957
    
    
    
    12
    
    
    
    
    
    
    
    969Depreciation and amortization
    
    
    477
    
    
    
    85
    
    
    
    1
    
    
    
    563Total operating expenses
    
    
    5,808
    
    
    
    597
    
    
    
    1,199
    
    
    
    7,604Operating income (loss)
    
    
    1,234
    
    
    
    616
    
    
    
    (1,199
    )
    
    
    651Other income and (expenses):Equity income
    
    
    
    
    
    
    401
    
    
    
    
    
    
    
    401Management fees
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    98Interest income and other income
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    38Interest expense
    
    
    (77
    )
    
    
    
    
    
    
    (68
    )
    
    
    (145
    )Income (loss) before income taxes
    
    $
    1,157
    
    
    $
    1,115
    
    
    $
    (1,229
    )
    
    $
    1,043Total capital expenditures
    
    $
    925
    
    
    $
    167
    
    
    $
    
    
    
    $
    1,092Total investment in unconsolidated affiliate
    
    $
    
    
    
    $
    3,854
    
    
    $
    
    
    
    $
    3,854Total assets
    
    $
    77,882
    
    
    $
    15,912
    
    
    $
    16,831
    
    
    $
    110,625
 Six Months Ended June 30, 2010Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    50,193
    
    
    $
    8,795
    
    
    $
    
    
    
    $
    58,988Cost of sales
    
    
    31,040
    
    
    
    6,520
    
    
    
    
    
    
    
    37,560Gross profit
    
    
    19,153
    
    
    
    2,275
    
    
    
    
    
    
    
    21,428Operating expenses:General and administrative
    
    
    12,396
    
    
    
    1,233
    
    
    
    2,704
    
    
    
    16,333Selling, marketing and service
    
    
    2,394
    
    
    
    46
    
    
    
    
    
    
    
    2,440Depreciation and amortization
    
    
    1,215
    
    
    
    183
    
    
    
    2
    
    
    
    1,400Total operating expenses
    
    
    16,005
    
    
    
    1,462
    
    
    
    2,706
    
    
    
    20,173Operating income (loss)
    
    
    3,148
    
    
    
    813
    
    
    
    (2,706
    )
    
    
    1,255Other income and (expenses):Equity income
    
    
    
    
    
    
    1,837
    
    
    
    
    
    
    
    1,837Management fees
    
    
    
    
    
    
    296
    
    
    
    
    
    
    
    296Interest income and other income
    
    
    
    
    
    
    2
    
    
    
    54
    
    
    
    56Interest expense
    
    
    (138
    )
    
    
    
    
    
    
    (142
    )
    
    
    (280
    )Income (loss) before income taxes
    
    $
    3,010
    
    
    $
    2,948
    
    
    $
    (2,794
    )
    
    $
    3,164Total capital expenditures
    
    $
    2,921
    
    
    $
    70
    
    
    $
    1
    
    
    $
    2,992
  25




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Six Months Ended June 30, 2009Energy and
    
    
    
    
    
    
    UnallocatedSmart Grid
    
    
    Energy
    
    
    CorporateSolutions
    
    
    Services
    
    
    Costs
    
    
    TotalRevenues
    
    $
    35,886
    
    
    $
    8,969
    
    
    $
    
    
    
    $
    44,855Cost of sales
    
    
    24,070
    
    
    
    6,656
    
    
    
    
    
    
    
    30,726Gross profit
    
    
    11,816
    
    
    
    2,313
    
    
    
    
    
    
    
    14,129Operating expenses:General and administrative
    
    
    8,787
    
    
    
    1,014
    
    
    
    2,311
    
    
    
    12,112Selling, marketing and service
    
    
    1,783
    
    
    
    17
    
    
    
    
    
    
    
    1,800Depreciation and amortization
    
    
    938
    
    
    
    165
    
    
    
    2
    
    
    
    1,105Total operating expenses
    
    
    11,508
    
    
    
    1,196
    
    
    
    2,313
    
    
    
    15,017Operating income (loss)
    
    
    308
    
    
    
    1,117
    
    
    
    (2,313
    )
    
    
    (888
    )Other income and (expenses):Equity income
    
    
    
    
    
    
    878
    
    
    
    
    
    
    
    878Management fees
    
    
    
    
    
    
    203
    
    
    
    
    
    
    
    203Interest income and other income
    
    
    3
    
    
    
    
    
    
    
    88
    
    
    
    91Interest expense
    
    
    (185
    )
    
    
    
    
    
    
    (134
    )
    
