##### 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, 2007
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1609 Heritage Commerce CourtWake Forest, North Carolina
    
    27587(Address of principal executive offices)
    
    (Zip code)
 
 þ o
  o þ o
 o þ




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##### 



POWERSECURE INTERNATIONAL, INC.
 FORM 10-Q
For the Quarterly Period Ended September 30, 2007
 TABLE OF CONTENTS
  
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Consolidated Balance Sheets -
September 30, 2007 and December 31, 2006
    
    
    3Unaudited Consolidated Statements of Operations -
For the Three and Nine Months Ended September 30, 2007 and
September 30, 2006
    
    
    5Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 2007 and
September 30, 2006
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    46PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    47Item 1A. Risk Factors
    
    
    47Item 6. Exhibits
    
    
    47Signatures
    
    
    49EX-10.5EX-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 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    26,593,838
    
    
    $
    15,916,460Trade receivables, net of allowance for doubtful accounts of $248,016 and $225,004, respectively
    
    
    39,707,646
    
    
    
    40,255,372Other receivables
    
    
    152,217
    
    
    
    431,437Inventories
    
    
    20,455,786
    
    
    
    12,882,167Deferred income taxes
    
    
    231,990
    
    
    
    231,990Prepaid expenses and other current assets
    
    
    908,262
    
    
    
    818,583Total current assets
    
    
    88,049,739
    
    
    
    70,536,009PROPERTY, PLANT AND EQUIPMENT:Equipment
    
    
    7,015,433
    
    
    
    6,524,549Vehicles
    
    
    172,659
    
    
    
    166,894Furniture and fixtures
    
    
    565,176
    
    
    
    568,212Land, building and improvements
    
    
    1,130,809
    
    
    
    1,073,625Total property, plant and equipment, at cost
    
    
    8,884,077
    
    
    
    8,333,280Less accumulated depreciation and amortization
    
    
    4,307,603
    
    
    
    3,889,401Property, plant and equipment, net
    
    
    4,576,474
    
    
    
    4,443,879OTHER ASSETS:Goodwill
    
    
    9,146,409
    
    
    
    9,146,409Intangible rights and capitalized software costs, net of accumulatedamortization of $1,998,834 and $1,543,024, respectively
    
    
    1,761,102
    
    
    
    1,763,970Investment in unconsolidated affiliate
    
    
    3,451,145
    
    
    
    3,513,501Assets of discontinued operations
    
    
    
    
    
    
    144,490Other assets
    
    
    126,708
    
    
    
    151,177Total other assets
    
    
    14,485,364
    
    
    
    14,719,547TOTAL
    
    $
    107,111,577
    
    
    $
    89,699,435
 See accompanying notes to unaudited consolidated financial statements.
 3




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##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
 September 30,
    
    
    December 31,2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    5,274,902
    
    
    $
    15,090,540Accrued and other liabilities
    
    
    39,876,431
    
    
    
    16,026,867Restructuring charges payable
    
    
    8,327,864
    
    
    
    Current income taxes payable
    
    
    391,484
    
    
    
    570,217Current unrecognized tax benefit
    
    
    62,406
    
    
    
    Capital lease obligations
    
    
    1,367
    
    
    
    4,749Total current liabilities
    
    
    53,934,454
    
    
    
    31,692,373LONG-TERM NOTES PAYABLE
    
    
    
    
    
    
    NON-CURRENT CAPITAL LEASE OBLIGATIONS
    
    
    5,684
    
    
    
    7,431NON-CURRENT UNRECOGNIZED TAX BENEFIT
    
    
    285,117
    
    
    
    NON-CURRENT RESTRUCTURING CHARGES
    
    
    2,127,110
    
    
    
    COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN SUBSIDIARY
    
    
    24,191
    
    
    
