Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-Q**

 

**x****     ****QUARTERLY REPORT****PURSUANT TO****SECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2010**

 

**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**

 

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**LIME ENERGY CO.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**  (State or other jurisdiction of incorporation or organization) | ** ** | **36-4197337**

(I.R.S. Employer Identification No.) |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|

 

**1280 Landmeier Road, Elk GroveVillage, Illinois 60007-2410**(Address of principal executive offices, including zip code)

 

**(847) 437-1666**(Registrant’s telephone number, including area code)

 

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(Former name, former address and former fiscalyear, if changed since last report)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any,everyInteractive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) duringthe preceding 12months (or for such shorter period that the registrant was required to submitand post such files). Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

| Large Accelerated Filer  o |   | Accelerated Filer  o   |
|---------------------------------|--------|-----------------------------|
|                            |   |                        |
| Non-Accelerated Filer o         |   | Smaller reporting company x |

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

 

23,640,580 shares of the registrant’s common stock,$.0001 par value per share, were outstanding as of November 5, 2010.

 

 

 

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Tableof Contents

 

**LIME ENERGY CO.**

**FORM 10-Q**

For The Quarter Ended September 30, 2010

 

INDEX

 
| ** **    | ** **                                                                                                                                                                 | **Page**   |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** **                                                                                                                                                                 | **Number** |
|          |                                                                                                                                                                       |       |
| Part I   | Financial  Information                                                                                                                                                     |       |
|          |                                                                                                                                                                       |       |
| ITEM 1.       | Financial  Statements:                                                                                                                                                     |       |
|          |                                                                                                                                                                       |       |
|          | Condensed Consolidated Balance Sheets  September 30, 2010 (unaudited) and December 31, 2009                                                                      | 1          |
|          |                                                                                                                                                                       |       |
|          | Unaudited Condensed Consolidated Statements of  Operations Three months Ended September 30, 2010 and 2009 and the Nine  Months Ended September 30, 2010 and 2009 | 3          |
|          |                                                                                                                                                                       |       |
|          | Unaudited Condensed Consolidated Statement of  Stockholders’ Equity Nine Months Ended September 30, 2010                                                         | 4          |
|          |                                                                                                                                                                       |       |
|          | Unaudited Condensed Consolidated Statements of Cash  Flows Nine Months Ended September 30, 2010 and 2009                                                              | 5          |
|          |                                                                                                                                                                       |       |
|          | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                                                            | 7          |
|          |                                                                                                                                                                       |       |
| ITEM 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                | 16         |
|          |                                                                                                                                                                       |       |
| ITEM 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                | 29         |
|          |                                                                                                                                                                       |       |
| ITEM 4.       | Controls and  Procedures                                                                                                                                                   | 29         |
|          |                                                                                                                                                                       |       |
| Part II. | Other Information                                                                                                                                                          |       |
|          |                                                                                                                                                                       |       |
| ITEM 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                               | 30         |
|          |                                                                                                                                                                       |       |
| ITEM 6.       | Exhibits                                                                                                                                                                   | 30         |
|          |                                                                                                                                                                       |       |
|          | Signatures                                                                                                                                                                 | 31         |

 

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PART I- FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

**Lime Energy Co.**

**CondensedConsolidated Balance Sheets**

**(in thousands)**

 
| ** **                                                                   | ** ** | **September 30,** | ** ** | ** **            | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2010**               | ** ** | **December 31,** | ** ** |
| ** **                                                                   | ** ** | **(unaudited)**        | ** ** | **2009**** (1)** | ** ** |
|                                                                         |       |                   |       |                  |       |
| **Assets**                                                                   |       |                   |       |                  |       |
|                                                                         |       |                   |       |                  |       |
| **Current  assets**                                                          |       |                   |       |                  |       |
| Cash and cash equivalents                                                    | ** ** | **$**                  | **12,016** | ** **            | **$**      | **22,870** | ** ** |
| Restricted cash                                                              | ** ** | **3,804**              | ** ** | **500**               | ** ** |
| Accounts receivable, net                                                     | ** ** | **25,618**             | ** ** | **19,330**            | ** ** |
| Inventories                                                                  | ** ** | **515**                | ** ** | **230**               | ** ** |
| Costs and estimated  earnings in excess of billings on uncompleted contracts | ** ** | **8,214**              | ** ** | **5,532**             | ** ** |
| Prepaid expenses and other                                                   | ** ** | **986**                | ** ** | **752**               | ** ** |
| **Total  Current Assets**                                                    | ** ** | **51,153**             | ** ** | **49,214**            | ** ** |
|                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Net Property  and Equipment**                                              | ** ** | **1,962**              | ** ** | **1,917**             | ** ** |
|                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Long Term  Receivables**                                                   | ** ** | **558**                | ** ** | **545**               | ** ** |
| **Intangibles,  net**                                                        | ** ** | **2,910**              | ** ** | **3,382**             | ** ** |
| **Goodwill**                                                                 | ** ** | **18,627**             | ** ** | **18,627**            | ** ** |
|                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                         | ** ** | **$**                  | **75,210** | ** **            | **$**      | **73,685** | ** ** |

 

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**Lime Energy Co.**

**Condensed Consolidated BalanceSheets**

**(in thousands)**

 
| ** **                                                                                                                                                                               | ** ** | **September 30,** | ** ** | ** **            | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2010**               | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                               | ** ** | **(unaudited)**        | ** ** | **2009**** (1)** | ** ** |
|                                                                                                                                                                                     |       |                   |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                           |       |                   |       |                  |       |
|                                                                                                                                                                                     |       |                   |       |                  |       |
| **Current  liabilities**                                                                                                                                                                 |       |                   |       |                  |       |
| Current maturities of  long-term debt                                                                                                                                                    | ** ** | **$**                  | **115**    | ** **            | **$**      | **187** | ** ** |
| Accounts payable                                                                                                                                                                         | ** ** | **9,598**              | ** ** | **8,424**             | ** ** |
| Accrued expenses                                                                                                                                                                         | ** ** | **9,820**              | ** ** | **4,892**             | ** ** |
| Billings in excess of  costs and estimated earnings on uncompleted contracts                                                                                                             | ** ** | **2,233**              | ** ** | **634**               | ** ** |
| Customer deposits                                                                                                                                                                        | ** ** | **749**                | ** ** | **799**               | ** ** |
| **Total  Current Liabilities**                                                                                                                                                           | ** ** | **22,515**             | ** ** | **14,936**            | ** ** |
| ** **                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Long-Term  Debt,** less current maturities                                                                                                                                             | ** ** | **446**                | ** ** | **544**               | ** ** |
| ** **                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Total  Liabilities**                                                                                                                                                                   | ** ** | **22,961**             | ** ** | **15,480**            | ** ** |
| ** **                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Stockholders’  Equity**                                                                                                                                                           | ** ** | ** **             | ** ** | ** **            | ** ** |
| Common stock, $0.0001 par  value; 50,000,000 shares authorized 23,640,500 and 23,510,622 issued and  outstanding as of September 30, 2010 and December 31, 2009,  respectively | ** ** | **2**                  | ** ** | **2**                 | ** ** |
| Additional paid-in capital                                                                                                                                                               | ** ** | **182,815**            | ** ** | **181,665**           | ** ** |
| Accumulated deficit                                                                                                                                                                      | ** ** | **(130,568**           | **)**      | **(123,462**          | **)**      |
| ** **                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Total  Stockholders’ Equity**                                                                                                                                                     | ** ** | **52,249**             | ** ** | **58,205**            | ** ** |
| ** **                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                                                                     | ** ** | **$**                  | **75,210** | ** **            | **$**      | **73,685** | ** ** |

 

*See accompanying notes tocondensed consolidated financial statements*

 

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*(1)**      **Derivedfrom audited financial statements in the Company’s annual report on Form 10-Kfor the year ended December 31, 2009*

 

