##### 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 endedJune 30, 2008
 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 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
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



LIME ENERGY CO.
FORM 10-Q  For The Quarter Ended June 30, 2008
 INDEX
 PageNumberPart I Financial InformationITEM 1. Financial Statements:Condensed Consolidated Balance Sheets
June 30, 2008 (unaudited) and December 31, 2007
    
    
    1Condensed Consolidated Statement of Operations
Three Months Ended June 30, 2008 and 2007 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations
Six Months Ended June 30, 2008 and 2007 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity
Six Months Ended June 30, 2008 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2008 and 2007 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    22ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32ITEM 4. Controls and Procedures
    
    
    33Part II Other Information:ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    34ITEM 6. Exhibits
    
    
    35Signatures
    
    
    36302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 June 30,2008
    
    
    December 31,(unaudited)
    
    
    2007(1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    474,372
    
    
    $
    4,780,701Accounts receivable, net
    
    
    11,409,609
    
    
    
    6,382,060Inventories
    
    
    857,293
    
    
    
    1,067,940Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    2,235,325
    
    
    
    952,997Prepaid expenses and other
    
    
    850,590
    
    
    
    250,169Total Current Assets
    
    
    15,827,189
    
    
    
    13,433,867Net Property and Equipment
    
    
    2,095,351
    
    
    
    1,542,327Long Term Receivables
    
    
    299,149
    
    
    
    224,568Deferred Financing Costs, net
    
    
    5,464
    
    
    
    6,885Intangibles, net
    
    
    8,161,392
    
    
    
    3,979,052Goodwill
    
    
    17,932,383
    
    
    
    6,757,133$
    44,320,928
    
    
    $
    25,943,832
 1




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 June 30,2008
    
    
    December 31,(unaudited)
    
    
    2007(1)Liabilities and Stockholders EquityCurrent LiabilitiesLines-of-credit
    
    $
    10,770,775
    
    
    $
    Notes payable
    
    
    1,098,260
    
    
    
    150,000Current maturities of long-term debt
    
    
    657,417
    
    
    
    81,954Accounts payable
    
    
    6,961,171
    
    
    
    3,092,226Accrued expenses
    
    
    2,797,173
    
    
    
    1,571,683Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    1,057,915
    
    
    
    636,867Deferred revenue
    
    
    528,676
    
    
    
    894,550Customer deposits
    
    
    1,084,611
    
    
    
    1,180,834Total Current Liabilities
    
    
    24,955,998
    
    
    
    7,608,114Deferred Revenue
    
    
    168,973
    
    
    
    244,792Long-Term Debt, less current maturities, net of unamortized
discount of $1,914,528 and $2,412,305 at June 30, 2008 and
December 31, 2007, respectively
    
    
    3,785,765
    
    
    
    3,187,680Deferred Tax Liability
    
    
    1,034,000
    
    
    
    1,034,000Total Liabilities
    
    
    29,944,736
    
    
    
    12,074,586Stockholders EquityCommon stock, $.0001 par value; 200,000,000 shares
authorized, 8,643,531 and 7,720,269 issued as of
June 30, 2008 and December 31, 2007, respectively
    
    
    865
    
    
    
    773Additional paid-in capital
    
    
    115,538,152
    
    
    
    106,267,336Accumulated deficit
    
    
    (101,162,825
    )
    
    
    (92,398,863
    )Total Stockholders Equity
    
    
    14,376,192
    
    
    
    13,869,246$
    44,320,928
    
    
    $
    25,943,832
 See accompanying notes to condensed consolidated financial statements
 
 (1)
    
    Derived from audited financial statements in the Companys annual
report on Form 10-K for the year ended December 31, 2007 2




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Three months ended June 30
    
    2008
    
    
    2007Revenue
    
    $
    6,933,769
    
    
    $
    4,102,693Cost of sales
    
    
    6,024,443
    
    
    
    2,944,724Gross profit
    
    
    909,326
    
    
    
    1,157,969Selling, general and administrative
    
    
    4,509,116
    
    
    
    2,647,873Amortization of intangibles
    
    
    405,813
    
    
    
    482,020Operating loss
    
    
    (4,005,603
    )
    
    
    (1,971,924
    )Other Expense:Interest income
    
    
    13,224
    
    
    
    74,222Interest expense
    
    
    (538,210
    )
    
    
    (145,851
    )Total other expense
    
    
    (524,986
    )
    
    
    (71,629
    )Net Loss
    
    
    (4,530,589
    )
    
    
    (2,043,553
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.57
    )
    
    $
    (0.27
    )Weighted average common shares outstanding
    
    
    7,943,116
    
    
    
    7,651,699
 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)
 Six months ended June 30
    
    2008
    
    
    2007Revenue
    
    $
    9,841,248
    
    
    $
    6,631,240Cost of sales
    
    
    8,782,844
    
    
    
    5,101,204Gross profit
    
    
    1,058,404
    
    
    
