##### 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 endedSeptember 30, 2007
 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
    
    36-4197337(State or other jurisdiction of incorporation or organization)
    
    (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
  o o þ
  o þ




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##### 



LIME ENERGY CO.
FORM 10-Q  For The Quarter Ended September 30, 2007
 INDEX
 PageNumberPart I
    
    Financial InformationITEM 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets September 30, 2007 (unaudited) and December 31, 2006
    
    
    1Condensed Consolidated Statement of Operations Three Months Ended September 30, 2007 and 2006 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations Nine Months Ended September 30, 2007 and 2006 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity Nine Months Ended September 30, 2007 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows Nine Months Ended September 30, 2007 and 2006 (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
    
    
    30ITEM 4.
    
    Controls and Procedures
    
    
    30Part II
    
    Other Information:ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31ITEM 6.
    
    Exhibits
    
    
    32Signatures
    
    
    33CertificationCertificationCertificationCertification




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,2007
    
    
    December 31,(unaudited)
    
    
    2006 (1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    4,632,512
    
    
    $
    4,663,618Accounts receivable, net
    
    
    5,894,829
    
    
    
    2,825,947Inventories
    
    
    2,347,218
    
    
    
    614,491Advances to suppliers
    
    
    9,295
    
    
    
    132,083Prepaid expenses and other
    
    
    541,275
    
    
    
    279,017Total Current Assets
    
    
    13,425,129
    
    
    
    8,515,156Net Property and Equipment
    
    
    1,474,452
    
    
    
    1,201,008Long Term Receivables
    
    
    60,537
    
    
    
    102,904Deferred Financing Costs, net
    
    
    7,604
    
    
    
    Intangibles, net
    
    
    4,392,219
    
    
    
    5,126,829Cost in Excess of Assets Acquired
    
    
    10,592,681
    
    
    
    10,450,968$
    29,952,622
    
    
    $
    25,396,865
 1




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##### Table of Contents



LIME ENERGY CO.
CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,2007
    
    
    December 31,(unaudited)
    
    
    2006 (1)Liabilities and Stockholders EquityCurrent LiabilitiesAccounts payable
    
    $
    2,180,857
    
    
    $
    1,344,725Current maturities of long-term debt
    
    
    529,448
    
    
    
    46,699Accrued expenses
    
    
    1,092,239
    
    
    
    1,251,777Notes payable
    
    
    150,000
    
    
    
    150,000Deferred revenue
    
    
    1,115,173
    
    
    
    967,446Customer deposits
    
    
    1,332,834
    
    
    
    1,148,090Total Current Liabilities
    
    
    6,400,551
    
    
    
    4,908,737Deferred Revenue
    
    
    472,740
    
    
    
    748,980Long-Term Debt, less current maturities, net of unamortized
discount of $2,663,929 and $0 at September 30, 2007 and
December 31, 2006, respectively
    
    
    2,455,463
    
    
    
    520,392Deferred Tax Liability
    
    
    1,034,000
    
    
    
    1,034,000Total Liabilities
    
    
    10,362,754
    
    
    
    7,212,109Stockholders EquityCommon stock, $.0001 par value; 200,000,000 shares
authorized, 53,827,770 and 49,786,611 issued as
of September 30, 2007 and December 31, 2006,
respectively
    
    
    5,383
    
    
    
    4,979Additional paid-in capital
    
    
    104,350,536
    
    
    
    95,025,912Accumulated deficit
    
    
    (84,766,051
    )
    
    
    (76,846,135
    )Total Stockholders Equity
    
    
    19,589,868
    
    
    
    18,184,756$
    29,952,622
    
    
    $
    25,396,865
 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, 2006
 2




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 Three months ended September 30
    
    2007
    
    
    2006Revenue
    
    $
    5,461,090
    
    
    $
    2,130,158Cost of sales
    
    
    4,026,655
    
    
    
    1,592,613Gross profit
    
    
    1,434,435
    
    
    
    537,545Selling, general and administrative
    
    
    2,965,965
    
    
    
    3,561,427Amortization of intangibles
    
    
    713,881
    
    
    
    413,137Impairment loss
    
    
    
    
    
    
    760,488Operating loss
    
    
    (2,245,411
    )
    
    
    (4,197,507
    )Other Expense:Interest income
    
    
    75,332
    
    
    
    96,877Interest expense
    
    
    (395,346
    )
    
    
    (16,880
    )Total other (expense) income
    
    
    (320,014
    )
    
    
    79,997Net Loss
    
    
    (2,565,425
    )
    
    
    (4,117,510
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.05
    )
    
    $
    (0.08
    )Weighted average common shares outstanding
    
    
    53,651,740
    
    
    
    49,308,350
 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
    
    2007
    
    
    2006Revenue
    
    $
    12,092,330
    
    
    $
    4,611,321Cost of sales
    
    
    9,127,859
    
    
    
    3,474,496Gross profit
    
    
    2,964,471
    
    
    
    1,136,825Selling, general and administrative
    
    
    8,869,749
    
    
    
