##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period endedSeptember 30, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-16265
 
 LIME ENERGY CO.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    36-4197337
(I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
 (847) 437-1666
 
 þ o
  o o þ
 o þ




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##### 



LIME ENERGY CO.
FORM 10-Q  For The Quarter Ended September 30, 2006
 INDEX
  
 PageNumberPart I
    
    Financial InformationITEM 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets
September 30, 2006 (unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statement of Operations
Three Months Ended September 30, 2006 and 2005 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2006 and 2005 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity
Nine Months Ended September 30, 2006 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2006 and 2005 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    25ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    33ITEM 4.
    
    Controls and Procedures
    
    
    34Part II.
    
    Other Information:ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35ITEM 6.
    
    Exhibits
    
    
    36Signatures
    
    
    37CertificationCertificationCertificationCertification




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##### Table of Contents



LIME ENERGY CO.
CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,2006
    
    
    December 31,(unaudited)
    
    
    2005(1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    6,825,874
    
    
    $
    4,229,150Accounts receivable, net
    
    
    2,385,472
    
    
    
    1,747,019Inventories
    
    
    1,304,832
    
    
    
    1,457,789Advances to suppliers
    
    
    147,405
    
    
    
    324,677Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    
    
    
    
    28,462Prepaid expenses and other
    
    
    329,609
    
    
    
    207,480Total Current Assets
    
    
    10,993,192
    
    
    
    7,994,577Net Property and Equipment
    
    
    1,638,833
    
    
    
    2,514,196Long Term Receivables
    
    
    17,713
    
    
    
    Deferred Financing Costs, net
    
    
    
    
    
    
    299,964Intangibles, net
    
    
    5,605,691
    
    
    
    1,960,835Cost in Excess of Assets Acquired
    
    
    9,293,292
    
    
    
    4,329,402$
    27,548,721
    
    
    $
    17,098,974
 1




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##### Table of Contents



LIME ENERGY CO.
CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,2006
    
    
    December 31,(unaudited)
    
    
    2005(1)Liabilities and Stockholders EquityCurrent LiabilitiesLine of credit
    
    $
    
    
    
    $
    2,000,000Accounts payable
    
    
    1,799,259
    
    
    
    913,369Current maturities of long-term debt
    
    
    547,850
    
    
    
    651,313Accrued expenses
    
    
    763,295
    
    
    
    1,228,765Notes payable
    
    
    150,000
    
    
    
    150,000Deferred revenue
    
    
    1,780,738
    
    
    
    984,728Customer deposits
    
    
    1,136,552
    
    
    
    1,419,919Total Current Liabilities
    
    
    6,177,694
    
    
    
    7,348,094Deferred Revenue
    
    
    201,160
    
    
    
    1,044,524Long-Term Debt, less current maturities, net of unamortized
discount of $0 and $898,409 at September 30, 2006 and
December 31, 2005, respectively
    
    
    33,001
    
    
    
    4,328,719Total Liabilities
    
    
    6,411,855
    
    
    
    12,721,337Stockholders EquityPreferred stock, $.01 par value; 5,000,000 shares authorized
Series E  0 and 236,254 issued and outstanding as of
September 30, 2006 and December 31, 2005,
respectively (liquidation value of $0 and
$47,250,800 at September 30, 2006 and December
31, 2005, respectively)
    
    
    
    
    
    
    2,363Common stock, $.0001 par value; 200,000,000 shares
authorized, 49,786,611 and 3,386,465 issued as of
September 30, 2006 and December 31, 2005,
respectively
    
    
    4,979
    
    
    
    339Additional paid-in capital
    
    
    92,264,441
    
    
    
    64,773,556Accumulated deficit
    
    
    (71,132,554
    )
    
    
    (60,398,621
    )Total Stockholders Equity
    
    
    21,136,866
    
    
    
    4,377,637$
    27,548,721
    
    
    $
    17,098,974
 (1)
    
    Derived from audited financial statements in the Companys annual
report on Form 10-K for the year ended December 31, 2005 See accompanying notes to condensed consolidated financial statements
 2




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##### Table of Contents



LIME ENERGY CO.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 Three months ended September 30,
    
    2006
    
    
    2005Revenues
    
    $
    2,130,158
    
    
    $
    1,123,360Cost of sales
    
    
    1,592,613
    
    
    
    1,197,940Gross profit (loss)
    
    
    537,545
    
    
    
    (74,580
    )Selling, general and administrative
    
    
    3,974,564
    
    
    
    1,813,975Impairment loss
    
    
    760,488
    
    
    
    Operating loss
    
    
    (4,197,507
    )
    
    
    (1,888,555
    )Other Income (Expense)Interest income
    
    
    96,877
    
    
    
    16,879Interest expense
    
    
    (16,880
    )
    
    
    (94,331
    )Total other income (expense)
    
    
    79,997
    
    
    
    (77,452
    )Loss from continuing operations
    
    
    (4,117,510
    )
    
    
    (1,966,007
    )Discontinued OperationsLoss from discontinued operations
    
    
    
    
    
    
    (48,088
    )Net Loss
    
    
    (4,117,510
    )
    
    
    (2,014,095
    )Plus Preferred Stock Dividends
    
    
    
    
    
    
    (344,000
    )Net Loss Available to Common Shareholders
    
    $
    (4,117,510
    )
    
    $
    (2,358,095
    )Basic and diluted loss per common share from:Continuing operations
    
    $
    (0.08
    )
    
    $
    (0.69
    )Discontinued operations
    
    
    
    
    
    
    (0.01
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.08
    )
    