    STOCKHOLDERS EQUITY:Preferred stock  undesignated, $.01 par value; 2,000,000 shares
authorized; none issued and outstandingPreferred stock  Series C, $.01 par value; 500,000 shares
authorized; none issued and outstandingCommon stock, $.01 par value; 25,000,000 shares
authorized; 16,806,099 and 15,808,634 shares issued
and outstanding, respectively
    
    
    168,061
    
    
    
    158,086Additional paid-in-capital
    
    
    111,484,413
    
    
    
    102,287,543Deferred stock compensation
    
    
    (7,157,200
    )
    
    
    Accumulated deficit
    
    
    (53,760,253
    )
    
    
    (44,445,998
    )Total stockholders equity
    
    
    50,735,021
    
    
    
    57,999,631TOTAL
    
    $
    107,111,577
    
    
    $
    89,699,435
 See accompanying notes to unaudited consolidated financial statements.
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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Consolidated
Statements of Operations  (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUES:Sales and services
    
    $
    27,742,594
    
    
    $
    33,125,164
    
    
    $
    77,944,689
    
    
    $
    83,767,976Other
    
    
    268,712
    
    
    
    319,969
    
    
    
    1,111,656
    
    
    
    752,897Total revenues
    
    
    28,011,306
    
    
    
    33,445,133
    
    
    
    79,056,345
    
    
    
    84,520,873COSTS AND EXPENSES:Cost of sales and services
    
    
    18,785,036
    
    
    
    24,055,211
    
    
    
    54,679,605
    
    
    
    60,580,104General and administrative
    
    
    5,204,688
    
    
    
    5,535,861
    
    
    
    15,713,866
    
    
    
    13,473,641Selling, marketing and service
    
    
    1,358,185
    
    
    
    936,415
    
    
    
    3,232,820
    
    
    
    2,868,346Depreciation and amortization
    
    
    396,259
    
    
    
    306,332
    
    
    
    1,113,292
    
    
    
    682,636Research and development
    
    
    199,088
    
    
    
    163,411
    
    
    
    698,450
    
    
    
    536,095Restructuring charges
    
    
    
    
    
    
    
    
    
    
    14,139,216
    
    
    
    Interest, finance charges and other
    
    
    19,908
    
    
    
    13,898
    
    
    
    35,664
    
    
    
    148,609Total costs and expenses
    
    
    25,963,164
    
    
    
    31,011,128
    
    
    
    89,612,913
    
    
    
    78,289,431Income (loss) from continuing operations
before minority interest, income taxes,
equity income and litigation settlements
    
    
    2,048,142
    
    
    
    2,434,005
    
    
    
    (10,556,568
    )
    
    
    6,231,442Equity in income of unconsolidated affiliate
    
    
    656,186
    
    
    
    627,020
    
    
    
    1,977,481
    
    
    
    1,878,462Income from litigation settlements, net
    
    
    107,100
    
    
    
    
    
    
    
    385,434
    
    
    
    Minority interest
    
    
    5,809
    
    
    
    
    
    
    
    5,809
    
    
    
    (72,464
    )Income taxes
    
    
    (162,121
    )
    
    
    (150,496
    )
    
    
    (638,398
    )
    
    
    (262,010
    )Income (loss) from continuing operations
    
    
    2,655,116
    
    
    
    2,910,529
    
    
    
    (8,826,242
    )
    
    
    7,775,430Loss from disposal of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (140,490
    )
    
    
    Net income (loss)
    
    $
    2,655,116
    
    
    $
    2,910,529
    
    
    $
    (8,966,732
    )
    
    $
    7,775,430PER SHARE AMOUNTS (Note 1):Income (loss) from continuing operations:Basic
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    (0.55
    )
    
    $
    0.52Diluted
    
    $
    0.15
    
    
    $
    0.17
    
    
    $
    (0.55
    )
    
    $
    0.47Net income (loss):Basic
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    (0.56
    )
    
