##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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 Court 
Wake Forest, North Carolina
(Address of principal executive offices)
    
    27587
(Zip code)
 
 þ o
  Large accelerated filer oAccelerated filer þNon-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 September 30, 2008
 TABLE OF CONTENTS
  
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsUnaudited Consolidated Balance Sheets 
September 30, 2008 and December 31, 2007
    
    
    3Unaudited Consolidated Statements of Operations 
For the Three and Nine Months Ended September 30, 2008 and
September 30, 2007
    
    
    5Unaudited Consolidated Statements of Cash Flows 
For the Nine Months Ended September 30, 2008 and
September 30, 2007
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    25Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    58Item 4.
    
    Controls and Procedures
    
    
    59PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    61Item 1A.
    
    Risk Factors
    
    
    61Item 6.
    
    Exhibits
    
    
    66Signatures
    
    
    67EX-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)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    8,313,552
    
    
    $
    28,709,688Trade receivables, net of allowance for doubtful accounts
of $331,151 and $262,547, respectively
    
    
    39,291,353
    
    
    
    36,753,399Other receivables
    
    
    722,999
    
    
    
    376,198Inventories
    
    
    19,115,719
    
    
    
    20,785,549Deferred income taxes
    
    
    2,463,986
    
    
    
    2,528,636Prepaid expenses and other current assets
    
    
    841,881
    
    
    
    1,091,498Assets of discontinued operations held for sale (Note 3)
    
    
    
    
    
    
    2,399,589Total current assets
    
    
    70,749,490
    
    
    
    92,644,557PROPERTY, PLANT AND EQUIPMENT:Equipment
    
    
    18,765,545
    
    
    
    6,663,520Furniture and fixtures
    
    
    625,741
    
    
    
    614,589Land, building and improvements
    
    
    4,535,139
    
    
    
    1,013,022Total property, plant and equipment, at cost
    
    
    23,926,425
    
    
    
    8,291,131Less accumulated depreciation and amortization
    
    
    3,529,497
    
    
    
    2,640,424Property, plant and equipment, net
    
    
    20,396,928
    
    
    
    5,650,707OTHER ASSETS:Goodwill
    
    
    7,255,710
    
    
    
    7,255,710Restricted annuity contract
    
    
    2,106,522
    
    
    
    2,001,204Intangible rights and capitalized software costs, net of
accumulated amortization of $1,365,503 and $947,550,
respectively
    
    
    1,324,198
    
    
    
    1,660,676Investment in unconsolidated affiliate (Note 2)
    
    
    3,967,593
    
    
    
    3,652,251Other assets
    
    
    96,440
    
    
    
    158,363Total other assets
    
    
    14,750,463
    
    
    
    14,728,204TOTAL
    
    $
    105,896,881
    
    
    $
    113,023,468
 See accompanying notes to consolidated financial statements.
 3




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##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    8,487,671
    
    
    $
    11,321,639Accrued and other liabilities
    
    
    20,828,905
    
    
    
    35,156,946Current income taxes payable
    
    
    45,203
    
    
    
    Restructuring charges payable
    
    
    1,499,093
    
    
    
    4,047,849Note payable (Note 4)
    
    
    129,200
    
    
    
    Liabilities of discontinued operations held for sale
(Note 3)
    
    
    
    
    
    
    754,589Current unrecognized tax benefit
    
    
    78,867
    
    
    
    83,987Capital lease obligations
    
    
    1,472
    
    
    
    1,392Total current liabilities
    
    
    31,070,411
    
    
    
    51,366,402LONG-TERM NOTES PAYABLE (Note 4)
    
    
    2,357,900
    
    
    
    NON-CURRENT UNRECOGNIZED TAX BENEFIT
    
    
    757,066
    
    
    
    674,173NON-CURRENT RESTRUCTURING CHARGES
    
    
    621,274
    
    
    
    1,682,543DEFERRED COMPENSATION OBLIGATION
    
    
    304,920
    
    
    
    55,440NON-CURRENT CAPITAL LEASE OBLIGATIONS
    
    
    4,211
    
    
    
    5,326COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN SUBSIDIARY
    
    
    
    
    
    
    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; 17,040,778 and 16,860,267 shares issued
and outstanding, respectively
    
    
    170,408
    
    
    
    168,602Additional paid-in-capital
    
    
    107,283,181
    
    
    
    105,472,838Accumulated deficit
    
    
    (36,672,490
    )
    
    
    (46,401,856
    )Total stockholders equity
    
    
    70,781,099
    
    
    
    59,239,584TOTAL
    
    $
    105,896,881
    
    
    $
    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 Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    33,557,309
    
    
    $
    26,229,619
    
    
    $
    109,083,969
    
    
    $
    74,236,764Cost of sales
    
    
    22,645,919
    
    
    
    18,090,327
    
    
    
    74,352,518
    
    
    
    53,112,707Gross profit
    
    
    10,911,390
    
    
    
    8,139,292
    
    
    
    34,731,451
    
    
    
    21,124,057Operating expenses:General and administrative
    
    
    7,113,529
    
    
    
    5,123,984
    
    
    
    21,909,537
    
    
    