    $
    (0.70
    )Weighted Average Common Shares Outstanding
    
    
    49,308,350
    
    
    
    3,387,567
 See accompanying notes to condensed consolidated financial statements
 3




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##### Table of Contents



LIME ENERGY CO.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 Nine months ended September 30,
    
    2006
    
    
    2005Revenues
    
    $
    4,611,321
    
    
    $
    2,924,162Cost of sales
    
    
    3,474,496
    
    
    
    2,748,311Gross profit
    
    
    1,136,825
    
    
    
    175,851Selling, general and administrative
    
    
    7,957,736
    
    
    
    4,383,158Impairment Loss
    
    
    760,488
    
    
    
    Operating loss
    
    
    (7,581,399
    )
    
    
    (4,207,307
    )Other Income (Expense)Interest income
    
    
    125,646
    
    
    
    42,167Interest expense
    
    
    (3,256,755
    )
    
    
    (426,347
    )Total other expense
    
    
    (3,131,109
    )
    
    
    (384,180
    )Loss from continuing operations
    
    
    (10,712,508
    )
    
    
    (4,591,487
    )Discontinued Operations(Loss) income from discontinued operations
    
    
    (21,425
    )
    
    
    77,501Net Loss
    
    
    (10,733,933
    )
    
    
    (4,513,986
    )Plus Preferred Stock Dividends
    
    
    (24,347,725
    )
    
    
    (1,017,800
    )Net Loss Available to Common Shareholders
    
    $
    (35,081,658
    )
    
    $
    (5,531,786
    )Basic and diluted (loss) income per common share from:Continuing operations
    
    $
    (1.83
    )
    
    $
    (1.79
    )Discontinued operations
    
    
    (0.00
    )
    
    
    0.02Basic and Diluted Net Loss Per Common Share
    
    $
    (1.83
    )
    
    $
    (1.77
    )Weighted Average Common Shares Outstanding
    
    
    19,198,805
    
    
    
    3,124,609
 See accompanying notes to condensed consolidated financial statements
 4




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##### Table of Contents



LIME ENERGY CO.
STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS EQUITY
(Unaudited)
 Series E
    
    
    Series E
    
    
    Additional
    
    
    
    
    
    
    TotalCommon
    
    
    Common
    
    
    Preferred
    
    
    Preferred
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares(1)
    
    
    Stock(1)
    
    
    Shares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance,December 31, 2005
    
    
    3,386,465
    
    
    $
    339
    
    
    
    236,254
    
    
    $
    2,363
    
    
    $
    64,773,556
    
    
    $
    (60,398,621
    )
    
    $
    4,377,637Conversion of Series E Preferred Stock
    
    
    21,695,879
    
    
    
    2,170
    
    
    
    (243,234
    )
    
    
    (2,433
    )
    
    
    263
    
    
    
    
    
    
    
    Issuance of common stock (less issuance costs
of $101,162)
    
    
    17,875,000
    
    
    
    1,787
    
    
    
    
    
    
    
    
    
    
    
    17,772,051
    
    
    
    
    
    
    
    17,773,838Shares received for sale of Great Lakes
Controlled Energy Corporation
    
    
    (14,194
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (193,742
    )
    
    
    
    
    
    
    (193,743
    )Acquisition of Kapadia Consulting, Inc.
    
    
    500,000
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    479,950
    
    
    
    
    
    
    
    480,000Acquisition of Parke P.A.N.D.A Corporation
    
    
    5,000,000
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    4,999,500
    
    
    
    
    
    
    
    5,000,000Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (698,000
    )
    
    
    
    
    
    
    (698,000
    )Satisfaction of accrued dividends through
the issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    6,980
    
    
    
    70
    
    
    
    697,930
    
    
    
    
    
    
    
    698,000Conversion of revolver
    
    
    950,865
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    951,882
    
    
    
    
    
    
    
    951,977Beneficial value of adjustment in conversion price
of revolver
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    950,865
    
    
    
    
    
    
    
    950,865Term loan liquidated damages satisfied through
the issuance of common stock
    
    
    161,096
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    185,244
    
    
    
    
    
    
    
    185,260Termination of post repayment interest obligation
    
    
    231,500
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    266,202
    
    
    
    
    
    
    
    266,225Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,200
    
    
    
    
    
    
    
    25,200Share based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,053,540
    
    
    
    
    
    
    
    2,053,540Net loss for the nine months ended
September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,733,933
    )
    
    
    (10,733,933
    )Balance,September 30, 2006
    
    
    49,786,611
    
    
    $
    4,979
    
    
    
    
    
    
    $
    
    
    
    $
    92,264,441
    
    
    $
    (71,132,554
    )
    
    $
    21,136,866
 (1)
    
    Adjusted for 1 for 15 reverse split of common stock effected on June 15, 2006
 See accompanying notes to condensed consolidated financial statements.
 5




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##### Table of Contents



LIME ENERGY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine months ended September 30
    
    2006
    
    
    2005Cash Flow from Operating ActivitiesNet loss
    
    $
    (10,733,933
    )
    
    $
    (4,513,986
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of acquisitions and dispositionsDepreciation and amortization
    
    
    866,896
    
    
    
    373,147Warrants issued in exchange for services received
    
    
    25,200
    
    
    
    319,800Liquidated damages satisfied through issuance of common stock
    
    
    185,260
    
    
    
    Amortization of deferred financing costs
    
    
    299,964
    
    
    
    70,014Amortization of original issue discount
    
    
    898,409
    
    
    
    35,075Termination of post repayment interest and interest
converted to common stock
    