    $
    0.52Diluted
    
    $
    0.15
    
    
    $
    0.17
    
    
    $
    (0.56
    )
    
    $
    0.47WEIGHTED AVERAGE COMMONSHARES OUTSTANDING:Basic
    
    
    16,157,500
    
    
    
    15,730,954
    
    
    
    15,975,083
    
    
    
    14,818,667Diluted
    
    
    17,153,155
    
    
    
    17,250,856
    
    
    
    15,975,083
    
    
    
    16,507,783
 See accompanying notes to unaudited consolidated financial statements.
 5




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##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows

(unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (8,966,732
    )
    
    $
    7,775,430Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities:Loss on disposal of discontinued operations
    
    
    140,490
    
    
    
    Restructuring charges
    
    
    14,139,216
    
    
    
    Depreciation and amortization
    
    
    1,113,292
    
    
    
    682,636Minority interest in subsidiary
    
    
    (5,809
    )
    
    
    72,464Loss on disposal of property, plant and equipment
    
    
    73,963
    
    
    
    33,294Equity in income of unconsolidated affiliate
    
    
    (1,977,481
    )
    
    
    (1,878,462
    )Distributions from unconsolidated affiliate
    
    
    1,994,462
    
    
    
    361,302Stock compensation expense
    
    
    1,027,486
    
    
    
    578,141Changes in other assets and liabilities:Trade receivables, net
    
    
    547,726
    
    
    
    (22,328,032
    )Inventories
    
    
    (7,573,619
    )
    
    
    (8,194,027
    )Other current assets
    
    
    191,541
    
    
    
    (277,138
    )Other noncurrent assets
    
    
    24,469
    
    
    
    (118,257
    )Accounts payable
    
    
    (9,815,638
    )
    
    
    5,497,097Accrued restructuring charges
    
    
    (3,685,611
    )
    
    
    Income taxes payable
    
    
    (178,733
    )
    
    
    Accrued and other liabilities
    
    
    24,069,750
    
    
    
    13,095,743Net cash provided by (used in) continuing operations
    
    
    11,118,772
    
    
    
    (4,699,809
    )Net cash provided by discontinued operations of MCM
    
    
    2,000
    
    
    
    48,331Net cash provided by (used in) operating activities
    
    
    11,120,772
    
    
    
    (4,651,478
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (779,457
    )
    
    
    (1,117,194
    )Additions to patents and software development
    
    
    (462,481
    )
    
    
    (1,590,690
    )Investment in unconsolidated affiliate
    
    
    
    
    
    
    (1,260,360
    )Proceeds from sale of property, plant and equipment
    
    
    1,700
    
    
    
    16,375Net cash used in investing activities
    
    
    (1,240,238
    )
    
    
    (3,951,869
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from private placement, net
    
    
    
    
    
    
    26,221,123Proceeds from stock warrant and option exercises
    
    
    1,022,159
    
    
    
    2,973,254Net payments on line of credit
    
    
    
    
    
    
    (1,314,200
    )Principal payments on long-term notes payable
    
    
    
    
    
    
    (3,375,494
    )Cash distributions to minority interests
    
    
    
    
    
    
    (381
    )Payments on preferred stock redemptions
    
    
    (220,186
    )
    
    
    (80,735
    )Payments on capital lease obligations
    
    
    (5,129
    )
    
    
    (3,213
    )Net cash provided by financing activities
    
    
    796,844
    
    
    
    24,420,354NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    10,677,378
    
    
    
    15,817,007CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD
    
    
    15,916,460
    
    
    
    2,188,310CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    26,593,838
    
    
    $
    18,005,317
 See accompanying notes to unaudited consolidated financial statements.
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##### Table of Contents



POWERSECURE
INTERNATIONAL, INC. AND SUBSIDIARIES
 
 Notes to Unaudited Consolidated Financial Statements
 1. Summary of Significant Accounting Policies
 Organization and Name Change
   Principles of Consolidation 
 Use of Estimates 
 7