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**Lime Energy Co.**

**UnauditedCondensed Consolidated Statements of Operations**

**(in thousands)**

** **
| ** **                                                          | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                          | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                                                          | ** ** | **2010**                          | ** ** | **2009**                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                |       |                              |       |                              |       |   |   |   |   |
| **Revenue**                                                         | ** ** | **$**                             | **28,077** | ** **                        | **$**      | **21,003** | ** ** | **$** | **57,398** | ** ** | **$** | **50,523** | ** ** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of sales                                                       | ** ** | **22,100**                        | ** ** | **16,524**                        | ** ** | **45,373** | ** ** | **40,397** | ** ** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  Profit**                                                   | ** ** | **5,977**                         | ** ** | **4,479**                         | ** ** | **12,025** | ** ** | **10,126** | ** ** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and  administrative expenses                       | ** ** | **6,261**                         | ** ** | **5,731**                         | ** ** | **18,788** | ** ** | **16,513** | ** ** |
| Amortization of  intangibles                                        | ** ** | **147**                           | ** ** | **269**                           | ** ** | **472** | ** ** | **927** | ** ** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  Loss**                                                 | ** ** | **(431**                          | **)**      | **(1,521**                        | **)**      | **(7,235** | **)** | **(7,314** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other Income (Expense)                                              | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                     | ** ** | **56**                            | ** ** | **30**                            | ** ** | **154** | ** ** | **92** | ** ** |
| Interest expense                                                    | ** ** | **(7**                            | **)**      | **(2,004**                        | **)**      | **(25** | **)** | **(2,907** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total other income  (expense)                                       | ** ** | **49**                            | ** ** | **(1,974**                        | **)**      | **129** | ** ** | **(2,815** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing  operations before discontinued operations     | ** ** | **(382**                          | **)**      | **(3,495**                        | **)**      | **(7,106** | **)** | **(10,129** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Discontinued  Operations:**                                       | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from operation of  discontinued business                       | ** ** | **—**                        | ** ** | **(396**                          | **)**      | **—** | ** ** | **(1,425** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Loss**                                                        | ** ** | **(382**                          | **)**      | **(3,891**                        | **)**      | **(7,106** | **)** | **(11,554** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Preferred Stock Dividends                                           | ** ** | **—**                        | ** ** | **(297**                          | **)**      | **—** | ** ** | **(1,499** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Loss  Available to Common Stockholders**                      | ** ** | **$**                             | **(382**   | **)**                             | **$**      | **(4,188** | **)** | **$** | **(7,106** | **)** | **$** | **(13,053** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and diluted loss per  common share from continuing operations | ** ** | **$**                             | **(0.02**  | **)**                             | **$**      | **(0.24** | **)** | **$** | **(0.30** | **)** | **$** | **(0.87** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discontinued operations                                             | ** ** | **—**                        | ** ** | **(0.02**                         | **)**      | **—** | ** ** | **(0.11** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and Diluted Loss Per  Common Share                            | ** ** | **$**                             | **(0.02**  | **)**                             | **$**      | **(0.26** | **)** | **$** | **(0.30** | **)** | **$** | **(0.98** | **)** |
|                                                                | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted Average Common  Shares Outstanding (in thousands)          | ** ** | **23,640**                        | ** ** | **15,852**                        | ** ** | **23,614** | ** ** | **13,331** | ** ** |

 

*See accompanying notes tocondensed consolidated financial statements*

 

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** **

**Lime Energy Co.**

**UnauditedCondensed Consolidated Statement of Stockholders’ Equity**

**(in thousands)**

 
| ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Total**              | ** **   |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|--------------|
| ** **                                                  | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** **   |
| ** **                                                  | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Equity**             | ** **   |
|                                                        |       |       |       |       |       |           |       |            |       |                   |         |
| **Balance,** December 31, 2009                         | ** ** | **23,511** | ** ** | **$**      | **2**      | ** **     | **$**      | **181,665**     | ** ** | **$**                  | **(123,462** | **)** | **$** | **58,205** | ** ** |
|                                                        |       |       |       |       |       |           |       |            |       |                   |         |
| Share based compensation                                    |       | —     |       | —     |       | 1,078          |       | —          |       | 1,078                  |         |
|                                                        |       |       |       |       |       |           |       |            |       |                   |         |
| Shares issued for benefit  plans and option exercises       |       | 129        |       | —     |       | 72             |       | —          |       | 72                     |         |
|                                                        |       |       |       |       |       |           |       |            |       |                   |         |
| Net loss for the nine  months ended September 30, 2010 |       | —     |       | —     |       | —         |       | (7,106          | )          | (7,106                 | )            |
|                                                        |       |       |       |       |       |           |       |            |       |                   |         |
| **Balance,  September 30, 2010**                       | ** ** | **23,640** | ** ** | **$**      | **2**      | ** **     | **$**      | **182,815**     | ** ** | **$**                  | **(130,568** | **)** | **$** | **52,249** | ** ** |

 

*See accompanying notes tocondensed consolidated financial statements.*

 

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**Lime Energy Co.**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(in thousands)**

** **
| **Nine Months Ended September 30,**                                             | ** ** | **2010**    | ** ** | **2009**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
|                                                                                                |       |        |       |       |       |
| **Cash  Flows from Operating Activities**                                                           |       |        |       |       |       |
| Net Loss                                                                                            | ** ** | **$**       | **(7,106** | **)**      | **$**      | **(11,554** | **)** |
|                                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** |
| Adjustments to reconcile  net loss to net cash used in operating activities, net of assets acquired | ** ** | ** **  | ** ** | ** ** | ** ** |
| Provision for bad debts                                                                             | ** ** | **26**      | ** ** | **130**    | ** ** |
| Share-based compensation                                                                            | ** ** | **1,078**   | ** ** | **1,326**  | ** ** |
| Preferred stock dividends                                                                           | ** ** | **—**  | ** ** | **(1,499** | **)**      |
| Depreciation and  amortization                                                                      | ** ** | **847**     | ** ** | **1,495**  | ** ** |
| Amortization of deferred  financing costs                                                           | ** ** | **—**  | ** ** | **15**     | ** ** |
| Amortization of issuance  discount                                                                  | ** ** | **—**  | ** ** | **1,411**  | ** ** |
| Issuance of stock and  warrants in exchange for services received                                   | ** ** | **—**  | ** ** | **13**     | ** ** |
| Accrued dividend satisfied  through the issuance of preferred stock                                 | ** ** | **—**  | ** ** | **781**    | ** ** |
| Accrued interest satisfied  through the issuance of common stock                                    | ** ** | **—**  | ** ** | **204**    | ** ** |
| Beneficial value of change  in conversion price of subordinated notes                               | ** ** | **—**  | ** ** | **938**    | ** ** |
| PIK notes issued for  interest                                                                      | ** ** | **—**  | ** ** | **21**     | ** ** |
| Asset impairment                                                                                    | ** ** | **—**  | ** ** | **503**    | ** ** |
| Loss on disposition of  fixed assets                                                                | ** ** | **9**       | ** ** | **13**     | ** ** |
| Changes in assets and  liabilities:                                                                 | ** ** | ** **  | ** ** | ** ** | ** ** |
| Accounts receivable                                                                                 | ** ** | **(6,327**  | **)**      | **493**    | ** ** |
| Inventories                                                                                         | ** ** | **(285**    | **)**      | **(310**   | **)**      |
| Costs and estimated  earnings in excess of billings on uncompleted contracts                        | ** ** | **(2,682**  | **)**      | **454**    | ** ** |
| Prepaid expenses and other                                                                          | ** ** | **(234**    | **)**      | **526**    | ** ** |
| Accounts payable                                                                                    | ** ** | **1,174**   | ** ** | **(2,217** | **)**      |
| Accrued expenses                                                                                    | ** ** | **4,928**   | ** ** | **124**    | ** ** |
| Billings in excess of  costs and estimated earnings on uncompleted contracts                        | ** ** | **1,599**   | ** ** | **(420**   | **)**      |
| Deferred revenue                                                                                    | ** ** | **—**  | ** ** | **(90**    | **)**      |
| Customer deposits                                                                                   | ** ** | **(50**     | **)**      | **(440**   | **)**      |
|                                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net cash used in operating  activities                                                              | ** ** | **(7,023**  | **)**      | **(8,083** | **)**      |
|                                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Cash  Flows From Investing Activities**                                                           | ** ** | ** **  | ** ** | ** ** | ** ** |
| Acquisition costs, net of  cash acquired                                                            | ** ** | **—**  | ** ** | **(1,047** | **)**      |
| Proceeds from sales of  fixed assets                                                                | ** ** | **1**       | ** ** | **11**     | ** ** |
| Purchases of property and  equipment                                                                | ** ** | **(431**    | **)**      | **(305**   | **)**      |
| Increase in restricted  cash                                                                        | ** ** | **(3,304**  | **)**      | **—** | ** ** |
|                                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net cash used in investing  activities                                                              | ** ** | **(3,734**  | **)**      | **(1,341** | **)**      |
|                                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Cash  Flows From Financing Activities**                                                           | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net payments on line of  credit                                                                     | ** ** | **—**  | ** ** | **(3,966** | **)**      |
| Proceeds from long-term  debt                                                                       | ** ** | **—**  | ** ** | **27**     | ** ** |
| Principal repayments of  long-term debt                                                             | ** ** | **(169**    | **)**      | **(1,574** | **)**      |
| Proceeds from issuance of  common stock                                                             | ** ** | **72**      | ** ** | **38,203** | ** ** |
| Costs related to stock  issuances                                                                   | ** ** | **—**  | ** ** | **(2,828** | **)**      |
| Proceeds from exercise of  options and warrants                                                     | ** ** | **—**  | ** ** | **45**     | ** ** |
|                                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net cash (used in)  provided by financing activities                                                | ** ** | **(97**     | **)**      | **29,907** | ** ** |
|                                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Net  (Decrease) Increase in Cash and Cash Equivalents**                                           | ** ** | **(10,854** | **)**      | **20,483** | ** ** |
|                                                                                                |       |        |       |       |       |
| Cash and Cash Equivalents, at beginning of period                                                   |       | **22,870**  | ** ** | **3,734**  |       |
|                                                                                                |       | ** **  | ** ** | ** ** |       |
| Cash and Cash Equivalents, at end of period                                                         |       | **$**       | **12,016** | ** ** | **$**      | **24,217** |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