    
    274,747
    
    
    
    Beneficial value of revolver adjustment in conversion price
    
    
    950,865
    
    
    
    Share based compensation
    
    
    2,053,540
    
    
    
    Loss on disposal of fixed assets
    
    
    93,563
    
    
    
    11,743Impairment loss
    
    
    760,488
    
    
    
    Changes in assets and liabilities, net of acquisitions
and dispositionsAccounts receivable
    
    
    278,241
    
    
    
    348,258Inventories
    
    
    285,746
    
    
    
    (217,339
    )Advances to suppliers
    
    
    177,272
    
    
    
    23,640Other current assets
    
    
    (96,103
    )
    
    
    (90,961
    )Accounts payable
    
    
    95,204
    
    
    
    (1,190,517
    )Accrued expenses
    
    
    (520,334
    )
    
    
    (148,411
    )Deferred revenue
    
    
    54,469
    
    
    
    (93,404
    )Other current liabilities
    
    
    (284,687
    )
    
    
    (44,992
    )Net cash used in operating activities
    
    
    (4,335,193
    )
    
    
    (5,117,933
    )Cash Flows Used In Investing ActivitiesAcquisitions (including acquisition costs), net of cash acquired
    
    
    (3,930,120
    )
    
    
    (1,644,419
    )Sale of discontinued operations
    
    
    (83,586
    )
    
    
    Purchase of property and equipment
    
    
    (29,565
    )
    
    
    (470,342
    )Net cash used in investing activities
    
    
    (4,043,271
    )
    
    
    (2,114,761
    )Cash Flows Provided by Financing Activities(Payments) borrowings on lines of credit
    
    
    (1,456,545
    )
    
    
    2,000,000Payment on long-term debt
    
    
    (5,342,105
    )
    
    
    (390,959
    )Proceeds from issuance of common stock
    
    
    17,875,000
    
    
    
    5,625,000Issuance costs related to stock issuances
    
    
    (101,162
    )
    
    
    (216,787
    )Net cash provided by financing activities
    
    
    10,975,188
    
    
    
    7,017,254Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,596,724
    
    
    
    (215,440
    )Cash and Cash Equivalents, at beginning of period
    
    
    4,229,150
    
    
    
    1,789,808Cash and Cash Equivalents, at end of period
    
    $
    6,825,874
    
    
    $
    1,574,368Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest  continuing operations
    
    $
    382,541
    
    
    $
    140,346Cash paid during the periods for interest  discontinued operations
    
    
    42
    
    
    
    302Value of warrants issued in exchange for services received
    
    
    25,200
    
    
    
    319,800
 6




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##### Table of Contents



Supplemental Disclosures of Noncash Investing and Financing Activities:
    Cash
    
    $
    1,710Accounts receivable
    
    
    710,465Inventory
    
    
    142,789Other current assets
    
    
    7,088Property and equipment
    
    
    79,917Identifiable intangible assets
    
    
    3,250,000Cost in excess of assets acquired
    
    
    4,536,949Total assets acquired
    
    
    8,728,918Line of credit
    
    
    (400,000
    )Accounts payable
    
    
    (338,536
    )Accrued expenses
    
    
    (89,571
    )Notes payable
    
    
    (45,763
    )Other current liabilities
    
    
    (368
    )Total liabilities assumed
    
    
    (874,238
    )Net assets acquired
    
    
    7,854,680Less valuation of shares issued for acquisition
    
    
    (5,000,000
    )Acquisition costs
    
    
    (134,680
    )Total cash paid
    
    $
    2,720,000
  Cash
    
    $
    47,329Accounts receivable
    
    
    501,115Other current assets
    
    
    4,403Long term receivables
    
    
    17,713Property and equipment
    
    
    16,430Identifiable intangible assets
    
    
    1,131,000Cost in excess of assets acquired
    
    
    600,683Total assets acquired
    
    
    2,318,673Accounts payable
    
    
    (657,079
    )Accrued expenses
    
    
    (41,470
    )Deferred revenue
    
    
    (14,693
    )Other current liabilities
    
    
    (952
    )Total liabilities assumed
    
    
    (714,194
    )Net assets acquired
    
    
    1,604,479Less valuation of shares issued for acquisition
    
    
    (480,000
    )Acquisition costs
    
    
    (18,415
    )Total cash paid
    
    $
    1,106,064
 See accompanying notes to condensed consolidated financial statements
 7




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##### Table of Contents



Lime Energy Co.
Notes to Financial Statements
 Note 1  Basis of Presentation
     Note 2  Stock-based Compensation
  8




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net Loss, as reported
    
    $
    (2,014,000
    )
    
    $
    (4,514,000
    )Deduct: Stock-based employee compensation
expense included in reported net loss
    
    
    
    
    
    
    Add: Total stock-based employee compensation
expense determined under fair value
based method for awards
    
    
    (160,000
    )
    
    
    (664,000
    )Net Loss, pro-forma
    
    
    (2,174,000
    )
    
    
    (5,178,000
    )Preferred stock dividends
    
    
    (344,000
    )
    
    
    (1,018,000
    )Net Loss Available to Common Shareholders
    
    $
    (2,518,000
    )
    
    $
    (6,196,000
    )Net loss per share:Basic and diluted  as reported
    
    $
    (0.70
    )
    
    $
    (1.77
    )Basic and diluted  pro forma
    
    $
    (0.74
    )
    
    $
    (1.98
    )
  Three Months Ended
    
    Nine months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Weighted average fair value
per option granted
    
    $
    0.77
    
    
    