    
    (319
    )Income (loss) before income taxes
    
    $
    126
    
    
    $
    2,198
    
    
    $
    (2,359
    )
    
    $
    (35
    )Total capital expenditures
    
    $
    1,466
    
    
    $
    280
    
    
    $
    
    
    
    $
    1,746
   26




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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
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




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
    
    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




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29




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30




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Recent Developments
 ® ®
  ® ®
  31




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32




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33




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Backlog
  Revenue Backlog to be recognized after June 30, 2010
 Anticipated
    
    
    Estimated PrimaryDescription
    
    Revenue
    
    
    Recognition PeriodProject-based Revenue  Near term
    
    $
    40 Million
    
    
    3Q10 through 1Q11Project-based Revenue  Long term
    
    $
    36 Million
    
    
    2Q11 through 2Q13Recurring Revenue
    
    $
    51 Million
    
    
    3Q10 through 2019Revenue Backlog to be recognized after June 30, 2010
    
    $
    127 Million
 Note: Anticipated revenue and estimated primary recognition periods are subject to risks and
uncertainties as indicated in 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 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.
  Operating Segments
  Energy and Smart Grid Solutions
   34




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Energy Services
  Results of Operations
 Second Quarter 2010 Compared to Second Quarter 2009
 Revenues
  Period-over-PeriodQuarter Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Revenues:Energy and Smart Grid Solutions
    
    $
    29,733
    
    
    $
    20,671
    
    
    $
    9,062
    
    
    
    43.8
    %Energy Services
    
    
    4,581
    
    
    
    4,464
    
    
    
    117
    
    
    
    2.6
    %Total
    
    $
    34,314
    
    
    $
    25,135
    
    
    $
    9,179
    
    
    
    36.5
    %
    35




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Gross Profit and Gross Profit Margins
  Period-over-PeriodQuarter Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Cost of Sales and Services:Energy and Smart Grid Solutions
    
    $
    19,133
    
    
    $
    13,629
    
    
    $
    5,504
    
    
    
    40.4
    %Energy Services
    
    
    3,344
    
    
    
    3,251
    
    
    
    93
    
    
    
    2.9
    %Total
    
    $
    22,477
    
    
    $
    16,880
    
    
    $
    5,597
    
    
    
    33.2
    %Segment Gross Profit:Energy and Smart Grid Solutions
    
    $
    10,600
    
    
    $
    7,042
    
    
    $
    3,558
    
    
    
    50.5
    %Energy Services
    
    
    1,237
    
    
    
    1,213
    
    
    
    24
    
    
    
    2.0
    %Total
    
    $
    11,837
    
    
    $
    8,255
    
    
    $
    3,582
    
    
    
    43.4
    %Segment Gross Profit Margins:Energy and Smart Grid Solutions
    
    
    35.7
    %
    
    
    34.1
    %Energy Services
    
    
    27.0
    %
    
    
    27.2
    %Total
    
    
    34.5
    %
    
    
    32.8
    %
    36




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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.
   37




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Operating Expense
  Period-over-PeriodQuarter Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Consolidated Operating Expenses:General and administrative
    
    $
    9,007
    
    
    $
    6,072
    
    
    $
    2,935
    
    
    
    48.3
    %Selling, marketing and service
    
    
    1,387
    
    
    
    969
    
    
    
    418
    
    
    
    43.1
    %Depreciation and amortization
    
    
    743
    
    
    
    563
    
    
    
    180
    
    
    
    32.0
    %Total
    
    $
    11,137
    
    
    $
    7,604
    
    
    $
    3,533
    
    
    
    46.5
    %
   38




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General and Administrative Expenses.
 Period-over-PeriodQuarter Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment G&A Expenses:Energy and Smart Grid Solutions:Personnel costs
    
    $
    4,057
    
    
    $
    2,772
    
    
    $
    1,285
    
    
    
    46.4
    %Vehicle lease and rental
    
    
    961
    
    
    
    450
    
    
    
    511
    
    
    
    113.6
    %Insurance
    
    
    353
    
    
    
    275
    
    
    
    78
    
    
    
    28.4
    %Rent-office and equipment
    
    
    235
    
    
    
    194
    
    
    
    41
    
    
    
    21.1
    %Professional fees and consulting
    
    
    282
    
    
    
    102
    
    
    
    180
    
    
    
    176.5
    %Development costs
    
    
    64
    
    
    
    66
    
    
    
    (2
    )
    
    
    -3.0
    %Travel
    
    
    287
    
    
    
    169
    
    
    
    118
    
    
    