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| **As of September 30,**                                                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                             |       |     |       |     |       |
| **Supplemental  Disclosure of Cash Flow Information (in thousands)**                             |       |     |       |     |       |
|                                                                                             |       |     |       |     |       |
| Cash paid during the  period for interest:                                                       |       |     |       |     |       |
| -    Continuing operations                                                        |       | $        | 26         |     | $          | 417 |   |
| -    Discontinued operations                                                      |       | —   |       | 1        |       |
|                                                                                             |       |     |       |     |       |
| Interest obligation  satisfied through the issuance of common stock                              |       | —   |       | 204      |       |
|                                                                                             |       |     |       |     |       |
| Accrued earn-out satisfied  through the issuance of common stock                                 |       | —   |       | 293      |       |
|                                                                                             |       |     |       |     |       |
| Satisfaction of accrued  dividend through the issuance of 19 sharesof series A-1 preferred stock |       | —   |       | 781      |       |
|                                                                                             |       |     |       |     |       |
| Extinguishment of line of  credit                                                                |       | —   |       | 21       |       |
|                                                                                             |       |     |       |     |       |
| Issuance of line of credit  note in satisfaction of interest payable                             |       | —   |       | 21       |       |
|                                                                                             |       |     |       |     |       |
| Cash paid for preferred  dividends                                                               |       | —   |       | 1,006    |       |
|                                                                                             |       |     |       |     |       |
| Subordinated notes  converted to common stock                                                    |       | —   |       | 5,000    |       |
|                                                                                             |       |     |       |     |       |
| Value of warrants recorded  to deferred financing costs                                          |       | —   |       | 309      |       |
|                                                                                                  |            |          |            |          |            |  |  |

 

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LimeEnergy Co.

Notes to Unaudited Condensed Consolidated FinancialStatements

 

***Note 1 — Basis ofPresentation***

 

The accompanying unaudited condensed consolidated financialstatements (the “Financial Statements”) of Lime Energy Co. (“Lime Energy” and,together with its subsidiaries, the “Company”, “we”, “us” or “our”) have beenprepared in accordance with Rule 10-01 of Regulation S-X promulgated bythe Securities and Exchange Commission (the “SEC”) and, therefore, do notinclude all information and footnotes necessary for a fair presentation offinancial position, results of operations and cash flows in conformity withaccounting principles generally accepted in the United States of America (“GAAP”).  In our opinion, however, the FinancialStatements contain all adjustments, consisting only of normal recurringadjustments, necessary to present fairly our financial position, results ofoperations and cash flows as of and for the interim periods.

 

The results of operations for the three months andnine months ended September 30, 2010 and 2009 are not necessarilyindicative of the results to be expected for the full year.

 

For further information, refer to the audited financialstatements and the related footnotes included in the Lime Energy Co. AnnualReport on Form 10-K for the year ended December 31, 2009.

 

The Company disposed of the assets of its MaximumPerformance Group, Inc. (“MPG”) subsidiary on August 10, 2009 and hasreported the operating results for this business as discontinuedoperations.  Please see Note 4 foradditional information regarding the discontinued operations.

 

***Note 2 -Share-Based Compensation***

 

**Stock Options**

 

A committee of the Board of Directors grants stockoptions and restricted stock under the Company’s 2008 Long Term Incentive Plan,as amended (the “Plan”). All of the options have been granted at a price equalto or greater than the market price of the Company’s stock on the date ofgrant. Substantially all stock option grants outstanding under the Plan vestratably over three years and expire 10 years from the date of grant. Inaddition to the Plan, the Company gives employees the right to purchase sharesat a discount to the market price under its employee stock purchase plan (“ESPP”).  During the second quarter of 2010 the Companyissued options to certain employees that vest upon achievement of certainfinancial objectives in combination with a minimum market price for its commonstock during a five-year period (the “Cliff Options”).  The Company assesses the probability ofachieving these objectives at the end of each month and recognizes expenseaccordingly.  In addition to the Plan andthe ESPP, the Board of Directors grants restricted stock to non-employeedirectors under the Company’s 2010 Non-Employee Director Stock Plan (the “Directors’Plan”).  Restricted stock granted to dateunder the Directors’ Plan vests 50% on grant and 50% on the first anniversaryof grant if the director is still serving on the Board of Directors on thevesting date.

 

The Company accounts for employee share-based awardsin accordance with Accounting Standards Codification (ASC) 718. This pronouncementrequires companies to measure the cost of employee service received in exchangefor a share-based award based on the fair value of the award at the date ofgrant, with expense recognized over the requisite service period, which isgenerally equal to the vesting period of the grant.

 

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Table ofContents

 

LimeEnergy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

The following table summarizes the Company’s totalshare-based compensation expense for the three-month period ended September 30,2010:

 
| ** **                   | ** ** | **Three months ended September 30, 2010** | ** ** | **Three months ended September 30, 2009** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Cost of**                                                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** | **Cost of** | ** ** | ** ** | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Sales**                                                          | ** ** | **SG&A**                                                       | ** ** | **Total** | ** ** | **Sales** | ** ** | **SG&A** | ** ** | **Operations** | ** ** | **Total** | ** ** |
|                         |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                |       | $                                                                  | 3          |                                                               | $          | 233 |   | $ | 236 |   | $ | 24 |   | $ | 363 |   | $ | 1 |   | $ | 388 |   |
|                         |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock             |       | —                                                             |       | 90                                                                 |       | 90 |   | — |   | — |   | — |   | — |   |
|                         |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Employee Stock Purchse  Plan |       | —                                                             |       | 11                                                                 |       | 11 |   | — |   | 29 |   | — |   | 29 |   |
|                         |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
|                         |       | $                                                                  | 3          |                                                               | $          | 334 |   | $ | 337 |   | $ | 24 |   | $ | 392 |   | $ | 1 |   | $ | 417 |   |

 

The following table summarizes the Company’s totalshare-based compensation expense for the nine-month period ended September 30,2010:

 
| ** **                   | ** ** | **Nine months ended September 30, 2010** | ** ** | **Nine months ended September 30, 2009** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Cost of**                                                  | ** ** | ** **                                                        | ** ** | ** ** | ** ** | **Cost of** | ** ** | ** ** | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Sales**                                                         | ** ** | **SG&A**                                                      | ** ** | **Total** | ** ** | **Sales** | ** ** | **SG&A** | ** ** | **Operations** | ** ** | **Total** | ** ** |
|                         |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                |       | $                                                                 | 14         |                                                              | $          | 893 |   | $ | 907 |   | $ | 77 |   | $ | 1,169 |   | $ | 9 |   | $ | 1,255 |   |
|                         |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock             |       | —                                                            |       | 145                                                               |       | 145 |   | — |   | — |   | — |   | — |   |
|                         |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Employee Stock Purchse  Plan |       | —                                                            |       | 26                                                                |       | 26 |   | — |   | 71 |   | — |   | 71 |   |
|                         |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
|                         |       | $                                                                 | 14         |                                                              | $          | 1,064 |   | $ | 1,078 |   | $ | 77 |   | $ | 1,240 |   | $ | 9 |   | $ | 1,326 |   |

 

The Company uses an Enhanced Hull-White Trinomialmodel to value its employee options.  Theweighted-average, grant-date fair value of stock options granted to employeesand the weighted-average significant assumptions used to determine those fairvalues, using an Enhanced Hull-White Trinomial model for stock options underASC 718, are as follows:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Weighted average  fair-value per option granted |       | $                                | 1.50       |                            | $          | 2.35 |   | $ | 2.05 |   | $ | 2.17 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Significant assumptions (weighted  average):    |       |                             |       |                            |       |   |   |   |   |
| Risk-free rate                                  |       | 0.16                             | %          | 0.18                            | %          | 0.07 | % | 0.13 | % |
| Dividend yield                                  |       | 0.00                             | %          | 0.00                            | %          | 0.00 | % | 0.00 | % |
| Expected volatility                             |       | 84.4                             | %          | 83.0                            | %          | 83.4 | % | 85.5 | % |
| Expected life (years) (1)                       |       | 5.6                              |       | 5.4                             |       | 5.9 |   | 5.1 |   |
| Expected turn-over rate                         |       | 13.30                            | %          | 10.60                           | %          | 9.00 | % | 11.60 | % |
| Expected exercise multiple                      |       | 2.20                             |       | 2.20                            |       | 2.20 |   | 2.20 |   |
|                                                 |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

----

(1)          The Company continues to use the simplified method to estimate expectedterm due to the historical structural changes to its business such thathistorical exercise data may no longer provide a reasonable basis on which toestimate expected term.