    (1)
    
    
    $
    1.02
    
    
    $
    0.69Significant assumptions
(weighted average):Risk-free rate
    
    
    5.06
    %
    
    
    
    
    
    
    5.03
    %
    
    
    2.82
    %Dividend yield
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    92.1
    %
    
    
    
    
    
    
    91.3
    %
    
    
    64.6
    %Expected life (years)
    
    
    5.7
    
    
    
    
    
    
    
    5.6
    
    
    
    5.5
 
 (1)
    
    No options were awarded during the three month period ended September 30, 2005  9




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##### Table of Contents



WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseThree months ended September 30, 2006
    
    Shares
    
    
    Share
    
    
    PriceOutstanding at June 30, 2006
    
    
    1,085,516
    
    
    $
    1.10-$194.85
    
    
    $
    39.40Granted
    
    
    9,503,333
    
    
    $
    1.00-$1.05
    
    
    $
    1.02Forfeited
    
    
    (39,468
    )
    
    $
    1.02-$30.75
    
    
    $
    8.03Outstanding at September 30, 2006
    
    
    10,549,381
    
    
    $
    1.00-$194.85
    
    
    $
    5.49Options exercisable at September
30, 2006
    
    
    897,605
    
    
    $
    1.00-$194.85
    
    
    $
    37.09
  WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseNine months ended September 30, 2006
    
    Shares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2005
    
    
    801,652
    
    
    $
    12.60-$194.85
    
    
    $
    46.47Granted
    
    
    9,876,668
    
    
    $
    1.00-$15.00
    
    
    $
    1.55Forfeited
    
    
    (128,939
    )
    
    $
    1.02-$105.00
    
    
    $
    6.36Outstanding at September 30, 2006
    
    
    10,549,381
    
    
    $
    1.00-$194.85
    
    
    $
    5.49
 10




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##### Table of Contents



Options Outstanding(1)
    
    
    Options Exercisable(1)Weighted AverageNumber
    
    
    Remaining
    
    
    Weighted Average
    
    
    Number Exercisable
    
    
    Weighted AverageOutstanding at
    
    
    Contractual
    
    
    Exercise
    
    
    at September 30,
    
    
    ExerciseExercise Price (1)
    
    September 30, 2006
    
    
    Life
    
    
    Price ($)
    
    
    2006
    
    
    Price ($)TBD (2)
    
    
    3,000,000
    
    
    9.8 years
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )$1.00  $2.00
    
    
    6,725,000
    
    
    9.8 years
    
    
    1.02
    
    
    
    208,888
    
    
    
    1.03$2.01  $10.00
    
    
    100,000
    
    
    9.3 years
    
    
    9.30
    
    
    
    
    
    
    
    $10.01  $20.00
    
    
    385,424
    
    
    4.0 years
    
    
    16.19
    
    
    
    350,427
    
    
    
    16.31$20.01  $30.00
    
    
    74,998
    
    
    3.9 years
    
    
    25.58
    
    
    
    78,332
    
    
    
    25.77$30.01  $50.00
    
    
    28,220
    
    
    6.7 years
    
    
    33.99
    
    
    
    24,219
    
    
    
    34.63$50.01  $194.85
    
    
    235,739
    
    
    3.4 years
    
    
    103.95
    
    
    
    235,739
    
    
    
    103.9510,549,381
    
    
    9.4 years
    
    
    5.49
    
    
    
    897,605
    
    
    
    37.09
 
 (1)
    
    All quantities and exercise prices have been adjusted for a 1 for 15 reverse
stock split effected on June 15, 2006.(2)
    
    The exercise price on these options will be set on a future date.
The exercise price on 1,500,000 shares will equal the average closing price of
the Companys stock for the 30 trading days prior to January 22, 2007, and the
exercise price on the remaining 1,500,000 shares will equal the average
closing price of the Companys stock for the 30 trading days prior to January
22, 2008.   Note 3  Revenue Recognition
   11




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##### Table of Contents



Note 4  Discontinued Operations
   September 30, 2006
    
    
    December 31, 2005Accounts receivable
    
    $
    
    
    
    $
    439,456Other current assets
    
    
    
    
    
    
    45,287Total current assets
    
    
    
    
    
    
    484,743Net property plant and equipment
    
    
    
    
    
    
    16,028Total assets
    
    
    
    
    
    $
    500,771Accounts payable
    
    $
    
    
    
    $
    73,825Accrued expenses
    
    
    
    
    
    
    81,167Current portion of long term debt
    
    
    
    
    
    
    2,160Deferred revenue
    
    
    
    
    
    
    241,154Customer deposits
    
    
    
    
    
    
    50,000Total current liabilities
    
    
    
    
    
    
    448,306Total liabilities
    
    $
    
    
    
    $
    448,306
 12




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##### Table of Contents



Three Months Ended
    
    Nine months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Revenue
    
    $
    
    
    
    $
    189,224
    
    
    $
    485,787
    
    
    $
    921,189Net (loss) income
    
    
    
    
    
    
    (48,088
    )
    
    
    (21,425
    )
    