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Basic and Diluted Earnings (Loss) Per Share 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Income (loss) from continuing operations
    
    $
    2,655,116
    
    
    $
    2,910,529
    
    
    $
    (8,826,242
    )
    
    $
    7,775,430Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (140,490
    )
    
    
    Net income (loss)
    
    $
    2,655,116
    
    
    $
    2,910,529
    
    
    $
    (8,966,732
    )
    
    $
    7,775,430Basic weighted-average common
shares outstanding in period
    
    
    16,157,500
    
    
    
    15,730,954
    
    
    
    15,975,083
    
    
    
    14,818,667Add dilutive effects of stock options,
warrants, and restricted stock awards
    
    
    995,655
    
    
    
    1,519,902
    
    
    
    
    
    
    
    1,689,116Diluted weighted-average common
shares outstanding in period
    
    
    17,153,155
    
    
    
    17,250,856
    
    
    
    15,975,083
    
    
    
    16,507,783Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    (0.55
    )
    
    $
    0.52Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Basic earnings (loss) per common share
    
    $
    0.16
    
    
    $
    0.19
    
    
    $
    (0.56
    )
    
    $
    0.52Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    0.15
    
    
    $
    0.17
    
    
    $
    (0.55
    )
    
    $
    0.47Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Diluted earnings (loss) per common share
    
    $
    0.15
    
    
    $
    0.17
    
    
    $
    (0.56
    )
    
    $
    0.47
 Statement of Cash Flows 
 Minority Interest
 8




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Financial Instruments
 Reclassification
 2. Investment in Unconsolidated Affiliate
   September 30,
    
    
    December 31,2007
    
    
    2006Total current assets
    
    $
    3,907,256
    
    
    $
    2,816,175Property, plant and equipment, net
    
    
    7,250,624
    
    
    
    5,828,718Total other assets
    
    
    15,666
    
    
    
    9,833Total assets
    
    $
    11,173,546
    
    
    $
    8,654,726Total current liabilities
    
    $
    1,424,483
    
    
    $
    1,081,382Long-term note payable
    
    
    2,563,688
    
    
    
    341,142Total shareholders equity
    
    
    7,185,375
    
    
    
    7,232,202Total liabilities and shareholders equity
    
    $
    11,173,546
    
    
    $
    8,654,726
 9




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Total revenues
    
    $
    3,189,887
    
    
    $
    2,866,781
    
    
    $
    9,493,031
    
    
    $
    8,357,557Total costs and expenses
    
    
    1,380,367
    
    
    
    1,137,685
    
    
    
    4,039,859
    
    
    
    3,374,494Net income
    
    $
    1,809,520
    
    
    $
    1,729,096
    
    
    $
    5,453,172
    
    
    $
    4,983,063
 3. Long-Term Debt
     10




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4. Restructuring Charges
  11




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12




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5. Employment and Non-Competition Agreement
  13




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
    
    A total of 300,000 restricted shares will cliff vest in their entirety on August 8,
2012, five years after the grant date, provided Mr. Hinton remains employed with the
Company on that date.
    
    The other 300,000 restricted shares vest in five equal annual installments, after the
end fiscal 2007 and the subsequent four fiscal years, based on the Company achieving a
performance target each year relating to its income from continuing operations, excluding
restructuring charges related to the second quarter 2007 retirement of the Companys
founders and the relocation of the Companys principal executive offices to Wake Forest,
North Carolina.
    