 

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LimeEnergy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

The risk-free interest rate is based on the U.S.Treasury Bill rates at the time of grant. The dividend yield reflects the factthat the Company has never paid a dividend on its common stock and does notexpect to in the foreseeable future. The Company estimated the volatility ofits common stock at the date of grant based on the historical volatility of itsstock. The expected term of the options is based on the simplified method asdescribed in the Staff Accounting Bulletin No. 107, which is the averageof the vesting term and the original contract term.  The expected turnover rate represents theexpected forfeitures due to employee turnover and is based on historical ratesexperienced by the Company.  The expectedexercise multiple represents the mean ratio of the stock price to the exerciseprice at which employees are expected to exercise their options and is based onan empirical study completed by S. Huddart and M. Lang (1996).

 

Option activity under the Company’s stock option plansas of September 30, 2010 and changes during the three months then endedare presented below:

 
| ** **                                      | ** ** | **Shares** | ** ** | **Exercise Price Per   Share** | ** ** | **Weighted   Average Exercise   Price** | ** ** |
|-------------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|--------------------------------------------------------|------------|
|                                            |       |       |       |                                          |       |                                                   |       |
| Outstanding at  June 30, 2010              |       | 3,396,678  |       | $3.30 - $1,363.95                             |       | $                                                      | 7.17       |   |
|                                            |       |       |       |                                          |       |                                                   |       |
| Granted                                         |       | 10,000     |       | $3.04 - $3.51                                 |       | $                                                      | 3.28       |   |
| Exercised                                       |       | —     |       |                                          |       | —                                                 |       |
| Forfeited                                       |       | (27,267    | )          | $3.50 - $840.00                               |       | $                                                      | 14.73      |   |
|                                            |       |       |       |                                          |       |                                                   |       |
| Outstanding at  September 30, 2010         |       | 3,379,411  |       | $3.04 - $1,363.95                             |       | $                                                      | 7.10       |   |
|                                            |       |       |       |                                          |       |                                                   |       |
| Options exercisable at  September 30, 2010 |       | 1,968,665  |       | $3.30 - $1,363.95                             |       | $                                                      | 8.70       |   |

 

Option activity under the Company’s stock option plansas of September 30, 2010 and changes during the nine months then ended arepresented below:

 
| ** **                                      | ** ** | **Shares** | ** ** | **Exercise Price Per   Share** | ** ** | **Weighted   Average Exercise   Price** | ** ** |
|-------------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|--------------------------------------------------------|------------|
|                                            |       |       |       |                                          |       |                                                   |       |
| Outstanding at  December 31, 2009          |       | 2,441,344  |       | $3.29 - $1,363.95                             |       | $                                                      | 9.66       |   |
|                                            |       |       |       |                                          |       |                                                   |       |
| Granted                                         |       | 1,031,638  |       | $3.04 - $4.96                                 |       | $                                                      | 4.47       |   |
| Exercised                                       |       | (15,061    | )          | $3.29 - $3.30                                 |       | $                                                      | 3.30       |   |
| Forfeited                                       |       | (78,510    | )          | $3.50 - $945.00                               |       | $                                                      | 52.83      |   |
|                                            |       |       |       |                                          |       |                                                   |       |
| Outstanding at  September 30, 2010         |       | 3,379,411  |       | $3.04 - $1,363.95                             |       | $                                                      | 7.10       |   |
|                                            |       |       |       |                                          |       |                                                   |       |
| Options exercisable at  September 30, 2010 |       | 1,968,665  |       | $3.30 - $1,363.95                             |       | $                                                      | 8.70       |   |

 

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LimeEnergy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

The following table summarizes information about stockoptions outstanding at September 30, 2010:

 
| ** **              | ** ** | **Options Outstanding**                                          | ** ** | **Options Exercisable**                                                | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Number   Outstanding   at September  30, 2010** | ** ** | **Weighted   Average   Remaining   Contractual   Life** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Number   Exercisable at  September 30,   2010** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
|                    |       |                                                                  |       |                                                                        |       |   |   |   |   |   |   |
| $3.04 - $4.00           |       | 635,524                                                               |       | 7.0 years                                                                   |       | $ | 3.48 |   | 363,809 |   | $ | 3.45 |   |
| $4.01 - $6.00           |       | 1,078,639                                                             |       | 9.4 years                                                                   |       | $ | 4.50 |   | 67,861 |   | $ | 4.73 |   |
| $6.01 - $8.00           |       | 1,283,052                                                             |       | 6.0 years                                                                   |       | $ | 7.05 |   | 1,269,385 |   | $ | 7.05 |   |
| $8.01 - $10.00          |       | 19,569                                                                |       | 7.5 years                                                                   |       | $ | 9.15 |   | 17,836 |   | $ | 9.20 |   |
| $10.01 - $20.00         |       | 349,989                                                               |       | 7.0 years                                                                   |       | $ | 11.14 |   | 237,136 |   | $ | 11.15 |   |
| $20.01 - $1,363.95      |       | 12,638                                                                |       | 1.3 years                                                                   |       | $ | 300.98 |   | 12,638 |   | $ | 300.98 |   |
|                    |       |                                                                  |       |                                                                        |       |   |   |   |   |   |   |
| $3.04 - $1,363.95       |       | 3,379,411                                                             |       | 7.4 years                                                                   |       | $ | 7.10 |   | 1,968,665 |   | $ | 8.70 |   |

 

The aggregate intrinsic value of the outstandingoptions (the difference between the closing stock price on the last trading dayof the third quarter of 2010 of $3.59 per share and the exercise price,multiplied by the number of in-the-money options) that would have been receivedby the option holders had all option holders exercised their options on September 30,2010 was approximately $81,000. The aggregate intrinsic value of exercisableoptions as of September 30, 2010 was approximately $59,000.  These amounts will change based on changes inthe fair market value of the Company’s common stock.

 

As of September 30, 2010, there was approximately$536,000 of total unrecognized compensation cost related to stock options whichis expected to be recognized over a weighted-average period of 1.1 year andunrecognized cost of $217,000 related to restricted stock which will berecognized over a weighted-average period of 9.3 months.  In addition, there was approximately $1.4million of unrecognized expense related to the Cliff Options which may be recognizedover the next 4.25 years.

 

***Note 3 —Acquisition of Advanced Biotherapy, Inc.***

 

On March 3, 2009, the Company exchanged 2,252,341shares of its common stock for 1,060,421,884 shares of Advanced Biotherapy, Inc.(“ADVB”) held by certain stockholders of ADVB (the “Sellers”) representing approximately90.8% of ADVB’s issued and outstanding shares pursuant to a Stock PurchaseAgreement dated November 18, 2008. The Company then completed a short-form merger in which it merged ADVBwith and into a newly formed merger subsidiary, with the merger subsidiarycontinuing as the surviving entity.  Uponthe closing of the merger the Company obtained access to ADVB’s assets,including approximately $7.4 million of cash and a revolving credit note issuedby the Company that had an outstanding balance of $42,000 and accrued interestpayable of $28,000.  Upon the closing ofthe transaction the Company cancelled the revolving credit note anddiscontinued the operations of ADVB.