    69.8
    %Other
    
    
    578
    
    
    
    346
    
    
    
    232
    
    
    
    67.1
    %Energy Services
    
    
    813
    
    
    
    500
    
    
    
    313
    
    
    
    62.6
    %Unallocated Corporate Costs
    
    
    1,377
    
    
    
    1,198
    
    
    
    179
    
    
    
    14.9
    %Total
    
    $
    9,007
    
    
    $
    6,072
    
    
    $
    2,935
    
    
    
    48.3
    %
    39




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Selling, Marketing and Service Expenses.
 Period-over-PeriodQuarter Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Selling, Marketing and Service:Energy and Smart Grid Solutions:Salaries
    
    $
    583
    
    
    $
    451
    
    
    $
    132
    
    
    
    29.3
    %Commission
    
    
    310
    
    
    
    280
    
    
    
    30
    
    
    
    10.7
    %Travel
    
    
    183
    
    
    
    126
    
    
    
    57
    
    
    
    45.2
    %Advertising and promotion
    
    
    177
    
    
    
    78
    
    
    
    99
    
    
    
    126.9
    %Bad debt expense (recovery)
    
    
    95
    
    
    
    22
    
    
    
    73
    
    
    
    331.8
    %Energy Services
    
    
    39
    
    
    
    12
    
    
    
    27
    
    
    
    225.0
    %Total
    
    $
    1,387
    
    
    $
    969
    
    
    $
    418
    
    
    
    43.1
    %
  Depreciation and Amortization Expenses.
  40




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Other Income and Expenses
  Period-over-PeriodQuarter Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Other Segment Income and (Expenses):Energy and Smart Grid Solutions:Interest income and other income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    nmInterest expense
    
    
    (68
    )
    
    
    (77
    )
    
    
    9
    
    
    
    11.7
    %Segment total
    
    
    (68
    )
    
    
    (77
    )
    
    
    9Energy Services:Equity income
    
    
    807
    
    
    
    401
    
    
    
    406
    
    
    
    101.2
    %Management fees
    
    
    142
    
    
    
    98
    
    
    
    44
    
    
    
    44.9
    %Interest income and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    nmSegment total
    
    
    949
    
    
    
    499
    
    
    
    450Unallocated Corporate:Interest income and other income
    
    
    24
    
    
    
    38
    
    
    
    (14
    )
    
    
    -36.8
    %Interest expense
    
    
    (71
    )
    
    
    (68
    )
    
    
    (3
    )
    
    
    -4.4
    %Income tax benefit (provision)
    
    
    (250
    )
    
    
    (26
    )
    
    
    (224
    )
    
    
    -861.5
    %Segment total
    
    
    (297
    )
    
    
    (56
    )
    
    
    (241
    )Total
    
    $
    584
    
    
    $
    366
    
    
    $
    218
 Equity Income.
 Management Fees.
 Interest Income and Other Income.
  41




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Interest Expense.
 Income Taxes.
 Noncontrolling Interest
  42




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Six Month Period 2010 Compared to Six Month Period 2009
 Revenues
  Period-over-PeriodSix Months Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Revenues:Energy and Smart Grid Solutions
    
    $
    50,193
    
    
    $
    35,886
    
    
    $
    14,307
    
    
    
    39.9
    %Energy Services
    
    
    8,795
    
    
    
    8,969
    
    
    
    (174
    )
    
    
    -1.9
    %Total
    
    $
    58,988
    
    
    $
    44,855
    
    
    $
    14,133
    
    
    
    31.5
    %
     43




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Gross Profit and Gross Profit Margins
  Period-over-PeriodSix Months Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Cost of Sales and Services:Energy and Smart Grid Solutions
    
    $
    31,040
    
    
    $
    24,070
    
    
    $
    6,970
    
    
    
    29.0
    %Energy Services
    
    
    6,520
    
    
    
    6,656
    
    
    
    (136
    )
    
    
    -2.0
    %Total
    
    $
    37,560
    
    
    $
    30,726
    
    
    $
    6,834
    
    
    
    22.2
    %Segment Gross Profit:Energy and Smart Grid Solutions
    
    $
    19,153
    
    
    $
    11,816
    
    
    $
    7,337
    
    
    
    62.1
    %Energy Services
    
    
    2,275
    
    
    
    2,313
    
    
    
    (38
    )
    
    
    -1.6
    %Total
    
    $
    21,428
    
    
    $
    14,129
    
    
    $
    7,299
    
    
    