    Upon a change in control of the Company, all restricted shares remaining to vest will
automatically vest.
  6. Discontinued Operations
  7. Income Taxes
  14




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8. Share-Based Compensation
    15




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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
    
    
    1,321,911
    
    
    $
    3.84
    
    
    
    5.56
    
    
    $
    8.71
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2005
    
    
    2,289,143
    
    
    $
    2.98GrantedDirectors
    
    
    22,500
    
    
    
    14.78GrantedEmployees
    
    
    271,000
    
    
    
    12.62Exercised
    
    
    (473,669
    )
    
    
    2.53Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (12,500
    )
    
    
    8.57Balance, September 30, 2006
    
    
    2,096,474
    
    
    $
    4.42
    
    
    
    6.74
    
    
    $
    7.52Exercisable, September 30, 2006
    
    
    1,544,932
    
    
    $
    3.00
    
    
    
    5.90
    
    
    $
    8.94
  16




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September 30,
    
    September 30,2007
    
    2006Expected stock price volatilility
    
    
    75.7
    %
    
    
    88.0
    %Risk Free interest rate
    
    
    5.09
    %
    
    
    4.68
    %Annual dividends
    
    $
    
    
    
    $
    Expected life  employees
    
    5
    years
    
    4.1
    yearsExpected life  directors
    
    5
    years
    
    6
    years
     9. Commitments and Contingencies and Income from Litigation Settlements
 Income from Litigation Settlements
  17




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##### Table of Contents



Other Matters 
   Preferred Stock Redemption 
 18




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10. Segment Information
  Distributed Generation
   Natural Gas Measurement Services
 19




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Automated Energy Data Collection and Telemetry TM
   20




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Summarized Segment Financial Information
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:PowerSecure
    
    $
    22,128
    
    
    $
    28,221
    
    
    $
    62,257
    
    
    $
    68,964Southern Flow
    
    
    4,101
    
    
    
    3,941
    
    
    
    11,979
    
    
    
    12,255Metretek Florida
    
    
    1,513
    
    
    
    964
    
    
    
    3,708
    
    
    
    2,549Other
    
    
    269
    
    
    
    320
    
    
    
    1,112
    
    
    
    753Total
    
    $
    28,011
    
    
    $
    33,446
    
    
    $
    79,056
    
    
    $
    84,521Segment profit (loss):PowerSecure
    
    $
    1,576
    
    
    $
    2,767
    
    
    $
    2,349
    
    
    $
    6,563Southern Flow
    
    
    789
    
    
    
    710
    
    
    
    2,150
    
    
    
    2,196Metretek Florida
    
    
    292
    
    
    
    (5
    )
    
    
    485
    
    
    
    (134
    )Other
    
    
    (609
    )
    
    
    (1,038
    )
    
    
    (15,541
    )
    
    
    (2,394
    )Total
    
    $
    2,048
    
    
    $
    2,434
    
    
    $
    (10,557
    )
    
    $
    6,231Capital expenditures:PowerSecure
    
    $
    291
    
    
    $
    1,759
    
    
    $
    842
    
    
    $
    2,587Southern Flow
    
    
    128
    
    
    
    26
    
    
    
    334
    
    
    
    72Metretek Florida
    
    
    11
    
    
    
    20
    
    
    
    66
    
    
    
    21Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Total
    
    $
    430
    
    
    $
    1,805
    
    
    $
    1,242
    
    
    $
    2,708Depreciation and amortization:PowerSecure
    
    $
    332
    
    
    $
    228
    
    
    $
    927
    
    
    $
    446Southern Flow
    
    
    37
    
    
    
    30
    
    
    
    104
    
    
    
    90Metretek Florida
    
    
    10
    
    
    
    29
    
    
    
    29
    
    
    
    90Other
    
    
    17
    
    
    
    19
    
    
    
    53
    
    
    
    57Total
    
    $
    396
    
    
    $
    306
    
    
    $
    1,113
    
    
    $
    683
 September 30,2007
    
    
    2006Total assets:PowerSecure
    
    $
    82,343
    
    
    $
    49,907Southern Flow
    
    
    12,704
    
    
    
    11,564Metretek Florida
    
    
    4,725
    
    
    
    3,875Other
    
    
    7,340
    
    
    