    
    77,501
 Note 5  Acquisition of Parke P.A.N.D.A. Corporation
      Cash
    
    $
    1,710Accounts receivable
    
    
    710,465Inventory
    
    
    142,789Other current assets
    
    
    7,088Net property and equipment
    
    
    79,917Identifiable intangible assets
    
    
    3,250,000Goodwill
    
    
    4,536,949Line of credit
    
    
    400,000Accounts payable
    
    
    338,536Accrued expenses
    
    
    89,571Notes payable
    
    
    45,763Other current liabilities
    
    
    368
 13




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##### Table of Contents



Estimated
    
    EstimatedAsset Class
    
    Value
    
    Useful LifeNon-compete agreement
    
    $
    362,000
    
    
    2 YearsCustomer contracts
    
    
    206,000
    
    
    1 monthSales pipeline
    
    
    52,000
    
    
    5 monthsTrade name
    
    
    2,630,000
    
    
    Indefinite
   Nine months Ended
    
    Nine months EndedSeptember 30, 2006
    
    September 30, 2005Revenue:As Reported
    
    $
    4,611,321
    
    
    $
    2,924,162Proforma
    
    
    6,495,151
    
    
    
    5,908,891Net Loss From Continuing Operations:As Reported
    
    
    (10,733,933
    )
    
    
    (4,513,986
    )Pro-forma
    
    
    (10,890,722
    )
    
    
    (4,217,213
    )Basic and Diluted Loss per Share From
Continuing Operations:As Reported
    
    
    (1.83
    )
    
    
    (1.77
    )Pro-forma
    
    
    (1.57
    )
    
    
    (0.64
    )
 Note 6  Acquisition of Kapadia Consulting, Inc.
  14




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##### Table of Contents



Accounts receivable
    
    $
    501,115Other current assets
    
    
    4,403Long term receivables
    
    
    17,713Property and equipment
    
    
    16,430Identifiable intangible assets
    
    
    1,131,000Goodwill
    
    
    600,683Accounts payable
    
    
    657,079Accrued expenses
    
    
    41,470Deferred revenue
    
    
    14,693Other current liabilities
    
    
    952
  Estimated
    
    EstimatedAsset Class
    
    Value
    
    Useful LifeSales backlog
    
    $
    175,000
    
    
    3 MonthsSales pipeline
    
    
    693,000
    
    
    12 MonthsNon-compete agreement
    
    
    90,000
    
    
    2 YearsCustomer list
    
    
    173,000
    
    
    10 Years
  15




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##### Table of Contents



Note 7  Cost in Excess of Assets Acquired
  BuildingControl and
    
    
    Energy
    
    
    EnergyAutomation
    
    
    Technology
    
    
    Services
    
    
    TotalBalance at December 31, 2005
    
    $
    173,742
    
    
    $
    4,155,660
    
    
    $
    
    
    
    $
    4,329,402Sale of Great Lakes Controlled
Energy Corporation
    
    
    (173,742
    )
    
    
    
    
    
    
    
    
    
    
    (173,742
    )Acquisition of Parke P.A.N.D.A.
Corporation
    
    
    
    
    
    
    
    
    
    
    4,536,949
    
    
    
    4,536,949Acquisition of Kapadia Consulting,
Inc.
    
    
    
    
    
    
    
    
    
    
    600,683
    
    
    
    600,683Balance at September 30, 2006
    
    $
    
    
    
    $
    4,155,660
    
    
    $
    5,137,632
    
    
    $
    9,293,292
  Note 8  Asset Impairment
    16




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##### Table of Contents



17




---



##### Table of Contents



Note 9  Net Loss Per Share
   Three Months Ended
    
    Nine months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Weighted average shares
issuable upon exercise of
outstanding options
    
    
    9,154,287
    
    
    
    790,450
    
    
    
    3,670,592
    
    
    
    771,833Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    1,117,231
    
    
    
    968,866
    
    
    
    1,089,874
    
    
    
    877,382Weighted average shares
issuable upon conversion of
preferred stock(1)
    
    
    
    
    
    
    1,529,136
    
    
    
    1,016,974
    
    
    
    1,508,150Weighted average shares
issuable upon conversion of
convertible debt(2)
    
    
    
    
    
    
    144,552
    
    
    
    236,520
    
    
    
    121,889Total
    
    
    10,271,518
    
    
    
    3,433,004
    
    
    
    6,013,960
    
    
    
    3,279,254
 
 (1)
    
    All of the outstanding shares of convertible preferred stock were converted to common
stock on June 29, 2006.(2)
    
    All of the convertible debt was retired or converted into common stock on June 29,
2006.  18




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##### Table of Contents



Note 10  Warranty Obligations
  Three Months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Balance, beginning of period
    
    $
    192,581
    
    
    $
    206,895
    
    
    $
    208,300
    
    
    $
    151,008Warranties issued
    
    
    18,540
    
    
    
    24,000
    
    
    
    47,790
    
    
    
    105,798Settlements
    
    
    (18,020
    )
    
    
    (10,741
    )
    
    
    (62,989
    )
    
    
    (36,652
    )Balance, as of September 30
    
    $
    193,101
    
    
    $
    220,154
    
    
    $
    193,101
    
    
    $
    220,154
 Note 11  Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    871,234
    
    
    $
    919,832Finished goods
    
    
    433,598
    
    
    
    537,957$
    1,304,832
    
    
    $
    1,457,789
 Note 12  Line of Credit
  19




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##### Table of Contents



Note 13  Term Loan Repayment
  Principal
    
    $
    5,038,030Interest through the date of repayment
    
    
    40,568Prepayment penalties
    
    
    516,071Related fees
    
    
    6,749Total payment
    
    $
    5,601,418
 Note 14  Dividends
  Three Months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Accrual of Dividend on Series
E Convertible Preferred
    
    $
    
    
    
    $
    344,000
    
    
    $
    698,000
    
    
    $
    1,017,800Deemed dividend associated
with change in conversion
price of the Series E
Convertible Preferred Stock
    
    
    
    
    