    51.7
    %Segment Gross Profit Margins:Energy and Smart Grid Solutions
    
    
    38.2
    %
    
    
    32.9
    %Energy Services
    
    
    25.9
    %
    
    
    25.8
    %Total
    
    
    36.3
    %
    
    
    31.5
    %
     44




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Operating Expense
  Period-over-PeriodSix Months Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Consolidated Operating Expenses:General and administrative
    
    $
    16,333
    
    
    $
    12,112
    
    
    $
    4,221
    
    
    
    34.8
    %Selling, marketing and service
    
    
    2,440
    
    
    
    1,800
    
    
    
    640
    
    
    
    35.6
    %Depreciation and amortization
    
    
    1,400
    
    
    
    1,105
    
    
    
    295
    
    
    
    26.7
    %Total
    
    $
    20,173
    
    
    $
    15,017
    
    
    $
    5,156
    
    
    
    34.3
    %
  General and Administrative Expenses.
 Period-over-PeriodSix Months Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment G&A Expenses:Energy and Smart Grid Solutions:Personnel costs
    
    $
    7,367
    
    
    $
    5,694
    
    
    $
    1,673
    
    
    
    29.4
    %Vehicle lease and rental
    
    
    1,521
    
    
    
    773
    
    
    
    748
    
    
    
    96.8
    %Insurance
    
    
    703
    
    
    
    541
    
    
    
    162
    
    
    
    29.9
    %Rent-office and equipment
    
    
    434
    
    
    
    361
    
    
    
    73
    
    
    
    20.2
    %Professional fees and consulting
    
    
    448
    
    
    
    145
    
    
    
    303
    
    
    
    209.0
    %Development costs
    
    
    84
    
    
    
    86
    
    
    
    (2
    )
    
    
    -2.3
    %Travel
    
    
    540
    
    
    
    355
    
    
    
    185
    
    
    
    52.1
    %Other
    
    
    1,299
    
    
    
    832
    
    
    
    467
    
    
    
    56.1
    %Energy Services
    
    
    1,233
    
    
    
    1,014
    
    
    
    219
    
    
    
    21.6
    %Unallocated Corporate Costs
    
    
    2,704
    
    
    
    2,311
    
    
    
    393
    
    
    
    17.0
    %Total
    
    $
    16,333
    
    
    $
    12,112
    
    
    $
    4,221
    
    
    
    34.8
    %
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Selling, Marketing and Service Expenses.
 Period-over-PeriodSix Months Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Segment Selling, Marketing and Service:Energy and Smart Grid Solutions:Salaries
    
    $
    1,082
    
    
    $
    907
    
    
    $
    175
    
    
    
    19.3
    %Commission
    
    
    596
    
    
    
    498
    
    
    
    98
    
    
    
    19.7
    %Travel
    
    
    347
    
    
    
    256
    
    
    
    91
    
    
    
    35.5
    %Advertising and promotion
    
    
    294
    
    
    
    114
    
    
    
    180
    
    
    
    157.9
    %Bad debt expense (recovery)
    
    
    75
    
    
    
    8
    
    
    
    67
    
    
    
    837.5
    %Energy Services
    
    
    46
    
    
    
    17
    
    
    
    29
    
    
    
    170.6
    %Total
    
    $
    2,440
    
    
    $
    1,800
    
    
    $
    640
    
    
    
    35.6
    %
  Depreciation and Amortization Expenses.
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Other Income and Expenses
  Period-over-PeriodSix Months Ended June 30,
    
    
    Difference2010
    
    
    2009
    
    
    $
    
    
    %Other Segment Income and (Expenses):Energy and Smart Grid Solutions:Interest income and other income
    
    $
    
    
    
    $
    3
    
    
    $
    (3
    )
    
    
    -100.0
    %Interest expense
    
    
    (138
    )
    
    
    (185
    )
    
    
    47
    
    
    
    25.4
    %Segment total
    
    
    (138
    )
    
    
    (182
    )
    
    
    44Energy Services:Equity income
    
    
    1,837
    
    
    
    878
    
    
    
    959
    
    
    
    109.2
    %Management fees
    
    
    296
    
    
    
    203
    
    
    
    93
    
    
    
    45.8
    %Interest income and other income
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    nmSegment total
    
    
    2,135
    
    
    
    1,081
    
    
    
    1,054Unallocated Corporate:Interest income and other income
    
    
    54
    
    
    
    88
    
    
    
    (34
    )
    
    
    -38.6
    %Interest expense
    
    
    (142
    )
    
    
    (134
    )
    
    
    (8
    )
    
    
    -6.0
    %Income tax benefit (provision)
    