    7,221,592Amortization of intangibles
    
    
    1,652,710
    
    
    
    736,144Impairment loss
    
    
    
    
    
    
    760,488Operating loss
    
    
    (7,557,988
    )
    
    
    (7,581,399
    )Other Expense:Interest income
    
    
    195,667
    
    
    
    125,646Interest expense
    
    
    (557,595
    )
    
    
    (3,256,755
    )Total other expense
    
    
    (361,928
    )
    
    
    (3,131,109
    )Loss from continuing operations
    
    
    (7,919,916
    )
    
    
    (10,712,508
    )Loss from discontinued operations
    
    
    
    
    
    
    (21,425
    )Net Loss
    
    
    (7,919,916
    )
    
    
    (10,733,933
    )Plus preferred stock dividends
    
    
    
    
    
    
    (24,347,725
    )Net Loss Available to Common Shareholders
    
    $
    (7,919,916
    )
    
    $
    (35,081,658
    )Basic and diluted loss per common share from
continuing operations
    
    $
    (0.15
    )
    
    $
    (1.83
    )Discontinued operations
    
    
    
    
    
    
    (0.00
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.15
    )
    
    $
    (1.83
    )Weighted average common shares outstanding
    
    
    52,441,622
    
    
    
    19,198,805
 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, 2006
    
    
    49,786,611
    
    
    $
    4,979
    
    
    $
    95,025,912
    
    
    $
    (76,846,135
    )
    
    $
    18,184,756Issuance of common stock
(less issuance costs of $202,932)
    
    
    2,999,632
    
    
    
    300
    
    
    
    2,796,400
    
    
    
    
    
    
    
    2,796,700Offering costs for 2006 issuance of
common stock
    
    
    
    
    
    
    
    
    
    
    (45,361
    )
    
    
    
    
    
    
    (45,361
    )Acquisition of Texas Energy Products, Inc.
    
    
    200,000
    
    
    
    20
    
    
    
    213,980
    
    
    
    
    
    
    
    214,000Acquisition of Preferred Lighting, Inc.
    
    

    105,485
    
    
    
    11
    
    
    
    200,411
    
    
    
    
    
 
    
 200,422Release of escrow shares to former owners of
Maximum Performance Group, Inc.
    
    
    20,715
    
    
    
    2
    
    
    
    26,306
    
    
    
    
    
    
    
    26,308Satisfaction of liquidated damages through the
issuance of common stock
    
    
    613,708
    
    
    
    61
    
    
    
    613,647
    
    
    
    
    
    
    
    613,708Share based compensation
    
    
    
    
    
    
    
    
    
    
    2,211,421
    
    
    
    
    
    
    
    2,211,421Warrants issued in connection with
Subordinated Convertible Notes
    
    
    
    
    
    
    
    
    
    
    1,136,537
    
    
    
    
    
    
    
    1,136,537Value of beneficial conversion feature on
Subordinated Convertible Notes
    
    
    
    
    
    
    
    
    
    
    1,866,537
    
    
    
    
    
    
    
    1,866,537Satisfaction of interest obligation through
issuance of common stock
    
    
    49,613
    
    
    
    5
    
    
    
    83,822
    
    
    
    
    
    
    
    83,827Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    162,000
    
    
    
    
    
    
    
    162,000Exercise of options
    
    
    41,928
    
    
    
    4
    
    
    
    32,126
    
    
    
    
    
    
    
    32,130Exercise of warrants
    
    
    10,078
    
    
    
    1
    
    
    
    7,594
    
    
    
    
    
    
    
    7,595Warrant repricing
    
    
    
    
    
    
    
    
    
    
    19,204
    
    
    
    
    
    
    
    19,204Net loss for the nine months ended
September 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,919,916
    )
    
    
    (7,919,916
    )Balance,September 30, 2007
    
    
    53,827,770
    
    
    $
    5,383
    
    
    $
    104,350,536
    
    
    $
    (84,766,051
    )
    
    $
    19,589,868
 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
    
    2007
    
    
    2006Cash Flow from Operating ActivitiesNet loss
    
    $
    (7,919,916
    )
    
    $
    (10,733,933
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of acquisitions and dispositionsDepreciation and amortization
    
    
    1,771,012
    
    
    
    866,896Share based compensation
    
    
    2,211,421
    
    
    
    2,053,540Warrants issued in exchange for services received
    
    
    162,000
    
    
    
    25,200Provision for bad debt
    
    
    121,216
    
    
    
    Liquidated damages satisfied through issuance of common stock
    
    
    613,708
    
    
    
    185,260Amortization of deferred financing costs
    
    
    968
    
    
    
    299,964Amortization of original issue discount
    
    
    339,145
    
    
    
    898,409Accrued interest satisfied through the issuance of common stock
    
    
    83,827
    
    
    
    Warrant repricing
    
    
    19,204
    
    
    
    Termination of post repayment interest and interest
converted to common stock
    
    
    
    
    
    
    274,747Beneficial value of revolver adjustment in conversion price
    
    
    
    
    
    
    950,865Loss on disposal of fixed assets
    
    
    