    
    
    
    
    
    23,085,467
    
    
    
    Deemed dividend associated
with change in exercise
price of warrants issued to
the preferred investors
    
    
    
    
    
    
    
    
    
    
    564,258
    
    
    
    Total
    
    $
    
    
    
    $
    344,000
    
    
    $
    24,347,725
    
    
    $
    1,017,800
  20




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##### Table of Contents



Note 15  Business Segment Information
      Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Energy Technology
    
    $
    1,110,000
    
    
    $
    1,123,000
    
    
    $
    3,591,000
    
    
    $
    2,924,000Energy Services
    
    
    1,020,000
    
    
    
    
    
    
    
    1,020,000
    
    
    
    Total
    
    
    2,130,000
    
    
    
    1,123,000
    
    
    
    4,611,000
    
    
    
    2,924,000Operating Loss:Energy Technology
    
    
    (1,916,000
    )
    
    
    (1,433,000
    )
    
    
    (3,813,000
    )
    
    
    (3,002,000
    )Energy Services
    
    
    (479,000
    )
    
    
    
    
    
    
    (479,000
    )
    
    
    Corporate Overhead
    
    
    (1,803,000
    )
    
    
    (456,000
    )
    
    
    (3,289,000
    )
    
    
    (1,205,000
    )Total
    
    
    (4,198,000
    )
    
    
    (1,889,000
    )
    
    
    (7,581,000
    )
    
    
    (4,207,000
    )Interest Income/
(Expense), net
    
    
    80,000
    
    
    
    (77,000
    )
    
    
    (3,131,000
    )
    
    
    (384,000
    )Loss from Continuing
Operations
    
    
    (4,118,000
    )
    
    
    (1,966,000
    )
    
    
    (10,712,000
    )
    
    
    (4,591,000
    )
 21




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##### Table of Contents



September
    
    
    December30, 2006
    
    
    31, 2005Total Assets:Energy Technology
    
    $
    16,716,406
    
    
    $
    16,424,460Energy Services
    
    
    10,832,315
    
    
    
    Building Control and
Automation
    
    
    
    
    
    
    674,514Total
    
    $
    27,548,721
    
    
    $
    17,098,974
 Note 16  Reverse Split
  Note 17  Name Change
  Note 18  Equity Issuances
 a)
    
    During the first three months of 2006, two holders of the Companys Series E Convertible
Preferred Stock converted a total of 7,130 shares of Series E Convertible Preferred Stock into
47,533 shares of common stock (quantity adjusted for the reverse split).b)
    
    Effective March 31, 2006, the Company received 14,194 shares of its common stock as part of
the sale of its Great Lakes Controlled Energy Corporation subsidiary to Messrs. Eugene Borucki
and Denis Enberg (quantity adjusted for the reverse split).c)
    
    On June 29, 2006, in a private placement pursuant to Regulation D under the Securities Act of
1933, as amended, the Company entered into a Securities Purchase Agreement and issued to 17
investors, including 10 existing holders of the Companys Series E Convertible Stock, for an
aggregate purchase price of $17,875,000, 17,875,000 shares of the Companys common stock (the
PIPE Transaction). The Company used $2.72 million of the proceeds to fund the cash
consideration for the acquisition of Parke; approximately $5.6 million to prepay two
convertible secured term loans and related prepayment penalties and accrued interest owed to
Laurus Master Fund Ltd.; $400,000 to pay off Parkes line of credit and $90,079 for
transaction related costs. The balance of the gross proceeds of approximately $9 million will
be used by the Company for working capital and other general corporate purposes.
 22




---



##### Table of Contents



d)
    
    Concurrently with the closing of the PIPE Transaction pursuant to the Securities Purchase
Agreement described in Note 18(c), the holders of all of the Companys outstanding Series E
Preferred Stock converted such shares into 21,648,346 shares of the Companys common stock, and
agreed that, upon the conversion, all agreements related to the Preferred Stock would be
terminated. The Series E Preferred Stock as originally issued was convertible at $6.67 per
share into 1,574,027 shares of the Companys common stock (adjusted for the reverse stock
split), however, the Series E contained antidilution provisions which automatically reduced the
conversion price of the Series E to the $1.00 per share issuance price of common stock in the
PIPE Transaction. This adjustment in the conversion price resulted in 20,074,319 additional shares being issued upon conversion of the Series E. The value of these additional shares of
$23,085,467 (valued at the market price of $1.15 per share) was treated as a deemed dividend
which the Company recorded by offsetting a dividend charge to additional paid-in capital,
without any effect on total stockholders equity.e)
    
    A number of the Companys common stock warrants, most of which are held by former holders of
the Companys Series E Convertible Preferred Stock, contain antidilution provisions that
automatically adjust the exercise price on the warrants to the issuance price of any security
convertible into the Companys common stock if the price is less than the exercise price on
the holders warrant. Prior to the PIPE Transaction the exercise price on these warrants
ranged from $13.50 per share to $15.00 per share (adjusted for the reverse split). The
issuance of common stock in the PIPE Transaction caused the exercise price on these warrants
to automatically be reduced to $1.00 per share. The Company compared the value of the
warrants prior to the adjustment to the value of the warrants after the adjustment, using a
modified Black-Scholes Option Pricing Model, and determined that the value had increased by
$297,868. The weighted average assumptions used for this analysis were as follows: risk free
rate of 5.04%, expected volatility of 109.4%, expected dividend of $0 and expected life of 2.2
years. This increase in value was treated as a deemed dividend and recorded by offsetting a
dividend charge to additional paid-in-capital, without any effect on total stockholders
equity.f)
    