    1,530,036Selling, general and administrative
    
    
    8,309,668
    
    
    
    5,903,785Amortization of intangibles
    
    
    643,660
    
    
    
    938,829Operating loss
    
    
    (7,894,924
    )
    
    
    (5,312,578
    )Other Expense:Interest income
    
    
    57,125
    
    
    
    120,335Interest expense
    
    
    (926,163
    )
    
    
    (162,249
    )Total other expense
    
    
    (869,038
    )
    
    
    (41,914
    )Net Loss
    
    
    (8,763,962
    )
    
    
    (5,354,492
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (1.12
    )
    
    $
    (0.72
    )Weighted average common shares outstanding
    
    
    7,838,010
    
    
    
    7,425,168
 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)
 Additional
    
    
    
    
    
    
    TotalCommon
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance,December 31, 2007
    
    
    7,720,269
    
    
    $
    773
    
    
    $
    106,267,336
    
    
    $
    (92,398,863
    )
    
    $
    13,869,246Acquisition of Applied Energy Management, Inc.
    
    
    882,725
    
    
    
    88
    
    
    
    6,999,912
    
    
    
    
    
    
    
    7,000,000Share based compensation
    
    
    
    
    
    
    
    
    
    
    1,944,920
    
    
    
    
    
    
    
    1,944,920Satisfaction of interest obligation through
issuance of common stock
    
    
    12,882
    
    
    
    1
    
    
    
    125,166
    
    
    
    
    
    
    
    125,167Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    97,000
    
    
    
    
    
    
    
    97,000Proceeds from exercise of options and warrants
    
    
    27,655
    
    
    
    3
    
    
    
    103,818
    
    
    
    
    
    
    
    103,821Net loss for the six months ended
June 30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,763,962
    )
    
    
    (8,763,962
    )Balance,June 30, 2008
    
    
    8,643,531
    
    
    $
    865
    
    
    $
    115,538,152
    
    
    $
    (101,162,825
    )
    
    $
    14,376,192
 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)
 Six months ended June 30
    
    2008
    
    
    2007Cash Flow from Operating ActivitiesNet loss
    
    $
    (8,763,962
    )
    
    $
    (5,354,492
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of acquisitionsDepreciation and amortization
    
    
    815,473
    
    
    
    1,007,629Share based compensation
    
    
    1,944,920
    
    
    
    1,488,116Warrants issued in exchange for services received
    
    
    97,000
    
    
    
    162,000Provision for inventory obsolescence
    
    
    
    
    
    
    47,781Provision for bad debt
    
    
    (16,995
    )
    
    
    3,246Liquidated damages satisfied through issuance of common stock
    
    
    
    
    
    
    613,708Amortization of deferred financing costs
    
    
    1,421
    
    
    
    250Amortization of original issue discount
    
    
    497,777
    
    
    
    87,521Accrued interest satisfied through the issuance of common stock
    
    
    125,167
    
    
    
    20,815Warrant repricing
    
    
    
    
    
    
    19,204Changes in assets and liabilities, net of acquisitions
and dispositionsAccounts receivable
    
    
    391,528
    
    
    
    (888,467
    )Inventories
    
    
    210,647
    
    
    
    (454,377
    )Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    (317,958
    )
    
    
    (411,795
    )Prepaid expenses and other current assets
    
    
    (349,637
    )
    
    
    (62,087
    )Accounts payable
    
    
    (1,436,762
    )
    
    
    281,698Accrued expenses
    
    
    367,867
    
    
    
    (351,324
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    (100,200
    )
    
    
    259,918Deferred revenue
    
    
    (441,693
    )
    
    
    (261,343
    )Customer liabilities and other current liabilities
    
    
    (96,223
    )
    
    
    134,744Net cash used in operating activities
    
    
    (7,071,630
    )
    
    
    (3,657,255
    )Cash Flows Used In Investing ActivitiesAcquisitions (including acquisition costs), net of cash acquired
    
    
    (3,716,752
    )
    
    
    (305,706
    )Purchase of property and equipment
    
    
    (135,912
    )
    
    
    (118,518
    )Net cash used in investing activities
    
    
    (3,852,664
    )
    
    
    (424,224
    )Cash Flows Provided by Financing ActivitiesAdvances on lines of credit
    
    
    7,009,797
    
    
    
    Proceeds from long-term debt
    
    
    25,372
    
    
    
    5,033,228Payment on long-term debt
    
    
    (521,025
    )
    
    
    (25,448
    )Cash paid for deferred financing costs
    
    
    
    
    
    
    (8,572
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    2,999,632Issuance costs related to stock issuances
    
    
    
    
    
    
    (248,293
    )Proceeds from exercise of options and warrants
    
    
    103,821
    
    
    
    7,595Net cash provided by financing activities
    
    
    6,617,965
    
    
    
    7,758,142Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (4,306,329
    )
    
    
    3,676,663Cash and Cash Equivalents, at beginning of period
    
    
    4,780,701
    
    
    