 

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LimeEnergy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

ADVBhad no revenue generating operations and did not have employees capable ofdeveloping a product that would be considered a business. Therefore the Companydid not consider ADVB a business as defined by Regulation S-X, Rule 11-01(d) orby generally accepted accounting principles. Consequently, the merger was notaccounted for as a business combination under the guidance of ASC 805, BusinessCombinations.  The substance of the ADVBacquisition includes two distinct events. First, as a result of thetransaction, the Company has settled the amounts due to ADVB under its revolvingcredit note (see Note 7).  In addition,the Company received approximately $7.4 million of cash in exchange for theshares of common stock it issued in connection with the ADVB acquisition. As aresult of the merger, the Company eliminated any debt due to ADVB, recorded theassets acquired (consisting primarily of cash and cash equivalents) at fairvalue and credited equity for the value of its common shares issued inconnection with the ADVB acquisition.

 

***Note 4 —Discontinued Operations***

 

OnAugust 10, 2009, the Company sold its Energy Technology business.  During the quarter ended June 30, 2009,in anticipation of the sale of the Energy Technology business, the Companyreduced the carrying value of the related assets to their expected fair value,incurring an impairment loss of $503,000.  The Company has reported the operating resultsof this business for the three-month and nine-month periods ended September 30,2009 as discontinued operations in the accompanying consolidated financialstatements.

 

***Note 5 — RecentAccounting Pronouncements***

 

InJune 2009, the FASB issued Accounting Standards Codification (“ASC”) 810, “Amendmentto FASB Interpretation No. 46(R)” to revise the approach to determine whena variable interest entity (VIE) should be consolidated. The new consolidationmodel for VIEs considers whether the Company has the power to direct theactivities that most significantly impact the VIE’s economic performance andshares in the significant risks and rewards of the entity. The guidance on VIE’srequires companies to continually reassess VIEs to determine if consolidationis appropriate and provide additional disclosures. The guidance is effectivefor the Company’s 2010 fiscal year. The adoption of this statement did not havea material impact on the Company’s consolidated results of operations andfinancial condition or cash flows.

 

ASC605-25—In October 2009, the Financial Accounting Standards Board (“FASB”)issued Accounting Standards Update (“ASU”) No. 2009-13 for updated revenuerecognition guidance under the provisions of ASC 605-25, “Multiple-ElementArrangements”. The previous guidance has been retained for criteria todetermine when delivered items in a multiple-deliverable arrangements should beconsidered separate units of accounting, however the updated guidance removesthe previous separation criterion that objective and reliable evidence of fairvalue of any undelivered items must exist for the delivered items to beconsidered a separate unit or separate units of accounting. This guidance iseffective for fiscal years beginning on or after June 15, 2010. TheCompany does not expect that the adoption of this guidance will have a materialeffect on the Company’s consolidated results of operations, financial positionor cash flows.

 

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LimeEnergy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

ASC820—In January 2010, the FASB issued ASU No. 2010-06, “Fair ValueMeasurements and Disclosures (Topic 820): Improving Disclosures About FairValue Measurements.” This guidance amends Subtopic 820-10 to require newdisclosures and clarify existing disclosures. This guidance requires newdisclosures of amounts and reasons for significant transfers between Level 1and Level 2 fair value measurements. Additionally, in the reconciliation forfair value measurements using significant unobservable inputs (Level 3),separate presentation of information about purchases, sales, issuances andsettlements is required. The guidance clarifies that fair value measurementdisclosures for each class of assets and liabilities may constitute a subset ofassets and liabilities within a line item on a reporting entity’s balancesheet. The guidance also clarifies disclosure requirements about inputs andvaluation techniques for both recurring and nonrecurring fair valuemeasurements (Level 2 or Level 3). The ASU also amends guidance on employers’disclosures about postretirement benefit plan assets under ASC 715 to requirethat disclosures be provided by classes of assets instead of by majorcategories of assets. The new disclosures and clarifications of existingdisclosures are effective for interim and annual reporting periods beginningafter December 15, 2009, except for the disclosures about purchases,sales, issuances and settlements in the roll forward of activity for Level 3fair value measurements. Those disclosures are effective for fiscal yearsbeginning after December 15, 2010, including interim periods within thosefiscal years. The Company does not expect that the adoption of this guidancewill have a material effect on the Company’s consolidated results ofoperations, financial position or cash flows.

 

***Note 6 — Net LossPer Share***

 

The Company computes loss per share under ACS 260 “EarningsPer Share,” which requires presentation of two amounts: basic and diluted lossper common share. Basic loss per common share is computed by dividing lossavailable to common stockholders by the number of weighted average commonshares outstanding, and includes all common stock issued.  Diluted earnings would include all commonstock equivalents.  The Company has notincluded the outstanding options, warrants or shares issuable upon conversionof the convertible debt as common stock equivalents in the computation ofdiluted loss per share for the three and nine months ended September 30,2010 and 2009 because the effect would be antidilutive.

 

The following table sets forth the weighted averageshares issuable upon exercise of outstanding options and warrants andconversion of convertible debt that are not included in the basic and dilutedloss per share available to common stockholders because to do so would beantidilutive:

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                              | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                    |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares  issuable upon exercise of outstanding options  |       | 3,396,095                        |       | 2,541,659                       |       | 3,132,300 |   | 2,519,161 |   |
|                                                                    |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares  issuable upon exercise of outstanding warrants |       | 796,116                          |       | 844,824                         |       | 800,419 |   | 776,189 |   |
|                                                                    |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares  issuable upon conversion of convertible debt   |       | —                           |       | 477,409                         |       | — |   | 637,988 |   |
|                                                                    |       |                             |       |                            |       |   |   |   |   |
| Total                                                                   |       | 4,192,211                        |       | 3,863,892                       |       | 3,932,719 |   | 3,933,338 |   |

 

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LimeEnergy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

***Note 7 — Revolving Line of Credit***

 

On March 12, 2008, the Company entered into arevolving line of credit note with Advanced Biotherapy, Inc. (“ADVB”) andRichard Kiphart, the Company’s Chairman and largest individual investor.  On November 14, 2008, Mr. Kiphartagreed to convert his note into shares of the Company’s Series A-1preferred stock (see Note 10).  On November 18,2008, the Company entered an agreement to acquire 90.8% of the shares of ADVBand it completed a short-form merger on March 3, 2009, whereby it mergedADVB with a newly created acquisition subsidiary.  Following the merger it canceled theoutstanding balance of $42,000 and accrued interest of $28,000 on the ADVB lineof credit.

 

***Note 8 — Subordinated ConvertibleTerm Notes***

 

During the second quarter of 2007, eight investors,including Richard Kiphart, the Company’s Chairman and largest individualstockholder (collectively the “Investors”), and the Company entered into a loanagreement under which the Investors lent the Company $5 million in the form ofsubordinated convertible term notes (the “Term Notes”).  Before the conversion discussed below, theTerm Notes were to mature on May 31, 2010, and accrued interest at therate of 10% per year.  Interest waspayable quarterly, 50% in cash and 50% in shares of the Company’s common stockvalued at the market price of the Company’s common stock on the interest duedate.

 

As part of the transaction, the Company issued theInvestors four-year warrants to purchase 206,044 shares of its common stock at$7.28 per share.  These warrants werevalued at $1,137,000 utilizing a modified Black-Scholes option pricing modeland the following assumptions: risk free rate of 4.846%; expected volatility of93.3%; expected dividend of $0; and expected life of four years.

 

In recording the transaction, the Company allocatedthe value of the proceeds to the Term Notes and warrants based on theirrelative fair values.  In doing so, itdetermined that the Term Notes contained a beneficial conversion feature sincethe fair market value of the common stock issuable upon conversion of the TermNotes (determined on the Term Note issuance date) exceeded the value allocatedto the Term Notes of $3,863,000.  TheTerm Notes were convertible into 714,286 shares of common stock which, at themarket price of $8.02 per share on date of issuance of the Term Notes, wasworth $5,730,000.  The difference betweenthe market value of the shares issuable upon conversion and the value allocatedto the Term Notes of $1,867,000 was considered to be the value of thebeneficial conversion feature.

 

The value of the beneficial conversion feature and thevalue of the warrants were recorded as a discount to the Term Notes which wasthen amortized over the term of the Term Notes using the effective interestmethod.  Amortization of the discount of$249,000 and $495,000 was included in interest expense during the three-monthand nine-month periods ended September 30, 2009.

 

In addition, the Company incurred costs of $9,000relative to the Term Note offering. These costs were capitalized and were also being amortized over the termof the Term Notes using the effective interest method.  Amortization of these deferred issuance costsof $1,000 was included in interest expense during the three-month andnine-month periods ended September 30, 2009.