    15,478,024Selling, marketing and service
    
    
    1,251,973
    
    
    
    1,114,748
    
    
    
    4,465,498
    
    
    
    2,431,213Depreciation and amortization
    
    
    543,706
    
    
    
    386,611
    
    
    
    1,528,382
    
    
    
    1,084,475Research and development
    
    
    29,076
    
    
    
    6,327
    
    
    
    92,857
    
    
    
    108,574Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,139,216Total operating expenses
    
    
    8,938,284
    
    
    
    6,631,670
    
    
    
    27,996,274
    
    
    
    33,241,502Operating income (loss)
    
    
    1,973,106
    
    
    
    1,507,622
    
    
    
    6,735,177
    
    
    
    (12,117,445
    )Other income and (expenses):Management fees
    
    
    137,115
    
    
    
    102,623
    
    
    
    450,323
    
    
    
    305,905Interest income
    
    
    89,020
    
    
    
    166,251
    
    
    
    434,082
    
    
    
    516,652Interest and finance charges
    
    
    (54,995
    )
    
    
    (18,535
    )
    
    
    (157,859
    )
    
    
    (32,732
    )Equity income
    
    
    839,445
    
    
    
    656,186
    
    
    
    3,030,005
    
    
    
    1,977,481Other income
    
    
    
    
    
    
    107,100
    
    
    
    
    
    
    
    663,441Minority interest
    
    
    
    
    
    
    5,809
    
    
    
    
    
    
    
    5,809Income (loss) before income taxes
    
    
    2,983,691
    
    
    
    2,527,056
    
    
    
    10,491,728
    
    
    
    (8,680,889
    )Income tax provision
    
    
    (69,739
    )
    
    
    (162,121
    )
    
    
    (684,194
    )
    
    
    (638,398
    )Income (loss) from continuing operations
    
    
    2,913,952
    
    
    
    2,364,935
    
    
    
    9,807,534
    
    
    
    (9,319,287
    )Discontinued operationsMetretek FloridaLoss on disposal
    
    
    
    
    
    
    
    
    
    
    (42,278
    )
    
    
    (140,490
    )Income (loss) from operations
    
    
    
    
    
    
    290,181
    
    
    
    (35,890
    )
    
    
    493,045Income (loss) from discontinued
operations
    
    
    
    
    
    
    290,181
    
    
    
    (78,168
    )
    
    
    352,555Net income (loss)
    
    $
    2,913,952
    
    
    $
    2,655,116
    
    
    $
    9,729,366
    
    
    $
    (8,966,732
    )PER SHARE AMOUNTS (NOTE 1):Income (loss) from continuing operations:Basic
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.60
    
    
    $
    (0.58
    )Diluted
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.57
    
    
    $
    (0.58
    )Net income (loss)Basic
    
    $
    0.18
    
    
    $
    0.16
    
    
    $
    0.59
    
    
    $
    (0.56
    )Diluted
    
    $
    0.17
    
    
    $
    0.15
    
    
    $
    0.57
    
    
    $
    (0.56
    )WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:Basic
    
    
    16,406,789
    
    
    
    16,157,500
    
    
    
    16,354,118
    
    
    
    15,975,083Diluted
    
    
    16,922,743
    
    
    
    17,153,155
    
    
    
    17,116,765
    
    
    
    15,975,083
 See accompanying notes to consolidated financial statements.
 5




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POWERSECURE INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    9,729,366
    
    
    $
    (8,966,732
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,528,382
    
    
    
    1,113,292Minority interest in subsidiary
    
    
    
    
    
    
    (5,809
    )Deferred income taxes
    
    
    64,650
    
    
    
    Loss on disposal of miscellaneous assets
    
    
    161,533
    
    
    
    73,963Equity in income of unconsolidated affiliate
    
    
    (3,030,005
    )
    
    
    (1,977,481
    )Distributions from unconsolidated affiliate
    
    
    3,375,398
    
    
    
    1,994,462Stock compensation expense
    
    
    1,576,179
    
    
    
    1,027,486Changes in other assets and liabilities:Trade receivables, net
    
    
    (2,537,954
    )
    
    
    547,726Inventories
    
    
    1,669,830
    
    
    
    (7,573,619
    )Other current assets
    
    
    (51,981
    )
    
    
    10,808Assets of discontinued operations held for sale
    
    
    2,399,589
    
    
    
    144,490Other noncurrent assets
    
    
    61,923
    
    
    
    24,469Accounts payable
    
    
    (2,833,968
    )
    
    
    (9,815,638
    )Restructuring charges, net of cash payments
    
    
    (3,610,025
    )
    
    
    10,453,605Accrued and other liabilities
    
    
    (14,328,041
    )
    
    
    24,069,750Liabilites of discontinued operations held for sale
    
    
    (754,589
    )
    
    
    Unrecognized tax benefits
    
    
    77,773
    
    
    
    Deferred compensation obligation
    
    
    249,480
    
    
    
    Retirement annuity
    
    
    (105,318
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    (6,357,778
    )
    
    
    11,120,772CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property, plant and equipment
    
    
    (15,857,353
    )
    