    4,663,618Cash and Cash Equivalents, at end of period
    
    $
    474,372
    
    
    $
    8,340,281Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest
    
    $
    194,697
    
    
    $
    12,219Value of warrants issued in exchange for services received
    
    $
    97,000
    
    
    $
    162,000
 6




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##### Table of Contents



Supplemental Disclosures of Noncash Investing and Financing Activities:
  Cash
    
    $
    2,091Accounts receivable
    
    
    5,476,663Costs and estimated profits in excess of amounts billed
    
    
    964,370Other current assets
    
    
    250,785Property and equipment
    
    
    588,925Identifiable intangible assets
    
    
    4,826,000Goodwill
    
    
    11,163,191Total assets acquired
    
    
    23,272,025Line of credit
    
    
    (3,760,978
    )Accounts payable
    
    
    (5,305,707
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    (521,248
    )Accrued expenses
    
    
    (857,624
    )Long term debt
    
    
    (2,119,685
    )Total liabilities assumed
    
    
    (12,565,242
    )Net assets acquired
    
    
    10,706,783Less valuation of shares issued for acquisition
    
    
    (7,000,000
    )Acquisition costs
    
    
    (206,783
    )Total cash paid
    
    $
    3,500,000
 See accompanying notes to condensed consolidated financial statements
 7




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##### Table of Contents



Lime Energy Co.
 
 Notes to Condensed Consolidated Financial Statements
 Note 1  Basis of Presentation
     Note 2  Stock-based Compensation
   Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average fair value
per option granted
    
    $
    4.38
    
    
    $
    5.25
    
    
    $
    5.09
    
    
    $
    5.11Significant assumptions
(weighted average):Risk-free rate
    
    
    1.85
    %
    
    
    4.90
    %
    
    
    2.25
    %
    
    
    5.01
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    86.6
    %
    
    
    88.2
    %
    
    
    87.4
    %
    
    
    89.0
    %Expected life (years)
    
    
    5.7
    
    
    
    5.8
    
    
    
    5.6
    
    
    
    5.5
 8




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
   WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at March 31, 2008
    
    
    2,101,302
    
    
    $
    6.30 - $1,363.95
    
    
    $
    23.79Granted
    
    
    131,300
    
    
    $
    7.93 - $10.00
    
    
    $
    8.00Exercised
    
    
    (2,277
    )
    
    $
    7.14
    
    
    $
    7.14Forfeited
    
    
    (22,301
    )
    
    $
    7.35 - $11.69
    
    
    $
    10.47Outstanding at June 30, 2008
    
    
    2,208,024
    
    
    $
    6.30 - $1,363.95
    
    
    $
    23.00Options exercisable at
June 30, 2008
    
    
    1,183,075
    
    
    $
    6.30 - $1,363.95
    
    
    $
    34.77
  WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2007
    
    
    2,170,348
    
    
    $
    6.30 - $1,363.95
    
    
    $
    23.31Granted
    
    
    166,567
    
    
    $
    7.93 - $10.00
    
    
    $
    8.28Exercised
    
    
    (13,414
    )
    
    $
    7.14
    
    
    $
    7.14Forfeited
    
    
    (115,477
    )
    
    $
    7.14 - $105.00
    
    
    $
    9.37Outstanding at June 30, 2008
    
    
    2,208,024
    
    
    $
    6.30 - $1,363.95
    
    
    $
    23.00Options exercisable at
June 30, 2008
    
    
    1,183,075
    
    
    $
    6.30 - $1,363.95
    
    
    $
    34.77
 9




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    AverageOutstanding at
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable at
    
    
    ExerciseExercise Price
    
    June 30, 2008
    
    
    Life
    
    
    Price
    
    
    June 30, 2008
    
    
    Price$6.30 - $7.00
    
    
    548,571
    
    
    7.9 years
    
    $
    6.74
    
    
    
    305,713
    
    
    $
    6.74$7.01 - $8.50
    
    
    936,578
    
    
    7.5 years
    
    
    7.34
    
    
    
    750,230
    
    
    
    7.21$8.51 - $11.00
    
    
    41,567
    
    
    9.7 years
    
    
    9.35
    
    
    
    14,284
    
    
    
    9.45$11.01 - $12.00
    
    
    567,390
    
    
    9.3 years
    
    
    11.14
    
    
    
    1,429
    
    
    
    11.20$12.01 - $13.50
    
    
    3,570
    
    
    9.0 years
    
    
    12.88
    
    
    
    1,071
    
    
    
    12.60$13.51  100.00
    
    
    14,286
    
    
    7.6 years
    
    
    65.10
    
    
    
    14,286
    
    
    
    65.10$100.01 - $1,363.95
    
    
    96,062
    
    
    1.6 years
    
    
    339.06
    
    
    
    96,062
    
    
    
    339.062,208,024
    
    
    7.8 years
    
    $
    23.00
    
    
    