    
    
    
    93,563Impairment loss
    
    
    
    
    
    
    760,488Changes in assets and liabilities, net of acquisitions
and dispositionsAccounts receivable
    
    
    (3,044,830
    )
    
    
    278,241Inventories
    
    
    (1,611,594
    )
    
    
    285,746Advances to suppliers
    
    
    122,788
    
    
    
    177,272Other current assets
    
    
    (242,756
    )
    
    
    (96,103
    )Accounts payable
    
    
    734,754
    
    
    
    95,204Accrued expenses
    
    
    (198,943
    )
    
    
    (520,334
    )Deferred revenue
    
    
    (164,297
    )
    
    
    54,469Other current liabilities
    
    
    76,684
    
    
    
    (284,687
    )Net cash used in operating activities
    
    
    (6,925,609
    )
    
    
    (4,335,193
    )Cash Flows Used In Investing ActivitiesAcquisitions (including acquisition costs), net of cash acquired
    
    
    (593,586
    )
    
    
    (3,930,120
    )Sale of discontinued operations
    
    
    
    
    
    
    (83,586
    )Purchase of property and equipment
    
    
    (376,152
    )
    
    
    (29,565
    )Net cash used in investing activities
    
    
    (969,738
    )
    
    
    (4,043,271
    )Cash Flows Provided by Financing ActivitiesPayments on lines of credit
    
    
    
    
    
    
    (1,456,545
    )Proceeds from long-term debt
    
    
    5,121,207
    
    
    
    Payment on long-term debt
    
    
    (39,458
    )
    
    
    (5,342,105
    )Cash paid for deferred financing costs
    
    
    (8,572
    )
    
    
    Proceeds from issuance of common stock
    
    
    2,999,632
    
    
    
    17,875,000Issuance costs related to stock issuances
    
    
    (248,293
    )
    
    
    (101,162
    )Proceeds from exercise of options and warrants
    
    
    39,725
    
    
    
    Net cash provided by financing activities
    
    
    7,864,241
    
    
    
    10,975,188Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (31,106
    )
    
    
    2,596,724Cash and Cash Equivalents, at beginning of period
    
    
    4,663,618
    
    
    
    4,229,150Cash and Cash Equivalents, at end of period
    
    $
    4,632,512
    
    
    $
    6,825,874Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest  continuing operations
    
    $
    58,660
    
    
    $
    395,875Cash paid during the periods for interest  discontinued operations
    
    
    
    
    
    
    42Value of warrants issued in exchange for services received
    
    $
    162,000
    
    
    $
    
 6




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##### Table of Contents



Supplemental Disclosures of Noncash Investing and Financing Activities:
  Cash
    
    $
    31,127Accounts receivable
    
    
    24,491Inventory
    
    
    53,499Other current assets
    
    
    14,702Property and equipment
    
    
    8,593Identifiable intangible assets
    
    
    422,100Cost in excess of assets acquired
    
    
    86,625Total assets acquired
    
    
    641,137Accounts payable
    
    
    (22
    )Accrued expenses
    
    
    (20,164
    )Other current liabilities
    
    
    (108,059
    )Total liabilities assumed
    
    
    (128,245
    )Net assets acquired
    
    
    512,892Less valuation of shares issued for acquisition
    
    
    (200,422
    )Acquisition costs
    
    
    (12,470
    )Total cash paid
    
    $
    300,000
  Cash
    
    $
    17,899Accounts receivable
    
    
    78,410Inventory
    
    
    67,634Other current assets
    
    
    4,800Property and equipment
    
    
    7,000Identifiable intangible assets
    
    
    496,000Cost in excess of assets acquired
    
    
    28,780Total assets acquired
    
    
    700,523Accounts payable
    
    
    (101,356
    )Accrued expenses
    
    
    (19,241
    )Other current liabilities
    
    
    (35,784
    )Total liabilities assumed
    
    
    (156,381
    )Net assets acquired
    
    
    544,142Less valuation of shares issued for acquisition
    
    
    (214,000
    )Acquisition costs
    
    
    (10,818
    )Total cash paid
    
    $
    319,324
 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
    
    Nine Months EndedSeptember 30
    
    September 302007
    
    2006
    
    2007
    
    2006Weighted average fair value
per option granted
    
    $
    1.25
    
    
    $
    0.77
    
    
    $
    0.90
    
    
    $
    1.02Significant assumptions
(weighted average):Risk-free rate
    
    
    4.44
    %
    
    
    5.06
    %
    
    
    4.84
    %
    
    
    5.03
    %Dividend yield
    
    
    0.0
    %
    
    
    0.00
    %
    
    
    0.0
    %
    
    
    0.00
    %Expected volatility
    
    
    88.2
    %
    
    
    92.1
    %
    
    
    88.3
    %
    
    
    91.3
    %Expected life (years)
    
    
    5.8
    
    
    
    5.7
    
    
    
    5.6
    
    
    
    5.6
 8




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
   WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at June 30, 2007
    