    
    (476
    )
    
    
    (50
    )
    
    
    (426
    )
    
    
    -852.0
    %Segment total
    
    
    (564
    )
    
    
    (96
    )
    
    
    (468
    )Total
    
    $
    1,433
    
    
    $
    803
    
    
    $
    630
 Equity Income.
 Management Fees.
 Interest Income and Other Income.
  47




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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;
 
    
    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;
  48




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
    
    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, 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.
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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
  Cash Flows
  Six Months Ended June 30,2010
    
    
    2009Net cash flows used in operating activities
    
    $
    (8,505
    )
    
    $
    (2,840
    )Net cash flows used in investing activities
    
    
    (7,386
    )
    
    
    (2,536
    )Net cash used in financing activities
    
    
    (304
    )
    
    
    (79
    )Net decrease in cash and cash equivalents
    
    $
    (16,195
    )
    
    $
    (5,455
    )
  51




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Cash Used in Operating Activities
   
    
    our net income of $2.7 million;
 
    
    non-cash charges of $1.4 million in depreciation and amortization;
 
    
    stock-based compensation expense of $1.0 million;
 
    
    cash distributions to the noncontrolling member of EfficientLights of $0.9 million;
 
    
    non-cash equity income from our WaterSecure operations of $1.8 million partially
offset by cash distributions from those operations of $1.6 million;
 
    
    an increase of $9.0 million in accounts receivable;
 
    
    an increase of $5.4 million in inventories;
 
    
    a decrease of $0.6 million in other current assets and liabilities
 
    
    an increase of $2.0 million of accounts payable;
 
    
    a decrease of $0.4 million of accrued expenses; and
 
    
    cash payments of $0.3 million on our restructuring obligations.
  
    
    our net loss of $0.1 million;
 
    
    non-cash charges of $1.1 million in depreciation and amortization;
 
    
    non-cash stock-based compensation expense of $0.8 million;
 
    
    cash distributions from our WaterSecure operations of $1.1 million partially offset
by non-cash equity income from those operations of $0.9 million;
 
    
    an increase of $1.4 million in accounts receivable;
 
    
    an increase of $3.0 million in inventories;
 
    
    a decrease of $0.2 million in other current assets and liabilities
 
    
    an increase of $1.5 million of accounts payable;
 
    
    a decrease of $1.5 million of accrued expenses;
 
    
    cash payments of $0.8 million on our restructuring obligations; and
 
    
    an increase in our deferred compensation obligation of $0.2 million.
 Cash Used in Investing Activities
   52




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Cash Used in Financing Activities
  Capital Spending
   Indebtedness
 Line of Credit .
     53




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54




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##### Table of Contents



Capital Lease Obligations.
     Restructuring Obligations.
 Preferred Stock Redemption
  55




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Contractual Obligations and Commercial Commitments
  Payments Due by PeriodRemainder
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    of 2010
    
    
    1  3 Years
    
    
    4  5 Years
    
    
    5 YearsContractual ObligationsCredit facility (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital lease obligations (2)
    
    
    5,588
    
    
    
    509
    
    
    
    2,033
    
    
    
    2,031
    
    
    
    1,015Operating leases
    
    
    4,108
    
    
    
    632
    
    
    
    1,936
    
    
    
    1,352
    
    
    
    188Deferred compensation (3)
    
    
    2,661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,661Non-compete agreement
    
    
    500
    
    
    
    
    
    
    
    200
    
    
    
    200
    
    
    
    100Series B preferred stock
    
    
    104
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    12,961
    
    
    $
    1,245
    
    
    $
    4,169
    
    
    $
    3,583
    
    
    $
    3,964
 
 (1)
    
    Total repayments are based upon borrowings outstanding as of June 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. Off-Balance Sheet Arrangements
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Liquidity
   Critical Accounting Policies
   57




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
    
    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
  58




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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
 Multiple Deliverable Revenue Arrangements Multiple Deliverable Revenue Arrangements  A Consensus of the FASB Emerging Issues Task Force (Topic 605) Revenue Recognition
  59




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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.
  Commodity Price Risk
 Foreign Exchange Risk
  60




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  Limitations in Control Systems
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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, 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.
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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.)
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SIGNATURES
  POWERSECURE INTERNATIONAL, INC.Date:    August 5, 2010
    By:
    /s/ Sidney HintonSidney HintonPresident and Chief Executive OfficerDate:    August 5, 2010
    By:
    /s/ Christopher T. HutterChristopher T. HutterExecutive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary  64