    
    (779,457
    )Investment in unconsolidated affiliate
    
    
    (709,594
    )
    
    
    Additions to intangible rights and software development
    
    
    (199,596
    )
    
    
    (462,481
    )Proceeds from sale of property, plant and equipment
    
    
    6,150
    
    
    
    1,700Net cash used in investing activities
    
    
    (16,760,393
    )
    
    
    (1,240,238
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from term loan
    
    
    2,584,000
    
    
    
    Proceeds from stock option exercises, net of shares tendered
    
    
    235,970
    
    
    
    1,022,159Principal payments on long-term notes payable
    
    
    (96,900
    )
    
    
    Payments on preferred stock redemptions
    
    
    
    
    
    
    (220,186
    )Payments on capital lease obligations
    
    
    (1,035
    )
    
    
    (5,129
    )Net cash provided by financing activities
    
    
    2,722,035
    
    
    
    796,844NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (20,396,136
    )
    
    
    10,677,378CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD
    
    
    28,709,688
    
    
    
    15,916,460CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    8,313,552
    
    
    $
    26,593,838
 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 (Loss) Per Share 
 7




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Income (loss) from continuing operations
    
    $
    2,913,952
    
    
    $
    2,364,935
    
    
    $
    9,807,534
    
    
    $
    (9,319,287
    )Income (loss) from discontinued
operations
    
    
    
    
    
    
    290,181
    
    
    
    (78,168
    )
    
    
    352,555Net income (loss)
    
    $
    2,913,952
    
    
    $
    2,655,116
    
    
    $
    9,729,366
    
    
    $
    (8,966,732
    )Basic weighted-average common
shares outstanding in period
    
    
    16,406,789
    
    
    
    16,157,500
    
    
    
    16,354,118
    
    
    
    15,975,083Add dilutive effects of stock
options and warrants
    
    
    515,954
    
    
    
    995,655
    
    
    
    762,647
    
    
    
    Diluted weighted-average common
shares outstanding in period
    
    
    16,922,743
    
    
    
    17,153,155
    
    
    
    17,116,765
    
    
    
    15,975,083Basic earnings (loss) per common share:Income (loss) from continuing
operations
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.60
    
    
    $
    (0.58
    )Income (loss) from discontinued
operations
    
    
    
    
    
    
    0.01
    
    
    
    (0.01
    )
    
    
    0.02Basic earnings (loss) per common share
    
    $
    0.18
    
    
    $
    0.16
    
    
    $
    0.59
    
    
    $
    (0.56
    )Diluted earnings (loss) per common
share:Income (loss) from continuing
operations
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.57
    
    
    $
    (0.58
    )Income (loss) from discontinued
operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.02Diluted earnings (loss) per common
share
    
    $
    0.17
    
    
    $
    0.15
    
    
    $
    0.57
    
    
    $
    (0.56
    )
 Cash and Cash Equivalents 
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Minority Interest 
  Income Taxes
  Fair Value Measurements 
  9




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Financial Assets and Financial Liabilities 
 Business Combinations 
 Derivative Instruments and Hedging Activities 
 Reclassification
 2. Investment in Unconsolidated Affiliate
  10




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September 30,
    
    
    December 31,2008
    
    
    2007Total current assets
    
    $
    2,741,876
    
    
    $
    3,136,735Property, plant and equipment, net
    
    
    7,988,098
    
    
    
    8,366,745Total other assets
    
    
    7,499
    
    
    
    13,469Total assets
    
    $
    10,737,473
    
    
    $
    11,516,949Total current liabilities
    
    $
    1,405,505
    
    
    $
    1,362,482Long-term note payable
    
    
    1,934,241
    
    
    
    2,372,807Total shareholders equity
    
    
    7,397,727
    
    
    
    7,781,660Total liabilities and
shareholders equity
    
    $
    10,737,473
    
    
    $
    11,516,949
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Total revenues
    
    $
    4,404,281
    
    
    $
    3,189,887
    
    
    $
    14,771,503
    
    
    $
    9,493,031Total costs and
expenses
    
    
    2,328,983
    
    
    
    1,380,367
    
    
    
    6,655,437
    
    
    
    4,039,859Net income
    
    $
    2,075,298
    
    
    $
    1,809,520
    
    
    $
    8,116,066
    
    
    $
    5,453,172
 3. Discontinued Operations
   11




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Total revenues
    
    $
    
    
    
    $
    1,512,976
    
    
    $
    1,284,576
    
    
    $
    3,707,925Operating expenses
    
    
    
    
    
    
    1,222,795
    
    
    
    1,320,466
    
    
    
    3,214,880Income (loss) from operations
    
    
    
    
    
    
    290,181
    
    
    
    (35,890
    )
    
    
    493,045Loss on disposal
    
    
    
    
    
    
    
    
    
    
    (42,278
    )
    
    
    (140,490
    )Income (loss) from
discontinued operations
    
    $
    
    
    
    $
    290,181
    
    
    $
    (78,168
    )
    
    $
    352,555
  12




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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
  4. Debt
 Line of Credit
   13




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14




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Equipment Line
 15




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5. Share-Based Compensation
  Stock Options
   16




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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
    
    
    30,000
    
    
    