    19,028Total
    
    $
    107,112
    
    
    $
    84,374
 21




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Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
 Introduction
  Overview
  
    
    PowerSecure, which designs, sells and manages distributed generation systems;
    
    Southern Flow, which provides natural gas measurement services; and
    
    Metretek Florida, which designs, manufactures and sells data collection and energy
measurement monitoring systems.
    22




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25




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Critical Accounting Policies
   Results of Operations
  26




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(all amounts reported in thousands)Revenues:PowerSecure
    
    $
    22,128
    
    
    $
    28,221
    
    
    $
    62,257
    
    
    $
    68,964Southern Flow
    
    
    4,101
    
    
    
    3,941
    
    
    
    11,979
    
    
    
    12,255Metretek Florida
    
    
    1,513
    
    
    
    964
    
    
    
    3,708
    
    
    
    2,549Other
    
    
    269
    
    
    
    320
    
    
    
    1,112
    
    
    
    753Total
    
    $
    28,011
    
    
    $
    33,446
    
    
    $
    79,056
    
    
    $
    84,521Gross Profit:PowerSecure
    
    $
    7,038
    
    
    $
    7,468
    
    
    $
    17,833
    
    
    $
    18,337Southern Flow
    
    
    1,101
    
    
    $
    1,092
    
    
    $
    3,291
    
    
    $
    3,377Metretek Florida
    
    
    818
    
    
    
    510
    
    
    
    2,141
    
    
    
    1,474Total
    
    $
    8,957
    
    
    $
    9,070
    
    
    $
    23,265
    
    
    $
    23,188Segment Profit (Loss):PowerSecure
    
    $
    1,576
    
    
    $
    2,767
    
    
    $
    2,349
    
    
    $
    6,563Southern Flow
    
    
    789
    
    
    
    710
    
    
    
    2,150
    
    
    
    2,196Metretek Florida
    
    
    292
    
    
    
    (5
    )
    
    
    485
    
    
    
    (134
    )Other
    
    
    (609
    )
    
    
    (1,038
    )
    
    
    (15,541
    )
    
    
    (2,394
    )Total
    
    $
    2,048
    
    
    $
    2,434
    
    
    $
    (10,557
    )
    
    $
    6,231
    27




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®
  28




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Third Quarter 2007 Compared to Third Quarter 2006
 Revenues.
     Costs and Expenses.
 29




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Quarter-over-QuarterQuarter Ended September 30,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %(In thousands)Costs and Expenses:Costs of Sales and ServicesPowerSecure
    
    $
    15,090
    
    
    $
    20,752
    
    
    $
    (5,662
    )
    
    
    -27
    %Southern Flow
    
    
    3,000
    
    
    
    2,849
    
    
    
    151
    
    
    
    5
    %Metretek Florida
    
    
    695
    
    
    
    454
    
    
    
    241
    
    
    
    53
    %Total
    
    
    18,785
    
    
    
    24,055
    
    
    
    (5,270
    )
    
    
    -22
    %General and administrative
    
    
    5,205
    
    
    
    5,536
    
    
    
    (331
    )
    
    
    -6
    %Selling, marketing and service
    
    
    1,358
    
    
    
    936
    
    
    
    422
    
    
    
    45
    %Depreciation and amortization
    
    
    396
    
    
    
    306
    
    
    
    90
    
    
    
    29
    %Research and development
    
    
    199
    
    
    
    163
    
    
    
    36
    
    
    
    22
    %Interest, finance charges and
other
    
    
    20
    
    
    
    14
    
    
    
    6
    
    
    
    43
    %Income taxes
    
    
    162
    
    
    
    150
    
    
    
    12
    
    
    
    8
    %
      30




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Equity in Income of Unconsolidated Affiliate.
 31




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Nine Month Period 2007 Compared to Nine Month Period 2006
 Revenues.
     Costs and Expenses.
 32