    Immediately following completion of the PIPE Transaction and prepayment of the Laurus term
loans, Laurus elected to convert the entire outstanding balance on its revolving line of
credit, along with accrued interest thereon, into 950,865 shares of the Companys common
stock. In addition, in consideration of the issuance by the Company of 392,596 shares of
common stock, Laurus agreed to a) waive the payment of liquidated damages due as a result of
the Companys failure to register shares of common stock into which the November 2005 $5
million term loan was convertible, and b) terminate the requirement that the Company pay it a
portion of the cash flows generated by VNPP projects for a period of 5 years following the
repayment of the November 2005 $5 million convertible term loan. The fair value of these shares, totaling $451,485 as determined based on the quoted market price of the shares, was
recorded as additional interest expenses for the nine months ended September 30, 2006.g)
    
    On June 30, 2006, the Company acquired Parke P.A.N.D.A. Corporation for consideration
consisting of 5,000,000 shares of Lime Energy common stock and cash of $2,720,000. Please see
Note 5 for additional information regarding the acquisition of Parke P.A.N.D.A. Corporation.h)
    
    During the six month period that the Companys Series E Convertible Stock was outstanding in
2006, the Board of Directors declared dividends payable on the Series E Convertible Preferred
Stock of $698,000. The dividends were paid with 6,980 additional shares of Series E
Convertible Preferred Stock. These Series E shares were converted into common stock on June
29, 2006.i)
    
    During July 2006, the Company issued a consultant a three year warrant to purchase 60,000
shares of its common stock at $1.00 per share as partial consideration for services provided
the Company. This warrant was valued at $25,200 using a modified Black-Sholes option pricing
model utilizing the following assumptions: risk free rate of 5.108%, expected volatility of
91.4%, expected dividend of
 23




---



##### Table of Contents



$0 and expected life of three years. The value of the warrant was charged to operations during
the second quarter of 2006.
 j)
    
    On September 26, 2006, the Company acquired Kapadia Consulting, Inc., effective September 30,
2006. Consideration consisted of 500,000 shares of Lime Energy common stock and cash of
$1,106,064. Please see Note 6 for additional information regarding the acquisition of Kapadia
Consulting, Inc.
 Note 19  Related Party Transactions
     24




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Results of Operations
     25




---



##### Table of Contents




    
    direct labor and commission costs related to our employee sales force;
    
    expenses related to our non-manufacturing management, supervisory and staff salaries and
employee benefits;
    
    commission costs related to our independent sales representatives and our distributors;
    
    costs related to insurance, travel and customer entertainment and office supplies costs
and the cost of non-manufacturing utilities;
    
    costs related to marketing and advertising our products;
    
    costs of outside professionals such as lawyers, accountants, and investor relations
professionals;
    
    research and development expenses;
    
    costs related to administrative functions that serve to support the existing businesses
of the Company, as well as to provide the infrastructure for future growth.
  Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005.
     26




---



##### Table of Contents



Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005.
    27




---



##### Table of Contents



Nine Months Ended September 302006
    
    
    2005Contractual interest
    
    $
    347,624
    
    
    $
    161,257Amortization of deferred issuance costs
and debt discount
    
    
    1,175,970
    
    
    
    105,090Value of warrant
    
    
    
    
    
    
    160,000Value of adjustment in conversion price
    
    
    950,865
    
    
    
    Prepayment penalties
    
    
    516,071
    
    
    
    Termination of post re-payment interest
obligation
    
    
    266,225
    
    
    
    Total Interest Expense
    
    $
    3,256,755
    
    
    $
    426,347
    28




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##### Table of Contents



Liquidity and Capital Resources
  29




---



##### Table of Contents



Nine months ended September 30,
    
    2006
    
    2005Net cash used in operating activities
    
    $
    (4,335,193
    )
    
    $
    (5,117,933
    )Net cash used in investing activities
    
    
    (4,043,271
    )
    
    
    (2,114,761
    )Net cash provided by financing activities
    
    
    10,975,188
    
    
    
    7,017,254Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,596,724
    
    
    
    (215,440
    )Cash and Cash Equivalents, at beginning of period
    
    
    4,229,150
    
    
    
    1,789,808Cash and Cash Equivalents, at end of period
    
    $
    6,825,874
    
    
    $
    1,574,368
 Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005.
  Operating Activities
   30




---



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Investing Activities
  Financing Activities
   LIQUIDITY
   31




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##### Table of Contents




    
    Focus on increasing the commercial sales of our products and services. In June
2006 we acquired Parke Industries and as part of this acquisition Dan Parke became our
President and Chief Operating Officer. During the last 3 months Dan has spent a great deal
of time and effort expanding, training and integrating the sales and marketing staffs of
our three companies (now four with the addition of Kapadia). His goal is to have at least
20 fully trained sales people on our staff by the end of the year, each with the ability to
sell $1 million to $2 million annually. If we are successful in achieving these goals we
believe we will begin to see a significant increase in revenue beginning in the first
quarter of 2007.
    
    Expand and improve the product line through internal development or acquisition.
An expanded product line would allow us to offer additional solutions to our customers,
thereby increasing the value of each customer relationship. We have recently begun an
internal R&D process to improve our existing products in order to expand their markets,
reduce their costs and extend their useful lives. We are also constantly evaluating
acquisition opportunities with the view toward adding new products and services to our
product line and expanding our geographic market.
    