    
    11,315,633
    
    
    $
    0.90-$194.85
    
    
    $
    4.00Granted
    
    
    145,000
    
    
    $
    1.60-$1.90
    
    
    $
    1.68Exercised
    
    
    (56,500
    )
    
    $
    1.02-$1.02
    
    
    $
    1.02Forfeited
    
    
    (20,000
    )
    
    $
    1.02-$1.02
    
    
    $
    1.02Outstanding at September 30, 2007
    
    
    11,384,133
    
    
    $
    0.90-$194.85
    
    
    $
    3.91Options exercisable at
September 30, 2007
    
    
    5,086,179
    
    
    $
    0.90-$194.85
    
    
    $
    7.45
  WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2006
    
    
    10,707,132
    
    
    $
    0.96-$194.85
    
    
    $
    4.13Granted
    
    
    850,000
    
    
    $
    0.90-$1.90
    
    
    $
    1.21Exercised
    
    
    (56,500
    )
    
    $
    1.02-$1.02
    
    
    $
    1.02Forfeited
    
    
    (116,499
    )
    
    $
    0.90-$35.40
    
    
    $
    5.42Outstanding at September 30, 2007
    
    
    11,384,133
    
    
    $
    0.90-$194.85
    
    
    $
    3.91Options exercisable at
September 30, 2007
    
    
    5,086,179
    
    
    $
    0.90-$194.85
    
    
    $
    7.45
 9




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Options Outstanding
    
    
    Options ExercisableWeightedNumber
    
    
    Average
    
    
    Weighted
    
    
    Number
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    
    Average
    
    
    Exercisable at
    
    
    AverageSeptember 30,
    
    
    Contractual
    
    
    Exercise
    
    
    September 30,
    
    
    ExerciseExercise Price
    
    2007
    
    
    Life
    
    
    Price
    
    
    2007
    
    
    Price$0.90 - $1.00
    
    
    3,865,000
    
    
    8.8 years
    
    $
    0.96
    
    
    
    419,000
    
    
    $
    0.96$1.01 - $1.25
    
    
    6,571,000
    
    
    8.8 years
    
    
    1.02
    
    
    
    3,895,709
    
    
    
    1.02$1.26 - $1.50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $1.51 - $1.75
    
    
    135,000
    
    
    9.9 years
    
    
    1.59
    
    
    
    
    
    
    
    $1.76 - $2.00
    
    
    25,000
    
    
    9.8 years
    
    
    1.84
    
    
    
    
    
    
    
    $2.01 - $10.00
    
    
    100,000
    
    
    8.3 years
    
    
    9.30
    
    
    
    100,000
    
    
    
    9.30$10.01 - $194.85
    
    
    688,133
    
    
    2.7 years
    
    
    47.70
    
    
    
    671,470
    
    
    
    48.5111,384,133
    
    
    8.5 years
    
    $
    3.91
    
    
    
    5,086,179
    
    
    $
    7.45
   Note 3  Acquisitions of Texas Energy Products and Preferred Lighting, Inc.
   10




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
   Texas
    
    
    PreferredEnergy
    
    
    LightingCash
    
    $
    17,899
    
    
    $
    31,127Accounts receivable
    
    
    78,410
    
    
    
    24,491Inventory
    
    
    67,634
    
    
    
    53,499Other current assets
    
    
    4,800
    
    
    
    14,702Property and equipment
    
    
    7,000
    
    
    
    8,593Identifiable intangible assets
    
    
    496,000
    
    
    
    422,100Goodwill
    
    $
    28,780
    
    
    $
    86,625Accounts payable
    
    $
    101,356
    
    
    $
    22Accrued expenses
    
    
    19,241
    
    
    
    20,164Other current liabilities
    
    $
    35,784
    
    
    $
    108,060
  Estimated
    
    EstimatedAsset Class
    
    Value
    
    Useful LifeTexas Energy ProductsSales backlog
    
    $
    223,000
    
    
    3 MonthsSales pipeline
    
    
    273,000
    
    
    6 MonthsPreferred LightingSales backlog
    
    $
    13,200
    
    
    4 monthsSales pipeline
    
    
    322,900
    
    
    18 monthsCustomer list
    
    
    86,000
    
    
    36 months
   11




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
   Note 4  Recent Accounting Pronouncements
     The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115
 12




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Fair Value Measurements
 Note 5  Cost in Excess of Assets Acquired
  Energy
    
    EnergyTechnology
    
    Services
    
    TotalBalance at December 31, 2006
    
    $
    4,155,661
    
    
    $
    6,295,307
    
    
    $
    10,450,968Release of escrow shares
    
    
    26,308
    
    
    
    
    
    
    
    26,308Acquisition of Preferred Lighting
    
    
    
    
    
    
    86,625
    
    
    
    86,625Acquisition of Texas Energy
Products
    
    
    
    
    
    
    28,780
    
    
    
    28,780Balance at September 30, 2007
    
    $
    4,181,969
    
    
    $
    6,410,712
    
    
    $
    10,592,681
  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
    
    Nine months EndedSeptember 30
    
    September 302007
    
    2006
    
    2007
    
    2006Weighted average shares
issuable upon exercise of
outstanding options
    
    
    11,335,611
    
    
    