    1,183,075
    
    
    $
    34.77
   Note 3  Acquisitions of Applied Energy Management, Inc.
  10




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Cash
    
    $
    2,091Accounts receivable
    
    
    5,476,663Costs and estimated profits in excess of billings
on uncompleted contracts
    
    
    964,370Other current assets
    
    
    250,785Property and equipment
    
    
    588,925Identifiable intangible assets
    
    
    4,826,000Goodwill
    
    $
    11,163,191Line of credit
    
    $
    3,760,978Accounts payable
    
    
    5,305,707Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    521,248Accrued expenses
    
    
    857,624Long term debt
    
    $
    2,119,685
  Estimated
    
    EstimatedAsset Class
    
    Value
    
    Useful LifeContract backlog
    
    $
    261,000
    
    
    12 monthsSales pipeline
    
    
    1,695,000
    
    
    18 monthsCustomer list
    
    
    2,745,000
    
    
    
    5 to 15 yearsTechnology
    
    
    125,000
    
    
    5 years
   11




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2008
    
    June 30, 2008Revenue:As Reported
    
    $
    6,933,769
    
    
    $
    9,841,248Pro-forma
    
    
    10,851,335
    
    
    
    19,977,920Net Operating Loss:As Reported
    
    
    (4,005,603
    )
    
    
    (7,894,924
    )Pro-forma
    
    
    (6,110,737
    )
    
    
    (11,256,867
    )Basic and Diluted Loss per Share From
Continuing Operations:As Reported
    
    
    (0.57
    )
    
    
    (1.12
    )Pro-forma
    
    
    (0.66
    )
    
    
    (1.49
    )
 Note 4  Recent Accounting Pronouncements
   12




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 5  Goodwill
  EnergyEfficiencyServices
    
    TotalBalance at December 31, 2007
    
    $
    6,757,133
    
    
    $
    6,757,133Costs related to acquisition of Texas Energy
Product, Inc.
    
    
    6,029
    
    
    
    6,029Costs related to acquisition of Preferred
Lighting , Inc.
    
    
    6,030
    
    
    
    6,030Acquisition of Applied Energy Management
    
    
    11,163,191
    
    
    
    11,163,191Balance at June 30, 2008
    
    $
    17,932,383
    
    
    $
    17,932,383
  Note 6  Net Loss Per Share
   13




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Three Months Ended
    
    Six months EndedJune 30
    
    June 302008
    
    2007
    
    2008
    
    2007Weighted average shares
issuable upon exercise of
outstanding options
    
    
    2,120,073
    
    
    
    1,592,608
    
    
    
    2,132,305
    
    
    
    1,582,612Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    397,885
    
    
    
    285,374
    
    
    
    414,442
    
    
    
    243,594Weighted average shares
issuable upon conversion of
convertible debt
    
    
    714,286
    
    
    
    237,441
    
    
    
    714,286
    
    
    
    119,376Total
    
    
    3,232,244
    
    
    
    2,115,423
    
    
    
    3,261,033
    
    
    
    1,945,582
 Note 7  Warranty Obligations
   Three Months Ended
    
    Six Months EndedJune 30
    
    June 302008
    
    2007
    
    2008
    
    2007Balance, beginning of period
    
    $
    332,096
    
    
    $
    199,075
    
    
    $
    377,902
    
    
    $
    196,783Warranties issued
    
    
    14,600
    
    
    
    9,674
    
    
    
    33,700
    
    
    
    21,823Settlements
    
    
    (97,333
    )
    
    
    
    
    
    
    (162,239
    )
    
    
    (9,857
    )Balance, as of June 30
    
    $
    249,363
    
    
    $
    208,749
    
    
    $
    249,363
    
    
    $
    208,749
 14




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 8  Inventories
  June 30,
    
    December 31,2008
    
    2007Raw materials
    
    $
    859,131
    
    
    $
    1,056,315Work in process
    
    
    
    
    
    
    13,463Reserve for obsolescence
    
    
    (1,838
    )
    
    
    (1,838
    )$
    857,293
    
    
    $
    1,067,940
 Note 9  Revolving Lines of Credit
    i)
    
    failure to pay interest or unused funds fees within 10 days of written demand;ii)
    
    failure to pay outstanding principal and accrued interest thereon on the maturity date;iii)
    
    failure to pay termination fees on the termination date;iv)
    
    the Company makes an assignment for the benefit of creditors or admits in
writing its inability to pay its debts generally as they become due; or an order,
judgment or decree is entered adjudicating the Company bankrupt or insolvent; or any
order for relief with respect to the Company is entered under the Federal Bankruptcy
Code; or the Company petitions or applies to any tribunal for the appointment of a
custodian, trustee, receiver or liquidator of the Company, or of any substantial part
of the assets of the Company, or commences any proceeding relating to the Company under
bankruptcy reorganization,
 15




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any
jurisdiction; or any such petition or application is filed, or any such proceeding
is commenced, against the Company and such petition, application or proceeding is
not dismissed within sixty (60) days; or
 v)
    
    the Company sells substantially all of its assets.
     Note 10  Subordinated Convertible Term Notes
   16