    Aggressively manage our costs in order to conserve cash. We have made some
progress in reducing our costs during the last several years, but we plan to focus on
eliminating redundant operations and leveraging the synergies available as a result of the
acquisition of MPG, Parke and Kapadia to further reduce our costs.
    
    Sell our Building Automation Controls business. This sale, which was completed
effective March 31, 2006 will allow us to focus exclusively on the sale of our Energy
Technology and Energy Services products and services and is expected to reduce the cash
consumed in future periods.
    
    Secure additional capital to continue to fund operations until the business turns
cash flow positive. The PIPE Transaction that closed in June 2006 satisfied this
objective. While we may be able to raise additional capital through the recently announced
rights offering, the purpose of the rights offering is primarily to allow our stockholders
the opportunity to reduce some of the dilution in ownership sustained as a result of the
PIPE Transaction. We hope that the capital raised this year will be sufficient to carry us
to the point that our business begins to generate positive cash flow, thereby alleviating
the need to raise additional capital in the future.
   32




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##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements
  
 ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
 1 2
 33




---



##### Table of Contents



ITEM 4.
    
    Controls and Procedures
 a.
    
    Disclosure Controls and Procedures.
  b.
    
    Changes in Internal Controls.
  34




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 1.)
    
    On June 29, 2006 we entered into a Securities Purchase Agreement and issued to 17 investors,
including 10 existing holders of our Series E Convertible Stock, for an aggregate purchase
price of $17,875,000, 17,875,000 shares of our common stock (the PIPE Transaction). We used
$2.72 million of the proceeds to fund the cash consideration for the acquisition of Parke;
approximately $5.6 million to prepay two convertible secured term loans and related prepayment
penalties and accrued interest owed to Laurus Master Fund Ltd.; $400,000 to pay off Parkes
line of credit and $90,079 for transaction related costs. Subsequently, on September 26,
2006, we used $1,106,064 of the proceeds to pay the cash portion of the consideration for the
acquisition of Kapadia Consulting, Inc. described under (8) below. The balance of the gross
proceeds is being and will be used for working capital and other general corporate purposes.2.)
    
    Concurrently with the closing of the PIPE Transaction pursuant to the Securities Purchase
Agreement described above, the holders of all of our outstanding Series E Preferred Stock
converted such shares into 21,648,346 shares of our common stock, and agreed that, upon the
conversion, all agreements related to the Series E Preferred Stock would be terminated. The
Series E Preferred Stock as originally issued was convertible at $6.67 per share into
1,574,027 shares of our common stock (adjusted for the reverse stock split), however, the
Series E contained antidilution provisions which automatically reduced the conversion price of
the Series E to the $1.00 per share issuance price of common stock in the PIPE Transaction.
This adjustment in the conversion price resulted in 20,074,319 additional shares being issued
upon conversion of the Series E.3.)
    
    A number of our common stock warrants, most of which are held by former holders of our Series
E Convertible Preferred Stock, contain antidilution provisions that automatically adjust the
exercise price on the warrants to the issuance price of any security convertible into our
common stock if the price is less than the exercise price on the holders warrant. Prior to
the PIPE Transaction the exercise price on these warrants ranged from $13.50 per share to
$15.00 per share (adjusted for the reverse split). The issuance of common stock in the PIPE
Transaction caused the exercise price on these warrants to automatically be reduced to $1.00
per share.4.)
    
    Immediately following completion of the PIPE Transaction and prepayment of the Laurus term
loans, Laurus elected to convert the entire outstanding balance on its revolving line of
credit, along with accrued interest thereon, into 950,865 shares of our common stock. In
addition, in consideration of our issuance of 392,596 shares of common stock, Laurus agreed to
a) waive the payment of liquidated damages due as a result of our failure to register shares
of common stock into which the November 2005 $5 million term loan was convertible, and b)
terminate the requirement that we pay it a portion of the cash flows generated by VNPP
projects for a period of 5 years following the repayment of the November 2005 $5 million
convertible term loan.5.)
    
    On June 29, 2006, the we acquired Parke P.A.N.D.A. Corporation for consideration consisting
of 5,000,000 shares of our common stock (valued at $1.00 per share) and cash of $2,720,000.
Please see Note 5 to our financial statements for additional information regarding the
acquisition of Parke P.A.N.D.A. Corporation.6.)
    
    Effective June 29, 2006, our Board of Directors declared dividends payable on our Series E
Convertible Preferred Stock of $349,100. The dividends were paid with 3,491 additional shares
of Series E Convertible Preferred Stock. As described above, these Series E shares were
converted into common stock on June 29, 2006.
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7.)
    
    During July 2006, we issued a consultant a three year warrant to purchase 60,000 shares of
our common stock at $1.00 per share as partial consideration for services received. This
warrant was valued at $25,200 using a modified Black-Sholes option pricing model utilizing the
following assumptions: risk free rate of 5.108%, expected volatility of 91.4%, expected
dividend of $0 and expected life of three years. The value of the warrant was charged to
operations during the second quarter of 2006.8.)
    
    On September 26, 2006, we acquired Kapadia Consulting, Inc., effective September 30, 2006.
Consideration consisted of 500,000 shares of our common stock and cash of $1,106,064. Please
see Note 6 to our financial statements for additional information regarding the acquisition of
Kapadia Consulting, Inc.
  
 ITEM 6.
    
    Exhibits.
 31.1
    
    Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of the Chief Financial Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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SIGNATURES
  LIME ENERGY CO.:Dated: November 13, 2006
    By:
    /s/ David AsplundDavid AsplundChief Executive Officer (principal
executive officer) Dated: November 13, 2006
    By:
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principal
financial and accounting officer) 37