    12.14Exercised
    
    
    (149,333
    )
    
    
    3.15Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (62,500
    )
    
    
    11.22Balance, September 30, 2008
    
    
    1,546,035
    
    
    $
    5.44
    
    
    
    5.38
    
    
    $
    0.62Exercisable, September 30, 2008
    
    
    1,297,035
    
    
    $
    4.45
    
    
    
    4.98
    
    
    $
    1.62
 17




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WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2006
    
    
    2,085,344
    
    
    $
    4.61Granted-Directors
    
    
    37,500
    
    
    
    12.72Granted-Employees
    
    
    25,000
    
    
    
    12.29Exercised
    
    
    (402,058
    )
    
    
    2.67Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (13,750
    )
    
    
    8.26Balance, September 30, 2007
    
    
    1,732,036
    
    
    $
    5.30
    
    
    
    6.20
    
    
    $
    7.23Exercisable, September 30, 2007
    
    
    1,496,278
    
    
    $
    3.84
    
    
    
    5.56
    
    
    $
    8.71
  2008
    
    2007Expected stock price volatilility
    
    
    60.3
    %
    
    
    75.7
    %Risk Free interest rate
    
    
    2.96
    %
    
    
    5.09
    %Annual dividends
    
    $
    
    
    
    $
    Expected life
    
    5 years
    
    5 years
    18




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##### Table of Contents



Restricted Stock Awards
  WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2007
    
    
    640,500
    
    
    $
    12.48Granted-Directors
    
    
    23,148
    
    
    
    8.64Granted-Officers
    
    
    
    
    
    
    Granted-Employees
    
    
    27,500
    
    
    
    7.45Vested
    
    
    (65,788
    )
    
    
    12.01Forfeited
    
    
    
    
    
    
    Balance, September 30, 2008
    
    
    625,360
    
    
    $
    12.16
  WeightedUnvested
    
    
    AverageRestricted
    
    
    Grant DateShares
    
    
    Fair ValueBalance, December 31, 2006
    
    
    
    
    
    $
    Granted-Directors
    
    
    
    
    
    
    Granted-Officers
    
    
    600,000
    
    
    
    12.34Granted-Employees
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Balance, September 30, 2007
    
    
    600,000
    
    
    $
    12.34
 19




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##### Table of Contents




    
    A total of 300,000 restricted shares will cliff vest in their entirety on August 15,
2012.
    
    A total of 22,500 restricted shares will cliff vest in their entirety on December 10,
2012.
    
    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.
   6. Commitments and Contingencies
   20




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##### Table of Contents



7. Segment Information
  Distributed Generation and Energy Efficiency
 21




---



##### Table of Contents



22




---



##### Table of Contents



Natural Gas Measurement Services
   23




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##### Table of Contents



Summarized Segment Financial Information
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:PowerSecure
    
    $
    28,706
    
    
    $
    22,128
    
    
    $
    94,869
    
    
    $
    62,257Southern Flow
    
    
    4,851
    
    
    
    4,101
    
    
    
    14,215
    
    
    
    11,979Total
    
    $
    33,557
    
    
    $
    26,229
    
    
    $
    109,084
    
    
    $
    74,236Gross profit:PowerSecure
    
    $
    9,755
    
    
    $
    7,038
    
    
    $
    30,848
    
    
    $
    17,833Southern Flow
    
    
    1,156
    
    
    
    1,101
    
    
    
    3,883
    
    
    
    3,291Total
    
    $
    10,911
    
    
    $
    8,139
    
    
    $
    34,731
    
    
    $
    21,124Segment profit
(loss) (1):PowerSecure
    
    $
    2,408
    
    
    $
    1,576
    
    
    $
    8,087
    
    
    $
    2,349Southern Flow
    
    
    591
    
    
    
    667
    
    
    
    2,303
    
    
    
    2,006Other
    
    
    (1,026
    )
    
    
    (735
    )
    
    
    (3,655
    )
    
    
    (16,472
    )Total
    
    $
    1,973
    
    
    $
    1,508
    
    
    $
    6,735
    
    
    $
    (12,117
    )Capital
expenditures:PowerSecure
    
    $
    742
    
    
    $
    291
    
    
    $
    15,826
    
    
    $
    842Southern Flow
    
    
    152
    
    
    
    128
    
    
    
    231
    
    
    
    334Other
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    66Total
    
    $
    894
    
    
    $
    430
    
    
    $
    16,057
    
    
    $
    1,242Depreciation and
amortization:PowerSecure
    
    $
    479
    
    
    $
    332
    
    
    $
    1,345
    
    
    $
    927Southern Flow
    
    
    45
    
    
    
    37
    
    
    
    129
    
    
    
    104Other
    
    
    20
    
    
    
    17
    
    
    
    54
    
    
    
    53Total
    
    $
    544
    
    
    $
    386
    
    
    $
    1,528
    
    
    $
    1,084
 September 30,2008
    
    
    2007Total assets:PowerSecure
    
    $
    79,287
    
    
    $
    82,343Southern Flow
    
    
    11,922
    
    
    
    12,704Other
    
    
    14,688
    
    
    