    9,154,287
    
    
    
    11,166,833
    
    
    
    3,670,592Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    2,936,443
    
    
    
    1,117,231
    
    
    
    2,146,691
    
    
    
    1,089,874Weighted average shares
issuable upon conversion
of preferred stock(1)
    
    
    
    
    
    
    
    
    
    
    15,254,609
    
    
    
    1,016,974Weighted average shares
issuable upon conversion of
convertible debt
    
    
    5,000,000
    
    
    
    
    
    
    
    2,239,011
    
    
    
    236,520Total
    
    
    19,272,054
    
    
    
    10,271,518
    
    
    
    30,807,144
    
    
    
    6,013,960
 (1)
    
    All of the outstanding shares of convertible preferred stock were converted to common
stock on June 29, 2006.
  14




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 7  Warranty Obligations
   Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302007
    
    2006
    
    2007
    
    2006Balance, beginning of period
    
    $
    208,749
    
    
    $
    192,581
    
    
    $
    196,783
    
    
    $
    208,300Warranties issued
    
    
    3,840
    
    
    
    18,540
    
    
    
    25,663
    
    
    
    47,790Settlements
    
    
    (5,525
    )
    
    
    (18,020
    )
    
    
    (15,382
    )
    
    
    (62,989
    )Balance, as of September 30
    
    $
    207,064
    
    
    $
    193,101
    
    
    $
    207,064
    
    
    $
    193,101
 Note 8  Inventories
  September 30,
    
    December 31,2007
    
    2006Raw materials
    
    $
    2,723,563
    
    
    $
    1,010,995Work in process
    
    
    
    
    
    
    3,700Finished goods
    
    
    167,162
    
    
    
    196,586Reserve for obsolescence (1)
    
    
    (543,507
    )
    
    
    (596,790
    )$
    2,347,218
    
    
    $
    614,491
 (1)
    
    Includes $541,669 reserve for obsolete EnergySaver inventory
 15




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 9  Dividends
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302007
    
    2006
    
    2007
    
    2006Accrual of dividend on Series
E Convertible Preferred
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    698,000Deemed dividend associated
with change in conversion
price of the Series E
Convertible Preferred
Stock(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,085,467Deemed dividend associated
with change in exercise
price of warrants issued to
the preferred investors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    564,258Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    24,347,725
 (1)
    
    The holders of the Companys Series E convertible preferred stock converted all of
their shares of preferred stock into common stock on June 29, 2006.
 Note
10  Subordinated Convertible Term Note
   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
    
    
    5,000,000Closing market value of stock on term note issuance date
    
    $
    1.15Market 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  Business Segment Information
      18




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Energy Services
    
    $
    5,001,000
    
    
    $
    1,110,000
    
    
    $
    9,833,000
    
    
    $
    1,020,000Energy Technology
    
    
    683,000
    
    
    
    1,020,000
    
    
    
    2,548,000
    
    
    
    3,591,000Intercompany sales
    
    
    (223,000
    )
    
    
    
    
    
    
    (289,000
    )
    
    
    Total
    
    
    5,461,000
    
    
    
    2,130,000
    
    
    
    12,092,000
    
    
    
    4,611,000Operating Loss:Energy Services
    
    
    (76,000
    )
    
    
    (479,000
    )
    
    
    (1,009,000
    )
    
    
    (479,000
    )Energy Technology
    
    
    (1,043,000
    )
    
    
    (1,916,000
    )
    
    
    (2,439,000
    )
    
    
    (3,813,000
    )Corporate overhead
    
    
    (1,126,000
    )
    
    
    (1,803,000
    )
    
    
    (4,110,000
    )
    
    
    (3,289,000
    )Total
    
    
    (2,245,000
    )
    
    
    (4,198,000
    )
    
    
    (7,558,000
    )
    
    
    (7,581,000
    )Interest Expense, net
    
    
    (320,000
    )
    
    
    80,000
    
    
    
    (362,000
    )
    
    
    (3,131,000
    )Net Loss From
Continuing Operations
    
    
    (2,565,000
    )
    
    
    (4,118,000
    )
    
    
    (7,920,000
    )
    
    
    (10,712,000
    )Depreciation and Amortization:Energy
Services
    
    
    602,000
    
    
    
    289,000
    
    
    
    1,300,000
    
    
    
    289,000Energy Technology
    
    
    146,000
    
    
    
    140,000
    
    
    
    431,000
    
    
    
    490,000Corporate
    
    
    15,000
    
    
    
    31,000
    
    
    
    40,000
    
    
    
    88,000Total
    
    
    763,000
    
    
    
    460,000
    
    
    
    1,771,000
    
    
    
    867,000Capital Additions:Energy
Services
    
    
    108,000
    
    
    
    2,000
    
    
    
    159,000
    
    
    
    2,000Energy Technology
    
    
    62,000
    
    
    
    9,000
    
    
    
    89,000
    
    
    