 

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LimeEnergy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

On August 10, 2009, the Company and Mr. Kiphartagreed to convert his Term Notes, totaling $3.1 million, into 484,375 shares ofthe Company’s common stock at the prior day’s closing market price of $6.40 pershare.  Also on August 10, 2009, theholders of the remaining Term Notes all elected to convert their notes intocommon stock upon the closing of the then pending underwritten public offeringat the lower of the offering price less the underwriters’ discount and thestated conversion price of the notes of $7.00 per share.  The public follow-on offering closed on September 25,2009, at which time the $1.9 million in Term Notes were converted into 367,504shares of common stock.

 

***Note 9 — The November 2008PIPE Transaction***

 

OnNovember 13, 2008, the Company entered into Subscription Agreements with15 investors to sell 1,787,893 units, each comprised of one share of theCompany’s common stock and a warrant to purchase an additional quarter share ofcommon stock (the “Units”).  The saleprice was $3.51 per Unit, which was equal to 75% of the volume-weighted averageprice of the Company’s stock for the ten days prior to closing.  The warrants allow holders to purchase ashare of common stock for $4.10 per share, which was the closing price of theCompany’s common stock on the day prior to the closing, and the warrants areexercisable any time after May 13, 2009 and before November 13,2011.  The gross proceeds raised in theoffering were $6,275,500.

 

Theprivate offering closed in two tranches: tranche A, which was comprised ofunaffiliated investors; and tranche B which was comprised of affiliatedinvestors, primarily executive officers and directors of the Company.  The Company raised $3,000,500 in tranche A,which closed on November 13, 2008 and $3,275,000 in tranche B, whichclosed on January 30, 2009. The issuance of the Units sold in tranche Brequired approval by holders of a majority of the Company’s outstanding votingstock pursuant to the NASDAQ Marketplace Rules. The Company received the written consent in lieu of a meeting ofstockholders from the holders of shares representing 58.7% of the totaloutstanding shares of its common stock on November 13, 2008, which wassufficient under the Delaware General Corporation Law, the Company’s By-Lawsand the NASDAQ Marketplace Rules to approve the transaction.

 

Securitiesand Exchange Commission rules require that any corporate actions requiringstockholder approval that are approved pursuant to a written consent in lieu ofa meeting be communicated to all stockholders via an Information Statement andthat the corporate action so approved cannot take place until at least 20 daysfollowing the mailing or giving of the Information Statement tostockholders.  The Company mailed anInformation Statement to all of its stockholders on December 31, 2008informing them of the November 13, 2008 written consent in lieu of ameeting.

 

***Note 10 — Preferred Stock***

 

On November 14, 2008, Richard Kiphart agreed toconvert his $14.5 million revolving line of credit note and $207,104 of accruedinterest into 358,710 shares of Series A-1 preferred stock.  Each outstanding share of preferred stock wasentitled to cumulative quarterly dividends at a rate of (i) 15% per annumof its stated value (which was $41.00) on or prior to March 31, 2009 (9%in cash and 6% in additional shares of preferred stock); and (ii) 17% perannum of its stated value, at any time on or after April 1, 2009 (9% incash and 8% in additional shares of preferred stock).  The preferred stock was convertible at the 

 

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LimeEnergy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

holder’s election any time after December 31,2009 into shares of the Company’s common stock at the rate of 10 shares ofcommon stock for each share of preferred stock.

 

On August 10, 2009, to facilitate the anticipatedpublic offering of its common stock, the Company and Mr. Kiphart convertedhis Series A-1 preferred stock into 3,777,705 shares of the Company’scommon stock.  Following this conversionthere were no shares of Series A-1 Preferred Stock outstanding.

 

***Note 11 — Business Segment Information***

 

The Company is made up of 17 separate companies, butwith the sale of the Energy Technology business in August 2009, all of theremaining businesses operate in a single business segment, the EnergyEfficiency Services segment.

 

***Note 12 —Other Equity Issuances***

 

(a)          During the first quarter of 2010, holders of options to purchase 15,061shares of the Company’s common stock exercised their options on a cashlessbasis, exchanging 9,626 shares they were entitled to purchase pursuant to theoptions to satisfy the exercise price for 5,435 shares.

 

(b)         During the first quarter of 2010 the Company issued 81,494 shares ofrestricted stock to its executive officers. These shares vest ratably on December 31, 2010, 2011 and 2012 ifthe executive is still employed by the Company on each vesting date.

 

(c)          During the first nine months of 2010, the Company issued 130 shares ofits common stock to employees under its Employee Recognition Program.

 

(d)         In June 2010, following stockholder approval of the 2010Non-Employee Directors’ Stock Plan, the Company granted 18,359 shares of itscommon stock to five of its outside directors that participate on various Boardcommittees.  These shares vest 50% ongrant and 50% on the first anniversary of grant if the director is stillserving on the Company’s board of directors on the vesting date.

 

(e)          In June 2010,the Company received $72,039 in exchange for issuing 24,420 shares of itscommon stock to employees who participated in its Employee Stock Purchase Plan.

 

(f)            On September 25, 2009, the Company completed an underwrittenfollow-on public offering of its common stock, receiving $27,500,000 in grossproceeds less $1,650,000 in underwriters’ discount and offering costs of$381,830.  On October 2, 2009, theUnderwriters exercised their overallotment and purchased an additional 750,000shares from the Company for total net proceeds to the Company of $3,877,500.

 

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| ITEM 2. | **MANAGEMENT’S DISCUSSION AND  ANALYSIS****OF FINANCIAL CONDITION AND********RESULTS  OF OPERATIONS** |   |
|---------|------------------------------------------------------------------------------------------------------------|--------|

 

You should read the following discussion regarding theCompany along with our financial statements and related notes included in thisquarterly report.  This quarterly report,including the following discussion, contains forward-looking statements thatare subject to risks, uncertainties and assumptions.  Our actual results, performance andachievements in 2010 and beyond may differ materially from those expressed in,or implied by, these forward-looking statements.  See Cautionary Note Regarding Forward-LookingStatements.

 

**Overview**

 

We are a leading provider of energy efficiencysolutions. Our services include integrated energy engineering, consulting andimplementation of solutions which enable our customers to reduce theirfacilities’ energy consumption, lower their operating and maintenance costs andreduce their carbon footprint. We focus on solutions which include lighting,mechanical and electrical upgrade services, water conservation, weatherizationand renewable project development and implementation. We provide thesesolutions across a wide range of facilities including high-rise officebuildings, manufacturing plants, retail sites, mixed use complexes and largegovernment sites. We operate in threespecific markets: the commercial and industrial (C&I) market, the utilitymarket and the public sector market.  Inthe C&I market we sell directly to commercial and industrial clients.  In the utility market we provide programimplementation services for utility demand side management programs.  In the public sector market we work withenergy service companies (“ESCOs”) and act as a prime contractor to the federalgovernment for select contract opportunities that align with our implementationcapabilities.

 

We offer our clients a full range of services toaddress the energy efficiency needs of their facilities based on our ability toidentify and deliver significant return on our clients’ investments, improvethe quality of their physical workspaces, maximize their operational savingsand reduce their maintenance costs. Our turnkey services include**:**

 

·                  *Energy Engineering and Consulting*:  We apply our engineering expertise to analyzeclient’s energy consumption and operational needs and develop customized energyefficiency and renewable energy solutions. Our energy engineering and consulting services include sustainabilityconsulting, energy master planning, project development services, designengineering and building e-commissioning. We also provide design review and analysis of new construction projectsto maximize energy efficiency and sustainability, project management ofenergy-related construction, and processing and procurement of incentive andrebate applications.

 

·                  *Implementation:*  We provide complete turnkey implementationservices for a range of energy efficiency and renewable energy projects,including energy efficient lighting upgrades, energy efficiency mechanical andelectrical retrofit and upgrade services, water conservation, weatherizationand renewable project development and implementation, including solar, biomassand geothermal.  We consider factors suchas current facility infrastructure, best available technologies, buildingenvironmental conditions, hours of operation, energy costs, available utilityrebates and tax incentives, and installation, operation and maintenance costsof various efficiency alternatives.  Ourprofessionals’ extensive knowledge in energy efficiency solutions enables us toapply the most appropriate, effective and proven technologies available in themarketplace.