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
    Value Allocated to Term Notes:Proceeds from issuance
    
    $
    5,000,000Less value allocated to warrants
    
    
    (1,136,537
    )Value allocated to Term Notes
    
    $
    3,863,463Market Value of Shares Issuable Upon Conversion:Shares issuable upon conversion of the Term Notes
    
    
    714,286Closing market value of stock on Term Note issuance date
    
    $
    8.022Market value of shares issuable upon conversion
    
    $
    5,730,000Beneficial Conversion Value:Market value of shares issuable upon conversion
    
    $
    5,730,000Less value allocated to Term Notes
    
    
    (3,863,463
    )Value of beneficial conversion feature
    
    $
    1,866,537
    17




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 11  Notes Payable
    Note 12  Long Term Debt
  June 30,
    
    2008Mortgage note to American Chartered Bank, prime (5.00% as of
June 30, 2008) plus 1/2%, payable in monthly installments of
$3,000, plus interest until January 2010. A final payment of
$415,000 is due in February 2010. This note is collateralized
by the Companys building and land in Elk Grove Village,
Illinois
    
    $
    472,000Subordinated convertible term note (less debt discount
of $1,914,528, as of June 30, 2008) 10% interest rate due May
2010
    
    
    3,085,472Notes payable, interest rates of between prime and 9.25%, amortizing
over 24 months once permitted by senior lenders and payable in
full upon completion of an underwritten offering of at least
$20 million
    
    
    1,422,390Various other notes payable with monthly payments totaling $13,434
as of June 30, 2008, and interest rates between 0% and 8.99%
    
    
    411,580Total debt
    
    
    5,391,442Less current portion
    
    
    657,417Total long-term debt
    
    $
    4,734,025
 18




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  AggregateMaturities2008
    
    
    368,7512009
    
    
    864,1032010
    
    
    6,129,3052011
    
    
    53,3032112
    
    
    38,1122113
    
    
    2,396$
    7,455,970
 Note 13  Business Segment Information
   
    
    Energy Efficiency Services. The Energy Efficiency Services segment
includes:
 o
    
    Engineering and consulting: Energy engineering and consulting services
include project development services, energy management planning, energy bill
analysis, building energy audits, e-commissioning, design review and analysis of
new construction projects to maximize energy efficiency and sustainability, project
management of energy-related construction, and processing and procurement of
incentive and rebate applications.o
    
    Implementation:Implementation services includes energy efficiency
lighting upgrade services, mechanical and electrical conservation services, water
conservation services and renewable energy solutions.
 
    
    Energy Technology. The Energy Technology segment markets a patented line of
HVAC and lighting controllers under the eMAC and uMAC brand names. The technology
provides remote monitoring, management and control of commercial rooftop HVAC units and
facility lighting via wireless communication.
    
    Financial Services. The Financial Services segment began operations in late
2007 to enable the Companys commercial and industrial clients to pay for its energy
efficiency solutions over time. The Company records these extended term receivables as
long-term receivables and consolidates them within Lime Finance for purposes of optimal
receivables management and in anticipation of potentially financing them in order to
reduce its cost of capital.
 19




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Energy Efficiency Services
    
    $
    6,269,226
    
    
    $
    3,083,389
    
    
    $
    8,479,612
    
    
    $
    4,788,232Energy Technology
    
    
    659,446
    
    
    
    1,019,304
    
    
    
    1,351,480
    
    
    
    1,865,804Financial Services
    
    
    5,097
    
    
    
    
    
    
    
    10,156
    
    
    
    Intercompany sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,796
    )Total
    
    
    6,933,769
    
    
    
    4,102,693
    
    
    
    9,841,248
    
    
    
    6,631,240Operating Loss:Energy Efficiency Services
    
    
    (1,982,517
    )
    
    
    (226,494
    )
    
    
    (3,533,055
    )
    
    
    (933,471
    )Energy Technology
    
    
    (747,385
    )
    
    
    (578,993
    )
    
    
    (1,531,618
    )
    
    
    (1,394,932
    )Financial Services
    
    
    4,646
    
    
    
    
    
    
    
    9,649
    
    
    
    Corporate overhead
    
    
    (1,280,347
    )
    
    
    (1,166,437
    )
    
    
    (2,839,900
    )
    
    
    (2,984,175
    )Total
    
    
    (4,005,603
    )
    
    
    (1,971,924
    )
    
    
    (7,894,924
    )
    
    
    (5,312,578
    )Interest Expense, net
    
    
    (524,986
    )
    
    
    (71,629
    )
    
    
    (869,038
    )
    
    
    (41,914
    )Net Loss
    
    $
    (4,530,589
    )
    
    $
    (2,043,553
    )
    
    $
    (8,763,962
    )
    