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Period-over-PeriodNine Months Ended September 30,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %(In thousands)Costs and Expenses:Costs of Sales and ServicesPowerSecure
    
    $
    44,424
    
    
    $
    50,627
    
    
    $
    (6,203
    )
    
    
    -12
    %Southern Flow
    
    
    8,688
    
    
    
    8,878
    
    
    
    (190
    )
    
    
    -2
    %Metretek Florida
    
    
    1,567
    
    
    
    1,075
    
    
    
    492
    
    
    
    46
    %Total
    
    
    54,679
    
    
    
    60,580
    
    
    
    (5,901
    )
    
    
    -10
    %General and administrative
    
    
    15,714
    
    
    
    13,474
    
    
    
    2,240
    
    
    
    17
    %Selling, marketing and service
    
    
    3,233
    
    
    
    2,868
    
    
    
    365
    
    
    
    13
    %Depreciation and amortization
    
    
    1,113
    
    
    
    683
    
    
    
    430
    
    
    
    63
    %Research and development
    
    
    698
    
    
    
    536
    
    
    
    162
    
    
    
    30
    %Restructuring charges
    
    
    14,139
    
    
    
    
    
    
    
    14,139
    
    

 
 naInterest,
finance charges and other
    
    
    36
    
    
    
    149
    
    
    
    (113
    )
    
    
    -76
    %Income taxes
    
    
    638
    
    
    
    262
    
    
    
    376
    
    
    
    144
    %
      33




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Equity in Income of Unconsolidated Affiliate.
 Income from Litigation Settlements
 34




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##### Table of Contents



Quarterly Fluctuations
  
    
    the size, timing and terms of sales and orders, including large customer orders, such
as the recent significant orders at PowerSecure, as well as the effects of customers
delaying, deferring or canceling purchase orders or making smaller purchases than
expected;
    
    the effects of severe weather conditions, such as hurricanes, on the demand
requirements of our customers;
    
    our ability to obtain adequate supplies of key components and materials for our
products on a timely and cost-effective basis;
    
    our ability to implement our business plans and strategies and the timing of such
implementation;
    
    the pace of development of our new businesses, including PowerSecures new businesses,
and the growth of their markets;
    
    the timing, pricing and market acceptance of our new products and services;
    
    changes in our pricing policies and those of our competitors;
    
    variations in the length of our product and service implementation process;
    
    changes in the mix of products and services having differing margins;
    
    changes in the mix of international and domestic revenues;
    
    the life cycles of our products and services;
    
    budgeting cycles of utilities and other major customers;
    
    general economic and political conditions;
    
    the effects of litigation, claims and other proceedings;
    
    the effects of governmental regulations and regulatory changes in our markets;
    
    economic conditions in the energy industry, especially in the natural gas and
electricity sectors including the effect of cyclical changes in energy prices;
    
    changes in the prices charged by our suppliers;
    
    our ability to make and obtain the expected benefits from acquisitions of technology or
businesses, and the costs related to such acquisitions;
    
    changes in our operating expenses; and
    
    the development and maintenance of business relationships with strategic partners.
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Liquidity and Capital Resources
 Capital Requirements.
 
    
    operations;
    
    inventory;
    
    accounts receivable;
    
    research and development efforts;
    
    property and equipment acquisitions, including investments in shared savings
projects;
    
    software development;
    
    debt service requirements;
    
    severance and incentive compensation obligations under separation agreements
with our prior President and Chief Financial Officer; and
    
    business and technology acquisitions and other growth transactions.
 Cash Flow.
   37




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Restructuring Obligations.
 38




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Equipment Line of Credit
 39




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Working Capital Credit Facility.
    40




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Preferred Stock Redemption
 Contractual Obligations and Commercial Commitments.
 41




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Payments Due by Period (1)Remainder of
    
    
    Years
    
    
    Years
    
    
    AfterTotal
    
    
    2007
    
    
    2008-2009
    
    
    2010-2011
    
    
    2011Contractual ObligationsCredit Facility (2)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring Obligations
    