    19,000Corporate
    
    
    88,000
    
    
    
    6,000
    
    
    
    128,000
    
    
    
    9,000Total
    
    $
    258,000
    
    
    $
    17,000
    
    
    $
    376,000
    
    
    $
    30,000
 September
    
    
    December30, 2007
    
    

31, 2006Total Assets:Energy Services
    
    
    17,037,000
    
    
    
    12,491,000Energy Technology
    
    
    7,213,000
    
    
    
    7,410,000Corporate overhead
    
    
    5,703,000
    
    
    
    5,496,000Total
    
    $
    29,953,000
    
    
    $
    25,397,000
 19




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 12  Equity Issuances
 a)
    
    During January 2007, the Company issued consultants warrants with terms of two to three years
to purchase 420,000 shares of its common stock at prices of $1.00 to $1.08 per share as
partial consideration for services provided the Company. These warrants were initially valued
at $250,500 using a modified Black-Scholes option pricing model utilizing the following
assumptions: risk free rate of 5.129%, expected volatility of 88.9%, expected dividend of $0
and expected life of two to three years. One of these warrants was exercisable only if
certain objectives were achieved by the consultant prior to August 1, 2007. The value of
theses warrants were charged to operations during the first quarter of 2007. During second
quarter of 2007 the Company determined the consultant was unlikely to meet the objective
necessary for the warrant to vest, therefore it reversed $88,500 of expense it had previously
recorded in connection with this warrant.b)
    
    A provision of the June 2006 PIPE transaction required the Company to file and have declared
effective by no later than November 3, 2006, a registration statement registering the shares
issued as part of the transaction. To the extent that it failed to have the registration
statement declared effective by this date, it was required to pay penalties to the PIPE
investors at the rate of 1% of the purchase price paid by the investors per month. Largely as
a result of the questions regarding the need to amend its Certificate of Incorporation to
effect the reverse split of its stock, the Company was not able to have the registration
statement declared effective until February 14, 2007. All of the investors in the PIPE
transaction agreed to accept shares of the Companys common stock as payment of this
registration penalty. As of December 31, 2006, the Company had accrued $345,583 in penalties
related to its failure to register these shares. These accrued penalties, along with $268,125
of penalties for the period from January 1, 2007 through February 14, 2007, were satisfied
through the issuance of 613,708 shares of common stock in January and February 2007.c)
    
    On February 23, 2007, the Company commenced a rights offering to
stockholders in which it distributed to each holder of record as of
February 23, 2007 (other than the former Series E Preferred
stockholders and Daniel Parke, who waived their rights to
participate), five non-transferable subscription rights to purchase
shares of the Companys common stock at $1.00 per share. Stockholders
that participated in the rights offering were also able to subscribe
for any shares that were not purchased by other stockholders pursuant
to their subscription rights. The rights offering closed on March 30,
2007 and raised $2,796,700 (net of issuance costs of $202,932) through
the issuance of 2,999,632 shares of common stock to 260 of the
Companys existing stockholders. The Company received the proceeds
from the offering and issued the common stock to the participants
during the first week of April 2007.d)
    
    In connection with the placement of the subordinated convertible term
notes during the second quarter of 2007 the Company issued four-year
warrants to eight investors, including Richard Kiphart, the Companys
chairman and largest individual stockholder, to purchase 1,442,306
shares of its common stock at $1.04 per share. These warrants were
valued at $1,136,537 using a modified-Black Scholes option pricing
model utilizing the following assumptions: risk free rate of 4.846%,
expected volatility of 93.3%, expected dividend of $0 and expected
life of four years. The value of the warrants was recorded as a
discount to the subordinated convertible term notes and will be
amortized over the life of the notes using the effective interest
method.e)
    
    During the second quarter of 2007 five investors exercised their
warrants to purchase 10,078 shares of the Companys common stock at
$0.90 per share.
 20




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 f)
    
    As discussed in Note 5 to the Companys annual report on Form 10-K for
the year ended December 31, 2006, as part of the MPG acquisition,
166,148 shares of common stock were deposited in escrow for the
benefit of the selling stockholders of MPG to be released over the
two-year period following the April 30, 2005 purchase of MPG if it
achieved certain revenue targets during the period. During May 2007
the Company issued 19,729 shares to the former MPG stockholders which
it determined it owed them pursuant to the MPG merger agreement.
These shares were valued at $1.27 per share, the market value on the
date of their release, and recorded as an increase in the goodwill
associated with the MPG acquisition. The remaining 146,419 shares
that were in escrow were returned to the Company and canceled.g)
    
    Delano Group Securities LLC acted as an advisor on the acquisition of
MPG in 2005. Part of Delanos compensation for its services was tied
to the purchase price paid for MPG. Mr. David Asplund owned and
operated Delano prior to joining Lime Energy as its CEO in January
2006. Since the release of the escrow shares was considered a payment
of additional consideration to the former stockholders of MPG, the
Company issued Mr. Asplund 986 shares of its common stock in May 2007
in satisfaction of the commission owed Delano.h)
    