 

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We serve a wide range of commercial, industrial,utility and public sector clients.  Ourcommercial and industrial clients include many Fortune 500 companies for whichwe provide our energy efficiency solutions directly.  We also work for a number of utilities forwhich we manage energy efficiency portfolio projects. In late 2009 we won ourfirst contract to provide utility program management services for NationalGrid.  Under this contract we provideprogram marketing, project development and engineering, material procurement, databaseadministration and turnkey project implementation services in an exclusiveterritory in western New York for National Grid’s small business customers withdemand of 100kw or less.  Since winningthis first contract we have begun working under similar contracts with twoother utilities in three other territories in the Northeast.  Our public sector clients include federal,state and local government agencies and educational institutions, which weserve through our relationships with ESCOs and directly.  ESCOs are awarded project contracts with thepublic sector, and we provide energy efficiency expertise to develop andimplement tailored solutions under these contracts.  In addition, during the third quarter of 2009we became one of three companies qualified to bid directly under the US ArmyCorp. of Engineers’ Facility Repair and Renewal (FRR) program.  As a result, we are now able to work directlyon federal government projects under the FRR program.

 

In August 2009 we sold the assets of ourMaximum Performance Group, Inc. subsidiary, which made up our EnergyTechnology business segment, in order to focus on our core Energy EfficiencyServices business.  The Energy Technologysegment, which represented approximately 4% of our 2008 revenue, offered a patentedline of heating, ventilation and air conditioning and lighting controllersunder the eMAC and uMAC brand names.

 

**Results of Operations**

 

*Revenue*

 

We generate the majority of our revenue from the saleof our services and products that we purchase and resell to our clients.  The substantial majority of our revenue isderived from fixed-price contracts, although we occasionally bill on atime-and-materials basis. Under fixed-price contracts, we bill our clients foreach project once the project is completed or throughout the project asspecified in the contract. Under time-and-materials arrangements, we bill ourclients on an hourly basis with material costs and other reimbursable expensespassed through and recognized as revenue. Our projects take a couple days to ayear or more to complete, with projects in our commercial and industrialmarkets typically taking less time to complete than the larger projects in ourpublic sector markets.  We recognize therevenue on smaller, shorter term projects on a completed contract basis and onlarger, longer projects we utilize the percentage-of-completion method forrevenue recognition. All of our revenue is earned in the United States.

 

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*GrossProfit*

 

Gross profit equals our revenue less costs of sales.The cost of sales for our business consists primarily of materials, ourinternal labor, including engineering, and the cost of subcontracted labor.

 

Gross profit is a key metric that we use to evaluateour performance. Gross profit depends in large part on the volume and mix ofproducts and services that we sell during any given period.

 

*Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses (“SG&A”)include the following components:

 

·                                          direct labor and commission costs related to our employee sales force;

 

·                                          costs of our non-production management, supervisory and staff salariesand employee benefits, including the costs of share-based compensation;

 

·                                          costs related to insurance, travel and entertainment, office suppliesand utilities;

 

·                                          costs related to marketing and advertising our products;

 

·                                          legal and accounting expenses; and

 

·                                          costs related to administrative functions that serve to support ourexisting businesses, as well as to provide the infrastructure for futuregrowth.

 

*Amortization of Intangibles*

 

When we acquire companies we allocate the purchaseprice to tangible assets (such as property, equipment, accounts receivable, etc.),and any identifiable intangible assets (such as contract backlogs, customerlists, technology, trade name, etc.), with the balance recorded asgoodwill.  We amortize the value ofcertain intangible assets over their estimated useful lives as a non-cashexpense.

 

*OtherExpense*

 

Other expense consists of interest expense, net ofinterest earned on our investments. Interest expense represents the interestcosts and fees associated with the mortgage on our headquarters and variousvehicle loans, and for periods prior to 2010, our subordinated convertible termnotes (including amortization of the related debt discount and issuance costs),notes payable and our lines of credit. Interest income includes earnings on ourinvested cash balances and amortization of the discount on our long termreceivables.

 

*Dividend Expense*

 

Dividend expense relates to our Series A-1preferred stock, all of which were converted to common stock on August 10,2009.

 

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**Three months Ended September 30,2010 Compared to Three months Ended September 30, 2009**

 

***Consolidated Results***

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **$**      | ** ** | **%** | ** ** |
|                                          |       |                             |       |       |       |       |       |   |   |
| Revenue                                       |       | $                                | 28,077     |       | $          | 21,003     |       | $ | 7,074 |   | 33.7 | % |
| Cost of sales                                 |       | 22,100                           |       | 16,524     |       | 5,576      |       | 33.7 | % |
| Gross profit                                  |       | 5,977                            |       | 4,479      |       | 1,498      |       | 33.4 | % |
|                                          |       |                             |       |       |       |       |       |   |   |
| Selling, general and  administrative expenses |       | 6,261                            |       | 5,731      |       | 530        |       | 9.2 | % |
| Amortization of  intangibles                  |       | 147                              |       | 269        |       | (122       | )          | -45.4 | % |
| Operating Loss                                |       | (431                             | )          | (1,521     | )          | 1,090      |       | -71.7 | % |
|                                          |       |                             |       |       |       |       |       |   |   |
| Other income (expense)                        |       | 49                               |       | (1,974     | )          | 2,023      |       | -102.5 | % |
| Loss from continuing  operations              |       | (382                             | )          | (3,495     | )          | 3,113      |       | -89.1 | % |
|                                          |       |                             |       |       |       |       |       |   |   |
| Loss from discontinued  operations            |       | —                           |       | (396       | )          | 396        |       | -100.0 | % |
| Net loss                                      |       | (382                             | )          | (3,891     | )          | 3,509      |       | -90.2 | % |
|                                          |       |                             |       |       |       |       |       |   |   |
| Preferred stock dividends                     |       | —                           |       | (297       | )          | 297        |       | -100.0 | % |
| Net loss available to  common stockholders    |       | $                                | (382       | )          | $          | (4,188     | )          | $ | 3,806 |   | -90.9 | % |

 

The following table presentsthe percentage of certain items to revenue:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** |
| ** **                                    | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Revenue                                       |       | 100.0                            | %          | 100.0 | % |
| Cost of sales                                 |       | 78.7                             | %          | 78.7 | % |
| Gross profit                                  |       | 21.3                             | %          | 21.3 | % |
|                                          |       |                             |       |   |   |
| Selling, general and  administrative expenses |       | 22.3                             | %          | 27.3 | % |
| Amortization of  intangibles                  |       | 0.5                              | %          | 1.3 | % |
| Operating Loss                                |       | -1.5                             | %          | -7.2 | % |
|                                          |       |                             |       |   |   |
| Other income (expense)                        |       | 0.2                              | %          | -9.4 | % |
| Loss from continuing  operations              |       | -1.4                             | %          | -16.6 | % |
|                                          |       |                             |       |   |   |
| Loss from discontinued  operations            |       | 0.0                              | %          | -1.9 | % |
| Net loss                                      |       | -1.4                             | %          | -18.5 | % |
|                                          |       |                             |       |   |   |
| Preferred stock dividends                     |       | 0.0                              | %          | -1.4 | % |
| Net loss available to  common stockholders    |       | -1.4                             | %          | -19.9 | % |

 

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***Revenue.***  Ourconsolidated revenue for the three-month period ended September 30, 2010increased $7.1 million or 33.7%, to $28.1 million from $21.0 million for thesame period during 2009.  Contributing tothis increase was higher revenue from our new utility program managementinitiative and our new FRR contract. Both of these businesses are new initiatives we began in late 2009 andboth started generating meaningful revenue earlier this year.  Revenue generated in our C&I marketsdeclined slightly, while revenue from our public sector markets increasedslightly.  We expect our C&I businessto have a stronger fourth quarter, but to end the full year flat to downslightly when compared to 2009 as it appears that customers in this marketcontinue to remain cautious about making significant expenditures.

 

While revenue from ourpublic sector markets was higher during the third quarter of 2010 when comparedto the third quarter of 2009, year-to-date revenue continues to lag last year’sresults primarily as a result of customer uncertainty earlier this yearregarding funding sources.  We believethat this situation has largely been resolved and we expect higher revenuesduring the fourth quarter relative to 2009 to continue to help make up for thelower revenue experienced earlier in the year. However, we believe that full year revenue from this market will be downslightly from 2009 levels, though we expect to enter 2011 with a largercontracted backlog than we had at the beginning of 2010.

 

Revenue from our two newinitiatives are expected to continue to increase into the fourth quarter of2010 as these businesses continue to ramp up. The combination of these factors is expected to result in higher revenueduring the fourth quarter of 2010 when compared to both the third quarter of2010 and the fourth quarter of 2009.

 

***Gross Profit. ***Our gross profit for the third quarter of 2010 was$6.0 million, a $1.5 million or 33.4% increase when compared to the $4.5million in gross profit earned during the third quarter of 2009.  The increase in our gross profit was thedirect result of the increase in our revenue for the quarter.  Our gross margin for the third quarter of2010 was 21.3%, which was unchanged from the levels earned during the thirdquarter of 2009.  We expect a slightincrease in our gross margin during the fourth quarter of 2010 as our utilityprogram management and C&I businesses are projected to become a largerportion of our total revenue.