    12,065Total
    
    $
    105,897
    
    
    $
    107,112
 
 (1)
    
    Segment profit (loss) represents operating income (loss). 24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
 Introduction
  Overview
    25




---



##### Table of Contents



Recent Developments
  26




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27




---



##### Table of Contents



Revenue backlog to be recognized after September 30, 2008
 Anticipated
    
    
    Estimated PrimaryDescription
    
    Revenue
    
    
    Recognition PeriodProject-based RevenueNear term
    
    $39 Million
    
    
    4Q08-2Q09Project-based RevenueLong term
    
    $26 Million
    
    
    2H09-2011Recurring Revenue
    
    $32 Million
    
    4Q08 through 2014Backlog to be recognized after September 30, 2008
    
    $97 Million
   Operating Segments
  28




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Distributed Generation and Energy Efficiency
    29




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##### Table of Contents



Natural Gas Measurement Services
  Results of Operations
  Third Quarter 2008 Compared to Third Quarter 2007
 Revenues
  Period-over-PeriodQuarter Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Segment Revenues:PowerSecure
    
    $
    28,706
    
    
    $
    22,128
    
    
    $
    6,578
    
    
    
    29.7
    %Southern Flow
    
    
    4,851
    
    
    
    4,101
    
    
    
    750
    
    
    
    18.3
    %Total
    
    $
    33,557
    
    
    $
    26,229
    
    
    $
    7,328
    
    
    
    27.9
    %
   30




---



##### Table of Contents



Quarter Ended September 30,2008
    
    
    2007(In thousands)Revenues from Publix projects
    
    $
    9,002
    
    
    $
    13,035All other PowerSecure subsidiary revenues
    
    
    19,704
    
    
    
    9,093Total PowerSecure subsidiary revenues
    
    $
    28,706
    
    
    $
    22,128Publix as a percentage of total
PowerSecure subsidiary revenues
    
    
    31.4
    %
    
    
    58.9
    %
   31




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Gross Profit and Gross Profit Margins
  Period-over-PeriodQuarter Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Segment Cost of Sales and
Services:PowerSecure
    
    $
    18,951
    
    
    $
    15,090
    
    
    $
    3,861
    
    
    
    25.6
    %Southern Flow
    
    
    3,695
    
    
    
    3,000
    
    
    
    695
    
    
    
    23.2
    %Total
    
    $
    22,646
    
    
    $
    18,090
    
    
    $
    4,556
    
    
    
    25.2
    %Segment Gross Profit:PowerSecure
    
    $
    9,755
    
    
    $
    7,038
    
    
    $
    2,717
    
    
    
    38.6
    %Southern Flow
    
    
    1,156
    
    
    
    1,101
    
    
    
    55
    
    
    
    5.0
    %Total
    
    $
    10,911
    
    
    $
    8,139
    
    
    $
    2,772
    
    
    
    34.1
    %Segment Gross Profit Margins:PowerSecure
    
    
    34.0
    %
    
    
    31.8
    %Southern Flow
    
    
    23.8
    %
    
    
    26.8
    %Total
    
    
    32.5
    %
    
    
    31.0
    %
    32




---



##### Table of Contents




    
    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;
    
    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
  33




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##### Table of Contents



Period-over-PeriodQuarter Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Operating Expenses:General and
administrative
    
    $
    7,113
    
    
    $
    5,124
    
    
    $
    1,989
    
    
    
    38.8
    %Selling, marketing
and service
    
    
    1,252
    
    
    
    1,115
    
    
    
    137
    
    
    
    12.3
    %Depreciation and
amortization
    
    
    544
    
    
    
    387
    
    
    
    157
    
    
    
    40.6
    %Research and
development
    
    
    29
    
    
    
    6
    
    
    
    23
    
    
    
    383.3
    %Total
    
    $
    8,938
    
    
    $
    6,632
    
    
    $
    2,306
    
    
    
    34.8
    %
  General and Administrative Expenses.
 Period-over-PeriodQuarter Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)PowerSecure Subsidiary
G&A Expense:Personnel costs
    
    $
    3,740
    
    
    $
    2,623
    
    
    $
    1,117
    
    
    
    42.6
    %Vehicle lease and rental
    
    
    676
    
    
    
    385
    
    
    
    291
    
    
    
    75.6
    %Insurance
    
    
    249
    
    
    
    200
    
    
    
    49
    
    
    
    24.5
    %Rent-office and
equipment
    
    
    206
    
    
    
    181
    
    
    
    25
    
    
    
    13.8
    %Professional fees and
consulting
    
    
    96
    
    
    
    119
    
    
    
    (23
    )
    
    
    -19.3
    %Travel
    
    
    212
    
    
    
    100
    
    
    
    112
    
    
    
    112.0
    %Other
    
    
    415
    
    
    
    404
    
    
    
    11
    
    
    
    2.7
    %Southern Flow G&A
Expense
    
    
    513
    
    
    
    394
    
    
    
    119
    
    
    
    30.2
    %Corporate Overhead
Expense
    
    
    1,006
    
    
    
    718
    
    
    
    288
    
    
    
    40.1
    %Total
    
    $
    7,113
    
    
    $
    5,124
    
    
    $
    1,989
    
    
    