    On June 6, 2007, retroactive to May 31, 2007, the Company acquired the
assets and assumed certain liabilities of George Bradley Boyett dba
Texas Energy Products. The purchase consideration consisted of
200,000 shares of Lime Energy common stock and cash of $312,787. For
accounting purposes the stock was valued at $1.07 per share, the
average closing price of the stock for the 20 trading days immediately
prior to the closingi)
    
    On June 30, 2007, the Company issued 10,955 shares of its common stock
to the holders of its subordinated convertible term notes in
satisfaction of 50% of the interest owed on the note for the
three-month period ended June 30, 2007.j)
    
    On August 6, 2007, retroactive to July 31, 2007, the Company acquired the assets and assumed
certain liabilities of Preferred Lighting, Inc. for 105,485 shares of Lime Energy common stock
and cash of $300,000. Please refer to Note 3 for additional information regarding this
transaction.k)
    
    During the third quarter of 2007 certain employees exercises exercised options to purchase
41,928 shares of the Companys common stock.l)
    
    On September 30, 2007, the Company issued 38,658 shares of its common stock to the holders of
its subordinated convertible term notes in satisfaction of 50% of the interest owed on the
note for the three-month period ended September 30, 2007.
 21




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  Results of Operations
   22




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##### Table of Contents




    
    direct labor and commission costs related to our employee sales force;
    
    expenses related to our management and staff salaries and related employee benefits,
including the costs of share based compensation;
    
    commission costs related to our independent sales representatives and our
distributors;
    
    costs related to insurance, travel and entertainment and 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.
  Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
   23




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##### Table of Contents



Three months ended September 30
    
    2007
    
    2006Contractual interest
    
    $
    143,004
    
    
    $
    16,880Amortization of deferred issuance costs
and debt discount
    
    
    252,342
    
    
    
    Total Interest Expense
    
    $
    395,346
    
    
    $
    16,880
   24




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##### Table of Contents



Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
     25




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##### Table of Contents



Nine months ended
    
    2007
    
    2006Contractual interest
    
    $
    217,482
    
    
    $
    347,624Amortization of deferred issuance costs
and debt discount
    
    
    340,113
    
    
    
    1,175,970Value of adjustment in conversion price
    
    
    
    
    
    
    950,865Prepayment penalties
    
    
    
    
    
    
    516,071Termination of post re-payment interest
Obligation
    
    
    
    
    
    
    266,225Total Interest Expense
    
    $
    557,595
    
    
    $
    3,256,755
    26




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##### Table of Contents



Liquidity and Capital Resources
    Nine months ended September 30
    
    2007
    
    
    2006Net cash used in operating activities
    
    $
    (6,925,609
    )
    
    $
    (4,335,193
    )Net cash used in investing activities
    
    
    (969,738
    )
    
    
    (4,043,271
    )Net cash provided by financing activities
    
    
    7,864,241
    
    
    
    10,975,188Net (decrease) increase in cash and cash equivalents
    
    
    (31,106
    )
    
    
    2,596,724Cash and cash equivalents, at beginning of period
    
    
    4,663,618
    
    
    
    4,229,150Cash and cash equivalents, at end of period
    
    $
    4,632,512
    
    
    $
    6,825,874
 Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
  Operating Activities
   27




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Investing Activities
  Financing Activities
   LIQUIDITY
    28




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##### Table of Contents




    
    Focus on increasing the profitable sales of our products and services. We
believe that we have taken important steps toward achieving this goal during the last
twelve months and are starting to see the results of these efforts. During the first
nine-months of 2007 we increased our sales by 162% when compared to the same period during
2006. At the same time our SG&A expense, after adjustment for non-cash items, remained
relatively unchanged and the cash used to fund operations before changes in working capital
declined by approximately 40%. Our growth in revenue has come through acquisitions and the
expansion of new and existing businesses. We believe that the current infrastructure can
support annual sales of $25 million to $30 million without adding significant additional
SG&A expense. If we can do this, we believe we will significantly reduce or eliminate the
cash consumed for operating activities before changes in working capital and significantly
reduce or eliminate our reported net losses.
    
    Expand our sales through internal product development, acquisitions and/or opening
new offices. We believe there are opportunities for further growth through geographic
and product line expansion. We can expand geographically by opening new offices, hiring
additional sales people and/or by acquiring established businesses in regions of the
country we do not currently serve. We can add to our product line through internal product
development, partnerships, joint ventures, licensing agreements and/or by acquiring
business with products, services and/or expertise that we do not currently have. An
expanded product line would allow us to offer additional energy solutions to our customers,
thereby increasing the value of each customer relationship.
    
    Seek bank financing to fund our increased need for working capital. As our
sales continue to grow our working capital requirements increase. With the reduction in
our loss from operations, after adjusting for non cash items, we believe we are in a better
position to raise traditional bank financing to finance our working capital needs. We are
currently exploring the availability of this bank financing and hope to have something in
place before the end of 2007.
    
    Aggressively 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 to identify more efficient ways to achieve our objectives.
  29




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##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements
  
 Quantitative and Qualitative Disclosures About Market Risk
 1 2
 
 Controls and Procedures
 a.
    