    $
    (5,354,492
    )
 June 30, 2008
    
    
    December 31, 2007Total Assets:Energy Efficiency Services
    
    $
    39,388,426
    
    
    $
    16,493,666Energy Technology
    
    
    2,227,888
    
    
    
    3,166,073Financial Services
    
    
    702,468
    
    
    
    351,297Corporate overhead
    
    
    2,002,146
    
    
    
    5,932,796Total
    
    $
    44,320,928
    
    
    $
    25,943,832
 20




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 12  Equity Issuances
 (a)
    
    During the first six months of 2008, the Company issued consultants warrants with terms of
three years to purchase 17,143 shares of its common stock at prices of $8.05 to $9.45 per
share as partial consideration for services provided the Company. These warrants were valued
at $97,000 using a modified Black-Sholes option pricing model utilizing the following
assumptions: risk free rate of 3.259%, expected volatility of 91.6%, expected dividend of $0
and expected life of three years. The value of the warrants was charged to operations during
the first six months of 2008.
 (b)
    
    During the first six months of 2008, the Company issued 12,882 shares of its common stock to
the holders of its subordinated convertible term notes in satisfaction of 50% of the interest
owed on the notes.
 (c)
    
    During the first six months of 2008, holders of certain options and warrants exercised their
rights to purchase 27,655 shares of the Companys common stock at prices between $6.30 and
$7.35 per share.
 Note 13  Related Party Transactions
  21




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   
    
    Energy Efficiency Services. Our Energy Efficiency Services segment
represented approximately 86% of our revenue during the first half of 2008 and 95% of
our pro forma 2007 revenue (adjusted to include AEM). Our Energy Efficiency Services
segment includes:
 o
    
    Engineering and consulting: Our energy engineering and consulting
services include project development services, energy management planning, energy
bill analysis, building energy audits and e-commissioning. We also provide design
review and analysis of new construction projects to maximize energy efficiency and
sustainability, project management of energy-related construction, and processing
and procurement of incentive and rebate applications.
 o
    
    Implementation:We provide a range of energy efficiency and
conservation services, including energy efficient lighting upgrade services,
mechanical and electrical conservation services, water conservation services and
renewable energy solutions.
 
    
    Energy Technology. Our Energy Technology segment, which represented
approximately 6% of our pro forma 2007 revenue, offers our patented line of HVAC and
lighting controllers under the eMAC and uMAC brand names. The eMAC technology provides
remote monitoring, management and control of commercial rooftop HVAC units. Our uMAC
technology is a version of the eMAC that remotely controls the operation of a
facilitys lights via wireless communications.
    
    Financial Services. Our Financial Services segment began operations in late
2007 to enable our commercial and industrial clients to pay for our energy efficiency
solutions over time. We record the extended payment receivables from our clients as
long-term receivables. We consolidate them within a subsidiary for purposes of optimal
receivables management and in anticipation of potentially financing them in order to
reduce our cost of capital. Since its inception through June 30, 2008, we have
provided extended payment terms on approximately $930,000 of our sales, and we had
approximately $750,000 of receivables in this portfolio as of June 30, 2008.
 22




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##### Table of Contents



Results of Operations
 Revenue
  Energy Efficiency Services Segment
  Energy Technology Segment
  Financial Services Segment
  Gross Profit
  23




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##### Table of Contents



Selling, General and Administrative Expenses
  
    
    direct labor and commission costs related to our employee sales force;
    
    costs of our non-production management, supervisory and staff salaries and
employee benefits, including the costs of stock-based compensation;
    
    costs related to insurance, travel and entertainment, office supplies and
utilities;
    
    costs related to marketing and advertising our products;
    
    legal and accounting expenses;
    
    research and development expenses; and
    
    costs related to administrative functions that serve to support our existing
businesses, as well as to provide the infrastructure for future growth.
 Amortization of Intangibles
  Other Expense
  Results of Operations
 Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
 Revenue
  24




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##### Table of Contents



Gross Profit
  Selling, General and Administrative Expense
   Amortization of Intangibles
   25




---



##### Table of Contents



Three months ended June 30
    
    2008
    
    
    2007Lines of credit
    
    $
    139,974
    
    
    
    Convertible subordinated notes
    
    
    124,311
    
    
    $
    41,630Notes payable
    
    
    14,227
    
    
    
    4,219Mortgage
    
    
    6,701
    
    
    
    11,303Vehicle loans
    
    
    2,783
    
    
    
    928Capital Leases
    
    
    615
    
    
    
    Total contractual interest
    
    $
    288,611
    
    
    $
    58,080Amortization of deferred issuance costs
and debt discount
    
    
    249,599
    
    
    
    87,771Total Interest Expense
    
    $
    538,210
    
    
    $
    145,851
   Six Month Period Ended June 30, 2008 Compared to Six Month Period Ended June 30, 2007
 Revenue
    26




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##### Table of Contents



Gross Profit
  Selling, General and Administrative Expense
  Amortization of Intangibles
  Other Expense
  27




---



##### Table of Contents



Six months ended June 30
    
    2008
    
    2007Lines of credit
    
    
    139,974
    
    
    