    38.8
    %
  34




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##### Table of Contents



Selling, Marketing and Service Expenses.
 35




---



##### Table of Contents



Period-over-PeriodQuarter Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)PowerSecure Selling and
Marketing
Expense:Salaries
    
    $
    523
    
    
    $
    291
    
    
    $
    232
    
    
    
    79.7
    %Commission
    
    
    507
    
    
    
    608
    
    
    
    (101
    )
    
    
    -16.6
    %Travel
    
    
    148
    
    
    
    72
    
    
    
    76
    
    
    
    105.6
    %Advertising and promotion
    
    
    72
    
    
    
    89
    
    
    
    (17
    )
    
    
    -19.1
    %Bad debt expense
    
    
    (5
    )
    
    
    51
    
    
    
    (56
    )
    
    
    -109.8
    %Other business
development costs
    
    
    7
    
    
    
    4
    
    
    
    3
    
    
    
    75.0
    %Total
    
    $
    1,252
    
    
    $
    1,115
    
    
    $
    137
    
    
    
    12.3
    %
  Depreciation and Amortization Expenses.
 Research and Development Expenses.
 Other Income and Expenses
  36




---



##### Table of Contents



Period-over-PeriodQuarter Ended September 30,
    
    Difference2008
    
    2007
    
    $
    
    %(In thousands)Other Income and
(Expenses):Management fees
    
    $
    137
    
    
    $
    103
    
    
    $
    34
    
    
    
    33.0
    %Interest income
    
    
    89
    
    
    
    166
    
    
    
    (77
    )
    
    
    -46.4
    %Interest and
finance charges
    
    
    (55
    )
    
    
    (19
    )
    
    
    (36
    )
    
    
    -189.5
    %Equity income
    
    
    839
    
    
    
    656
    
    
    
    183
    
    
    
    27.9
    %Other income
    
    
    
    
    
    
    107
    
    
    
    (107
    )
    
    
    -100.0
    %Minority interest
    
    
    
    
    
    
    6
    
    
    
    (6
    )
    
    
    -100.0
    %Income tax benefit
(provision)
    
    
    (70
    )
    
    
    (162
    )
    
    
    92
    
    
    
    56.8
    %
 Management Fees.
 Interest Income.
 Interest and Finance Charges.
 Equity Income.
 37




---



##### Table of Contents



Other Income.
 Minority Interest
 Income Taxes.
 Nine Month Period 2008 Compared to Nine Month Period 2007
 Revenues
  38




---



##### Table of Contents



Period-over-PeriodNine Months Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Segment Revenues:PowerSecure
    
    $
    94,869
    
    
    $
    62,257
    
    
    $
    32,612
    
    
    
    52.4
    %Southern Flow
    
    
    14,215
    
    
    
    11,979
    
    
    
    2,236
    
    
    
    18.7
    %Total
    
    $
    109,084
    
    
    $
    74,236
    
    
    $
    34,848
    
    
    
    46.9
    %
    Nine Months Ended September 30,2008
    
    
    2007(In thousands)Revenues from Publix projects
    
    $
    42,093
    
    
    $
    34,932All other PowerSecure subsidiary revenues
    
    
    52,776
    
    
    
    27,325Total PowerSecure subsidiary revenues
    
    $
    94,869
    
    
    $
    62,257Publix as a percentage of total
PowerSecure subsidiary revenues
    
    
    44.4
    %
    
    
    56.1
    %
  39




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##### Table of Contents



Gross Profit and Gross Profit Margins
  Period-over-PeriodNine Months Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Segment Cost of Sales and Services:PowerSecure
    
    $
    64,021
    
    
    $
    44,424
    
    
    $
    19,597
    
    
    
    44.1
    %Southern Flow
    
    
    10,332
    
    
    
    8,688
    
    
    
    1,644
    
    
    
    18.9
    %Total
    
    $
    74,353
    
    
    $
    53,112
    
    
    $
    21,241
    
    
    
    40.0
    %Segment Gross Profit:PowerSecure
    
    $
    30,848
    
    
    $
    17,833
    
    
    $
    13,015
    
    
    
    73.0
    %Southern Flow
    
    
    3,883
    
    
    
    3,291
    
    
    
    592
    
    
    
    18.0
    %Total
    
    $
    34,731
    
    
    $
    21,124
    
    
    $
    13,607
    
    
    
    64.4
    %Segment Gross Profit Margins:PowerSecure
    
    
    32.5
    %
    
    
    28.6
    %Southern Flow
    
    
    27.3
    %
    
    
    27.5
    %Total
    
    
    31.8
    %
    
    
    28.5
    %
   40




---



##### Table of Contents



Operating Expense
  Period-over-PeriodNine Months Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Operating Expenses:General and
administrative
    
    $
    21,910
    
    
    $
    15,478
    
    
    $
    6,432
    
    
    
    41.6
    %Selling, marketing
and service
    
    
    4,465
    
    
    
    2,431
    
    
    
    2,034
    
    
    
    83.7
    %Depreciation and
amortization
    
    
    1,528
    
    
    
    1,084
    
    
    
    444
    
    
    