    Disclosure Controls and Procedures.Our management, including our chief executive officer and our chief financial officer,
maintains our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) and
has evaluated the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report. Based on such evaluation, our chief executive officer
and chief financial officer have concluded that, as of September 30, 2007, such disclosure
controls and procedures are effective for the purpose of ensuring that material information
required to be in the reports that we submit, file, furnish or otherwise provide to the
Securities and Exchange Commission is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
 30




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##### Table of Contents



b.
    
    Changes in Internal Controls.There have not been any changes in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2007 that
have materially affected or are reasonably likely to materially affect our internal control
over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Unregistered Sales of Equity Securities and Use of Proceeds
 (1)
    
    On February 23, 2007, we commenced a rights offering to stockholders in which we
distributed to each holder of record as of February 23, 2007 (other than the former Series
E Preferred stockholders and Daniel Parke, who waived their rights to participate), five
non-transferable subscription rights to purchase shares of our common stock at $1.00 per
share. Stockholders that participated in the rights offering were also able to subscribe
for any shares that were not purchased by other stockholders pursuant to their subscription
rights. The rights offering closed on March 30, 2007 and raised a total of $2,999,632
through the issuance of 2,999,632 shares of common stock to 260 of our existing
stockholders. We received the proceeds from the offering and issued the common stock to
the participants during the first week of April 2007. The proceeds from the offering will
be used for general purposes and to fund acquisitions.(2)
    
    During the second quarter of 2007 in connection with the placement of the subordinated
convertible term notes (see Note 10 to our condensed consolidated financial statements) we
issued four-year warrants to eight investors, including Richard Kiphart, our chairman and
largest individual stockholder, to purchase 1,442,306 shares of our common stock at $1.04
per share. These warrants were valued at $1,136,537 using a modified-Black Scholes option
pricing model utilizing the following assumptions: risk free rate of 4.846%, expected
volatility of 93.3%, expected dividend of $0 and expected life of four years. The value of
the warrants was recorded as a discount to the subordinated convertible term notes and will
be amortized over the life of the notes using the effective interest method. If these
warrants are exercised for cash, the proceeds will be used for general corporate purposes.(3)
    
    During the second quarter of 2007 five investors exercised their warrants to purchase
10,078 shares of our common stock at $0.90 per share. The proceeds of $7,595 will be used
for general corporate purposes.(4)
    
    As discussed in Note 5 to our annual report on Form 10-K for the year ended December
31, 2006, as part of the acquisition of MPG 166,148 shares of common stock were deposited
in escrow for the benefit of the selling stockholders of MPG to be released over the
two-year period following the April 30, 2005 purchase of MPG if MPG achieved certain
revenue targets during the period. During May 2007 we issued 19,729 shares to the former
MPG stockholders which we determined we owed them pursuant to the MPG merger agreement.
These shares were valued at $1.27 per share, the market value on the date of their release,
and recorded as an increase in the goodwill associated with the MPG acquisition. The
remaining 146,419 shares that were in escrow were returned to us and canceled.(5)
    
    Delano Group Securities LLC acted as an advisor on the acquisition of MPG in 2005 and
part of the compensation for its services was tied to the purchase price paid for MPG.
Delano was
 31




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##### Table of Contents



formerly owned by David Asplund. Mr. Asplund left Delano and became the CEO of Lime Energy
on January 23, 2006. In connection with the release of the escrow shares to the former
stockholders of MPG, we issued Mr. Asplund 986 shares of our common stock in May 2007 in
satisfaction of the commission owed Delano.(6)
    
    On June 6, 2007, we acquired, retroactive to May 31, 2007, the assets and assumed
certain liabilities of George Bradley Boyett dba Texas Energy Products. The purchase
consideration consisted of 200,000 shares of our common stock and cash of $312,787.(7)
    
    On June 30, 2007, we issued 10,955 shares of our common stock to the holders of our
subordinated convertible term notes in satisfaction of 50% of the interest owed on the
note.(8)
    
    On August 6, 2007, retroactive to July 31, 2007, we acquired the assets and assumed
certain liabilities of Preferred Lighting, Inc. for 105,485 shares of our common stock and
cash of $300,000. Please refer to Note 3 to our condensed consolidated financial
statements for additional information regarding this transaction.(9)
    
    During the third quarter of 2007 certain employees exercised options to purchase 41,928
shares of our common stock. The cash proceeds of $32,130 will be used for general
corporate purposes.(10)
    
    On September 30, 2007, we issued 38,658 shares of our common stock to the holders of
our subordinated convertible term notes in satisfaction of 50% of the interest owed on the
note for the three-month period ended September 30, 2007.
  
 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
 32




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##### Table of Contents



SIGNATURES
  LIME ENERGY CO.Dated: November 14, 2007
    
    By:
    
    /s/ David AsplundDavid AsplundChief Executive Officer
 (principal executive officer)Dated: November 14, 2007
    
    By:
    
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer
 (principal
financial and accounting officer)
 33