    Convertible subordinated notes
    
    
    248,628
    
    
    
    41,630Notes payable
    
    
    17,616
    
    
    
    8,438Mortgage
    
    
    14,924
    
    
    
    22,679Vehicle loans
    
    
    5,207
    
    
    
    1,731Capital Leases
    
    
    616
    
    
    
    Total contractual interest
    
    $
    426,965
    
    
    $
    74,478Amortization of deferred issuance costs
and debt discount
    
    
    499,198
    
    
    
    87,771Total Interest Expense
    
    $
    926,163
    
    
    $
    162,249
   Liquidity and Capital Resources
    28




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##### Table of Contents



Six months ended June 30
    
    2008
    
    2007Net cash used in operating activities
    
    $
    (7,071,630
    )
    
    $
    (3,657,255
    )Net cash used in investing activities
    
    
    (3,852,664
    )
    
    
    (424,224
    )Net cash provided by financing activities
    
    
    6,617,965
    
    
    
    7,758,142Net (decrease) increase in cash and cash equivalents
    
    
    (4,306,329
    )
    
    
    3,676,663Cash and cash equivalents, at beginning of period
    
    
    4,780,701
    
    
    
    4,663,618Cash and cash equivalents, at end of period
    
    $
    474,372
    
    
    $
    8,340,281
 Six months Ended June 30, 2008 Compared to Six months Ended June 30, 2007
 Operating Activities
     Investing Activities
  Financing Activities
  29




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##### Table of Contents



Sources of Liquidity
  Lines of Credit
    30




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##### Table of Contents



Key Strategies for Cash Flow Improvement
  
    
    Focus on increasing the sales and profitability of our products and services.
During the past two fiscal years, excluding the effects of the AEM acquisition, we
increased our revenue by $15.8 million, or 427%, and our gross profit increased from $2,000
to $4.4 million. This improvement in our gross profit was offset by a $7.7 million
increase in our SG&A expense ($4.0 million excluding non-cash stock-based compensation)
over the period, primarily as a result of acquisitions and the addition of sales and
administrative support personnel. However, we believe that we have the infrastructure in
place to support a substantial increase in revenue, without the need to increase headcount
significantly from current levels. While there are no assurances that we will
substantially grow our revenue, if we can achieve substantial revenue growth, we believe we
will significantly reduce or eliminate the cash consumed from operating activities before
changes in working capital.
    
    Turn around the performance of our Energy Technology segment. Largely as a
result of lower than expected sales, our Energy Technology segment recorded an operating
loss of approximately $8.2 million during 2007, or 55% of our total operating loss. Part
of the failure to achieve scale in this business is due to delays in getting a new version
of the eMAC into production. We have taken steps to address this issue and expect that the
new version of the eMAC will be available during the fourth quarter of 2008. In the
meantime, we have taken steps to reduce the overhead costs of this segment to better align
them with the anticipated level of business activity. We continue to invest in this
segment because we believe there is an attractive market for this segments products based
on a marketing study completed last year, positive feedback from our pilot programs and our
experience marketing the product. We are committed to turning around the performance of
this segment, however we continue to carefully review all of our alternatives for this
business.
    
    Manage our costs in order to conserve cash. The prudent use of the capital
resources available to us remains one of our top priorities. We are constantly reviewing
our operations looking for more efficient ways to achieve our objectives.
  Off-Balance Sheet Arrangements
  31




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##### Table of Contents



Contractual Obligations
  Payments due by periodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term debt (1)(2)(3)
    
    $
    19,074,221
    
    
    $
    11,948,114
    
    
    $
    7,061,461
    
    
    $
    64,646
    
    
    $
    Operating leases
    
    
    2,762,848
    
    
    
    1,020,667
    
    
    
    1,339,561
    
    
    
    402,620
    
    
    
    Employment agreements
    
    
    4,057,383
    
    
    
    1,564,560
    
    
    
    2,492,823
    
    
    
    
    
    
    
    Total
    
    $
    25,894,452
    
    
    $
    14,533,341
    
    
    $
    10,893,845
    
    
    $
    467,266
    
    
    $
    
 
 (1)
    
    Excludes floating rate interest on the long-term debt. Interest payments required during
2008, based on current interest rates are projected to be $258,386.(2)
    
    Includes $478,423 of interest on subordinated notes payable in shares of common stock(3)
    
    $5,000,000 in subordinated convertible notes will automatically convert to common stock if
the closing price on our common stock is $10.50 or greater for 20 days in a 30 day period at
any time after May 31, 2008.  Cautionary Note Regarding Forward-Looking Statements
  
 Quantitative and Qualitative Disclosures About Market Risk
  32




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##### Table of Contents



Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Controls.
  Limitations of the Effectiveness of Internal Controls
  33




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Unregistered Sales of Equity Securities and Use of Proceeds
 (1)
    