    41.0
    %Research and
development
    
    
    93
    
    
    
    109
    
    
    
    (16
    )
    
    
    -14.7
    %Restructuring
charges
    
    
    
    
    
    
    14,139
    
    
    
    (14,139
    )
    
    
    -100.0
    %Total
    
    $
    27,996
    
    
    $
    33,241
    
    
    $
    (5,245
    )
    
    
    -15.8
    %
 General and Administrative Expenses.
 Period-over-PeriodNine Months Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)PowerSecure Subsidiary G&A Expense:Personnel costs
    
    $
    11,063
    
    
    $
    7,927
    
    
    $
    3,136
    
    
    
    39.6
    %Vehicle lease and rental
    
    
    1,794
    
    
    
    1,108
    
    
    
    686
    
    
    
    61.9
    %Insurance
    
    
    706
    
    
    
    683
    
    
    
    23
    
    
    
    3.4
    %Rent-office and equipment
    
    
    656
    
    
    
    473
    
    
    
    183
    
    
    
    38.7
    %Professional fees and
consulting
    
    
    435
    
    
    
    500
    
    
    
    (65
    )
    
    
    -13.0
    %Travel
    
    
    667
    
    
    
    328
    
    
    
    339
    
    
    
    103.4
    %Other
    
    
    1,549
    
    
    
    1,005
    
    
    
    544
    
    
    
    54.1
    %Southern Flow G&A Expense
    
    
    1,438
    
    
    
    1,173
    
    
    
    265
    
    
    
    22.6
    %Corporate Overhead Expense
    
    
    3,602
    
    
    
    2,281
    
    
    
    1,321
    
    
    
    57.9
    %Total
    
    $
    21,910
    
    
    $
    15,478
    
    
    $
    6,432
    
    
    
    41.6
    %
  41




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Selling, Marketing and Service Expenses.
 42




---



##### Table of Contents



Period-over-PeriodNine Months Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)PowerSecure Selling and Marketing Expense:Salaries
    
    $
    1,621
    
    
    $
    821
    
    
    $
    800
    
    
    
    97.4
    %Commission
    
    
    1,841
    
    
    
    1,125
    
    
    
    716
    
    
    
    63.6
    %Travel
    
    
    472
    
    
    
    235
    
    
    
    237
    
    
    
    100.9
    %Advertising and
promotion
    
    
    272
    
    
    
    149
    
    
    
    123
    
    
    
    82.6
    %Bad debt expense
    
    
    246
    
    
    
    92
    
    
    
    154
    
    
    
    167.4
    %Other business
development costs
    
    
    13
    
    
    
    9
    
    
    
    4
    
    
    
    44.4
    %Total
    
    $
    4,465
    
    
    $
    2,431
    
    
    $
    2,034
    
    
    
    83.7
    %
  Depreciation and Amortization Expenses.
 Research and Development Expenses.
 Restructuring Charges.
 Other Income and Expenses
  43




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##### Table of Contents



Period-over-PeriodNine Months Ended September 30,
    
    
    Difference2008
    
    
    2007
    
    
    $
    
    
    %(In thousands)Other Income and
(Expenses):Management fees
    
    $
    450
    
    
    $
    306
    
    
    $
    144
    
    
    
    47.1
    %Interest income
    
    
    434
    
    
    
    517
    
    
    
    (83
    )
    
    
    -16.1
    %Interest and
finance charges
    
    
    (158
    )
    
    
    (33
    )
    
    
    (125
    )
    
    
    -378.8
    %Equity income
    
    
    3,030
    
    
    
    1,977
    
    
    
    1,053
    
    
    
    53.3
    %Other income
    
    
    
    
    
    
    663
    
    
    
    (663
    )
    
    
    -100.0
    %Minority interest
    
    
    
    
    
    
    6
    
    
    
    (6
    )
    
    
    -100.0
    %Income tax benefit
(provision)
    
    
    (684
    )
    
    
    (638
    )
    
    
    (46
    )
    
    
    -7.2
    %
 Management Fees.
 Interest Income.
 Interest and Finance Charges.
 Equity Income.
 Other Income.
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Minority Interest
 Income Taxes.
 Fluctuations
  
    
    the size, timing and terms of sales and orders, including large customer orders, such
as the significant Publix orders, as well as the effects of customers delaying, deferring
or canceling purchase orders or making smaller purchases than expected;
    
    our ability to continue to grow our business and generate increased revenues from
non-Publix customers;
    
    our ability to increase our long-term revenues through recurring revenue projects;
    
    the effects of the current and future economic and market challenges on our business
and revenues, especially due to these effects of these challenges on the timing of orders
from our customers;
    
    general economic and political conditions such as the current economic situation and
the volatility and disruption of the capital and the credit markets;
    
    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
fluctuations in the cost of raw materials;
    
    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;
    
    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;
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
    
    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;
    
    changes in our operating expenses;
    
    changes in our valuation allowance for our net deferred tax asset.
    