    
    10,455,000
    
    
    
    4,805,000
    
    
    
    5,295,000
    
    
    
    355,000
    
    
    
    Capital Lease Obligations
    
    
    9,000
    
    
    
    1,000
    
    
    
    4,000
    
    
    
    4,000
    
    
    
    Operating Leases
    
    
    4,276,000
    
    
    
    255,000
    
    
    
    1,725,000
    
    
    
    880,000
    
    
    
    1,416,000Series B Preferred Stock
    
    
    104,000
    
    
    
    104,000
    
    
    
    
    
    
    
    
    
    
    
    Caterpillar
Equipment Line (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    14,844,000
    
    
    $
    5,165,000
    
    
    $
    7,024,000
    
    
    $
    1,239,000
    
    
    $
    1,416,000
 
 (1)
    
    Does not include interest that may become due and payable on such obligations in any future
period.(2)
    
    Total repayments are based upon borrowings outstanding as of September 30, 2007, not
projected borrowings. Off-Balance Sheet Arrangements
 Liquidity.
 Recent Accounting Pronouncements
  42




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Cautionary Note Regarding Forward-Looking Statements
  
    
    our prospects, including our future revenues, expenses, net income, margins,
profitability, cash flow, liquidity, financial condition and results of operations;
    
    our products and services and our markets, including market position, market share,
market demand and benefits to customers;
    
    our ability to successfully develop, operate and grow our operations and businesses;
    
    our business plans, strategies, goals and objectives;
    
    the sufficiency of our capital resources, including our cash and cash equivalents, funds
generated from operations, available borrowings under our credit arrangements and other
capital resources, to meet our future working capital, capital expenditure, debt service
and business growth needs;
    
    industry trends and customer preferences;
    
    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.
  44




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
    45




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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
  46




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PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
 3.1
    
    Certificate of Ownership and Merger, as filed with the Secretary of State of the State of
Delaware on August 22, 2007, merging PowerSecure International, Inc. into Metretek
Technologies, Inc. and amending Registrants Second Amended and Restated Certificate of
Incorporation to change the Registrants name to PowerSecure International, Inc.
(Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed
on August 22, 2007.)3.2
    
    Amended and Restated By-Laws of PowerSecure International, Inc., as of August 22, 2007
(Incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K filed
on August 22, 2007.)10.1
    
    Credit Agreement, dated as ofAugust 23, 2007, among PowerSecure International, Inc., the
financial institutions from time to time parties thereto as lenders, and Citibank, N.A., as
administrative agent (Incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on August 24, 2007.)10.2
    
    Form of Security Agreement, dated as of August 23, 2007, by each of PowerSecure
International, Inc. and its active subsidiaries in favor of Citibank, N.A., as administrative
agent, as secured party (Incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed on August 24, 2007.)
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10.3
    
    Form of Guaranty, dated as of August 23, 2007, by each active subsidiary of PowerSecure
International, Inc. in favor of Citibank, N.A., as administrative agent
(Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K
filed on August 24, 2007.)10.4
    
    Employment and Non-Competition Agreement, dated as of August 15, 2007, by and between
Metretek Technologies, Inc. and Sidney Hinton (Incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on August 15, 2007.)10.5
    
    Restricted Stock Agreement, dated as of August 15, 2007, by and between Metretek
Technologies, Inc. and Sidney Hinton (Filed herewith.)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Filed herewith.)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Filed herewith.)32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 and Rule
13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule
13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)
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SIGNATURES
  POWERSECURE INTERNATIONAL, INC.Date:    November 6, 2007
    By:
    /s/ Sidney HintonSidney HintonPresident and Chief Executive OfficerDate:    November 6, 2007
    By:
    /s/ Gary ZuiderveenGary ZuiderveenVice President and
Chief Financial Officer 49