    During the first six months of 2008, we issued two consultants warrants with terms of
three years to purchase 17,143 shares of our common stock at prices of $8.05 to $9.45 per
share as partial consideration for services provided to us.(2)
    
    During the first six months of 2008, we issued 12,882 shares of our common stock to the
holders of our subordinated convertible term notes in satisfaction of 50% of the interest
owed to them.No underwriters were involved in the transactions described above. All of the securities
issued in these transactions were issued by us in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act, including Regulation D
promulgated thereunder, in that the transactions involved the issuance and sale of our
securities to financially sophisticated individuals or entities that were aware of our
activities and business and financial condition and took the securities for investment
purposes and understood the ramifications of their actions. Certain of the purchasers also
represented that they were accredited investors as defined in Regulation D and were
acquiring such securities for investment for their own account and not for distribution.
 
 Submission of Matters to a Vote of Security Holders
   Director
    
    For
    
    WithheldDavid R. Asplund
    
    
    6,327,704
    
    
    
    220,527Gregory T. Barnum
    
    
    6,323,029
    
    
    
    225,202William R. Carey
    
    
    5,559,732
    
    
    
    988,499Joseph F. Desmond
    
    
    6,327,731
    
    
    
    220,500Richard P. Kiphart
    
    
    5,576,757
    
    
    
    971,474Daniel W. Parke
    
    
    6,327,712
    
    
    
    220,519David W. Valentine
    
    
    6,323,029
    
    
    
    225,202
 Proposals and Vote Tabulations
 Votes Cast
    
    BrokerFor
    
    Against
    
    Abstain
    
    Non-votesManagement ProposalsApproved Adoption of 2008 Long-Term Incentive Plan
    
    
    2,313,649
    
    
    
    800,456
    
    
    
    2,443
    
    
    
    3,431,683Ratification of selection of independent auditors for 2008
    
    
    6,503,922
    
    
    
    43,712
    
    
    
    597
    
    
    
    
 34




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##### Table of Contents



Exhibits
 10.1
    
    Amended and Restated Line of Credit Note ($9,500,000) dated June 6, 2008, by the Company in
favor of Richard P. Kiphart (Incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K dated June 11, 2008 and filed on June 11, 2008)10.2
    
    Amended and Restated Line of Credit Note ($1,500,000) dated June 6, 2008, by the Company in
favor of (Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form
8-K dated June 11, 2008 and filed on June 11, 2008)10.3
    
    AR Note Issuance Agreement dated June 6, 2008, by and among the Company, Richard P. Kiphart
and Advanced Biotherapy, Inc. (Incorporated by reference to Exhibit 10.3 of the Companys
Current Report on Form 8-K dated June 11, 2008 and filed on June 11, 2008)10.4
    
    Stock Purchase Agreement dated June 11, 2008, by and among the Company, the Shareholders of
Applied Energy Management, Inc. and Stephen Glick, as Shareholder Representative (Incorporated
by reference to Exhibit 10.4 of the Companys Current Report on Form 8-K dated June 11, 2008
and filed on June 11, 2008)10.5
    
    Registration Rights Agreement dated June 11, 2008, by and among the Company and the
Shareholders of Applied Energy Management, Inc. (Incorporated by reference to Exhibit 10.5 of
the Companys Current Report on Form 8-K dated June 11, 2008 and filed on June 11, 2008)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
 35




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##### Table of Contents



SIGNATURES
  LIME ENERGY CO.Dated: August 15, 2008
    By:
    /s/ David AsplundDavid AsplundChief Executive Officer (principal
executive officer)Dated: August 15, 2008
    By:
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principal
financial and accounting officer) 36




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNo.
    
    Description10.1
    
    Amended and Restated Line of Credit Note ($9,500,000) dated June 6, 2008, by the Company in
favor of Richard P. Kiphart (Incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K dated June 11, 2008 and filed on June 11, 2008)10.2
    
    Amended and Restated Line of Credit Note ($1,500,000) dated June 6, 2008, by the Company in
favor of (Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form
8-K dated June 11, 2008 and filed on June 11, 2008)10.3
    
    AR Note Issuance Agreement dated June 6, 2008, by and among the Company, Richard P. Kiphart
and Advanced Biotherapy, Inc. (Incorporated by reference to Exhibit 10.3 of the Companys
Current Report on Form 8-K dated June 11, 2008 and filed on June 11, 2008)10.4
    
    Stock Purchase Agreement dated June 11, 2008, by and among the Company, the Shareholders of
Applied Energy Management, Inc. and Stephen Glick, as Shareholder Representative (Incorporated
by reference to Exhibit 10.4 of the Companys Current Report on Form 8-K dated June 11, 2008
and filed on June 11, 2008)10.5
    
    Registration Rights Agreement dated June 11, 2008, by and among the Company and the
Shareholders of Applied Energy Management, Inc. (Incorporated by reference to Exhibit 10.5 of
the Companys Current Report on Form 8-K dated June 11, 2008 and filed on June 11, 2008)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
 37