    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;
    
    the development and maintenance of business relationships with strategic partners;
    
    economic conditions in the energy industry, especially in the natural gas and
electricity sectors including the effect of changes in energy prices;
    
    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 acquisitions, including investments in recurring
revenue projects;
    
    software purchases or development;
    
    debt service requirements;
    
    restructuring obligations;
    
    deferred compensation obligations; and
    
    business and technology acquisitions and other growth transactions.
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Working Capital
  Cash Flows
  Nine Months Ended September 30,2008
    
    
    2007(In thousands)Net cash flows provided by (used in) operating
activities
    
    $
    (6,358
    )
    
    $
    11,120Net cash flows used in investing activities
    
    
    (16,760
    )
    
    
    (1,240
    )Net cash provided by financing activities
    
    
    2,722
    
    
    
    797Net increase (decrease) in cash and cash equivalents
    
    $
    (20,396
    )
    
    $
    10,677
 Cash Flows Provided by (Used in) Operating Activities
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Cash Used in Investing Activities
  Cash Provided by Financing Activities
  Capital Spending
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Indebtedness
 Restructuring Obligations.
 Working Capital Credit Facility.
  50




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Equipment Line.
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Preferred Stock Redemption
 Contractual Obligations and Commercial Commitments
  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
    
    
    2,487,000
    
    
    
    32,000
    
    
    
    258,000
    
    
    
    258,000
    
    
    
    1,939,000Restructuring obligations
    
    
    2,120,000
    
    
    
    438,000
    
    
    
    1,682,000
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    6,000
    
    
    
    
    
    
    
    4,000
    
    
    
    2,000
    
    
    
    Operating leases
    
    
    2,448,000
    
    
    
    222,000
    
    
    
    1,268,000
    
    
    
    615,000
    
    
    
    343,000Deferred compensation (3)
    
    
    2,411,000
    
    
    
    83,000
    
    
    
    666,000
    
    
    
    666,000
    
    
    
    996,000Series B preferred stock
    
    
    104,000
    
    
    
    104,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    9,576,000
    
    
    $
    879,000
    
    
    $
    3,878,000
    
    
    $
    1,541,000
    
    
    $
    3,278,000
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(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 September 30, 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
  Critical Accounting Policies
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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
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55




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Cautionary Note Regarding Forward-Looking Statements
  56




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
    
    our prospects, including our future revenues, the realization of our current revenue
backlog, 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, and
the quality and performance of our products and services and their ability to meet customer
performance requirements;
    
    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, including
capital requirements to execute recurring revenue model projects, debt service and business
growth needs;
    
    industry trends and customer preferences;
    
    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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
  58




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Commodity Price Risk
 Foreign Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Limitations in Control Systems
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PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  The quality and performance of our distributed generation systems and related products and
systems is, in part, dependent on the quality of component parts we source from various
manufacturers, which makes us susceptible to performance issues that could materially and
adversely affect our business and financial results.
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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, adversely affect 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 fires that occurred at the
programs facilities earlier this year, that can result in loss of life,
personal injuries, 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;
    
    the operational performance of our disposal facilities, and their ability to process
water for our customers on a timely basis;
    
    reliance upon significant suppliers and customers by the program; and
    
    changes in technology.
  The
recent downturn in general economic and market conditions and
volatility and disruption in the capital markets has affected us and could materially and adversely
affect our business and financial results in future periods.
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Because our future success depends, in part, upon our recurring revenue project business
model, which requires our up-front investment in capital for distributed generation equipment, if
we do not receive substantially all of the benefits anticipated by those projects or if one or
more of the risks associated with those projects materializes, then our financial condition and
results of operations would be materially and adversely affected.
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
  
  Disputes arising with the customer about the projects that ultimately results in either the
customer requiring us, or in us determining, to remove the equipment from the customers site,
which could result in a significant loss in
revenues and cash flow until the equipment can be
re-deployed in a new project or, if the equipment is not re-usable a significant write-down in our
assets.
    
    Our inability to receive the intended benefits from the project due to changes associated with
the distributed generation model, such as due to changes in tariff structures or customer
requirements.
    
  Our inability to receive recurring revenues due to customer issues, such as deterioration in the
customers ability to pay our ongoing fees or a dispute with the customer delaying, deferring or
reducing the project fees payable to us.
    
    Failure of the equipment to properly function and to perform and to deliver the intended
benefits, which could result in claims by the customer for damages to its equipment, lost revenues
and profits or safety issues and in the attempt by the customer to cancel the contract related to
the project or to refuse or to delay making payments in amounts we believe are due to us under
those contracts.
    
    New regulations, or changes in the interpretation of existing regulations, such as those
pertaining to air emissions or those relating to the requirements and conditions for the ownership
of power generation systems, could render our projects no longer economically viable, or
technically obsolete, or legally impractical.
    
    Injuries to persons caused by problems or failures of equipment owned by us.
    
    Environmental effects, such as fuel spills, could occur requiring costly and time-consuming
remediation efforts and potentially subjecting us to fines and penalties related to environmental
requirements and regulations.
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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:    November 6, 2008
    By:
    /s/ Sidney HintonSidney HintonPresident and Chief Executive OfficerDate:    November 6, 2008
    By:
    /s/ Christopher T. HutterChristopher T. HutterVice President, Chief Financial Officer,
Treasurer and Assistant Secretary 67