 

***Selling, General and AdministrativeExpense. ***Our selling, general and administrativeexpense increased $530 thousand or 9.2%, to $6.3 million during the thirdquarter of 2010 from $5.7 million during the third quarter of 2009.  Our SG&A expense as a percentage ofrevenue declined from 27.3% for the third quarter of 2009 to 22.3% for thethird quarter of 2010.  We have takensteps to reduce the SG&A expense in our C&I and public sectorbusinesses as both of these markets are expected to experience slight declinesin their full year revenue.  Thesereductions were more than offset by SG&A expense associated with our twonew business initiatives — our utility program management business and directgovernment business through the FRR contract. These new initiatives will contribute to an increase in our SG&Aexpense in future periods, but we expect the rate at which our total SG&Aexpense will grow will be lower than that of our consolidated revenue,resulting in continued reductions in our SG&A expense as a percentage ofrevenue.

 

***Amortization of Intangibles.*** Amortization expense declined $122 thousand to $147 thousand for thethird quarter of 2010 compared to $269 thousand for the third quarter of 2009.  Our amortization expense has declined as intangible assets associatedwith acquisitions we have made over the past four years have become fullyamortized.  Amortization expense isexpected to be $117 thousand during for the fourth quarter of 2010.

 

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***Other Non-Operating (Expense) Income.***  Otherexpense declined $2 million, resulting in income of $49 thousand for the thirdquarter of 2010 compared to expense of $2 million for the third quarter of2009.  Interest expense was $7 thousandfor the three-month period ended September 30, 2010, a decrease of $2million when compared to $2 million for the same period during 2009.  The components of interest expense for thethree-month periods ended September 30, 2010 and 2009 are as follows:

 
| **Three months ended September 30,**                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                             |       |     |       |     |       |
| Note payable                                                                     |       | $        | —     |     | $          | 22 |   |
| Mortgage                                                                         |       | 5        |       | 5        |       |
| Subordinated convertible  notes                                                  |       | —   |       | 81       |       |
| Other                                                                            |       | 2        |       | 28       |       |
|                                                                             |       |     |       |     |       |
| Total contractual interest                                                       |       | 7        |       | 136      |       |
|                                                                             |       |     |       |     |       |
| Amortization of deferred  issuance costs and debt discount                       |       | —   |       | 930      |       |
|                                                                             |       |     |       |     |       |
| Beneficial conversion  value of change in conversion price of subordinated notes |       | —   |       | 938      |       |
|                                                                             |       |     |       |     |       |
| Total interest expense                                                           |       | $        | 7          |     | $          | 2,004 |   |

 

Our contractual interestdeclined $129 thousand to $7 thousand for the three-month period ended September 30,2010 from $136 thousand for the same period during 2009.  The decline was the result of the repaymentof our notes payable and conversion of our subordinated notes during late 2009.  During the third quarter of 2009 we wrote-offthe balance of our deferred issuance costs of $930 thousand and incurred acharge of $938 thousand when we converted all of our outstanding subordinatedconvertible notes into shares of common stock at a conversion price that waslower than the stated conversion price on the notes.

 

Interest income increased$26 thousand to $56 thousand during the third quarter of 2010, from $30thousand during the third quarter of 2009. Approximately $43 thousand of the interest income recognized during thethird quarter of 2010 was amortization of the discount on our long-termreceivables, compared to $27 thousand recognized during third quarter of 2009.

 

***Discontinued Operations.***  Duringthe three-month period ended September 30, 2009 we reported a $396thousand loss from discontinued operations related to our former EnergyTechnology business.  We sold thisbusiness in August 2009, therefore there was no loss from discontinuedoperations reported during the 2010 period.

 

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**Nine months Ended September 30,2010 Compared to Nine months Ended September 30, 2009**

 

***Consolidated Results***

 
| ** **                                    | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **September 30,**          | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **$**      | ** ** | **%** | ** ** |
|                                          |       |                            |       |       |       |       |       |   |   |
| Revenue                                       |       | $                               | 57,398     |       | $          | 50,523     |       | $ | 6,875 |   | 13.6 | % |
| Cost of sales                                 |       | 45,373                          |       | 40,397     |       | 4,976      |       | 12.3 | % |
| Gross profit                                  |       | 12,025                          |       | 10,126     |       | 1,899      |       | 18.8 | % |
|                                          |       |                            |       |       |       |       |       |   |   |
| Selling, general and  administrative expenses |       | 18,788                          |       | 16,513     |       | 2,275      |       | 13.8 | % |
| Amortization of  intangibles                  |       | 472                             |       | 927        |       | (455       | )          | -49.1 | % |
| Operating Loss                                |       | (7,235                          | )          | (7,314     | )          | 79         |       | -1.1 | % |
|                                          |       |                            |       |       |       |       |       |   |   |
| Other income (expense)                        |       | 129                             |       | (2,815     | )          | 2,944      |       | -104.6 | % |
| Loss from continuing  operations              |       | (7,106                          | )          | (10,129    | )          | 3,023      |       | -29.8 | % |
|                                          |       |                            |       |       |       |       |       |   |   |
| Loss from discontinued  operations            |       | —                          |       | (1,425     | )          | 1,425      |       | -100.0 | % |
| Net loss                                      |       | (7,106                          | )          | (11,554    | )          | 4,448      |       | -38.5 | % |
|                                          |       |                            |       |       |       |       |       |   |   |
| Preferred stock dividends                     |       | —                          |       | (1,499     | )          | 1,499      |       | -100.0 | % |
| Net loss available to  common stockholders    |       | $                               | (7,106     | )          | $          | (13,053    | )          | $ | 5,947 |   | -45.6 | % |

 

The following table presentsthe percentage of certain items to revenue:

 
| ** **                                    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 30,**          | ** ** |
| ** **                                    | ** ** | **2010**                        | ** ** | **2009** | ** ** |
|                                          |       |                            |       |   |   |
| Revenue                                       |       | 100.0                           | %          | 100.0 | % |
| Cost of sales                                 |       | 79.0                            | %          | 80.0 | % |
| Gross profit                                  |       | 21.0                            | %          | 20.0 | % |
|                                          |       |                            |       |   |   |
| Selling, general and  administrative expenses |       | 32.7                            | %          | 32.7 | % |
| Amortization of  intangibles                  |       | 0.8                             | %          | 1.8 | % |
| Operating Loss                                |       | -12.6                           | %          | -14.5 | % |
|                                          |       |                            |       |   |   |
| Other income (expense)                        |       | 0.2                             | %          | -5.6 | % |
| Loss from continuing  operations              |       | -12.4                           | %          | -20.0 | % |
|                                          |       |                            |       |   |   |
| Loss from discontinued  operations            |       | 0.0                             | %          | -2.8 | % |
| Net loss                                      |       | -12.4                           | %          | -22.9 | % |
|                                          |       |                            |       |   |   |
| Preferred stock dividends                     |       | 0.0                             | %          | -3.0 | % |
| Net loss available to  common stockholders    |       | -12.4                           | %          | -25.8 | % |

 

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***Revenue.***  Our revenuefor the nine months ended September 30, 2010 was $57.4 million,representing a 13.6%, or $6.9 million increase when compared to the $50.5million earned during the nine months ended September 30, 2009.  Revenue from sales in our C&I market andpublic sector market were both down slightly for the nine-month period whencompared to the same period last year. These revenue declines were offset by higher revenue from our utilityprogram management division and FRR contract. Neither the utility program management division nor the FRR contractgenerated any revenue during the first nine months of 2009.

 

C&I revenue for thefirst nine months of 2009 benefited from several projects that carried overfrom a very strong fourth quarter of 2008, whereas a weaker fourth quarter of2009 resulted in fewer projects carrying over into the first nine months of2010, contributing to the decline in revenue when compared to the same periodduring 2009.  While we expect C&Ifourth quarter revenue to exceed the revenue earned during last year’s fourthquarter, we believe our full year C&I revenue will be flat to down slightlywhen compared to the revenue earned in 2009, as customers continue to becautious with their capital expenditures given the current economicenvironment.

 

We believe that the declinein revenue in our public sector market during the first nine months of 2010 wasprimarily caused by uncertainty regarding financing sources for our publicsector clients.  We also believe that theseissues have largely been resolved and expect that our fourth quarter revenuefor this market will exceed the revenue earned during the fourth quarter of2009.  However, we don’t believe that wewill be able to make up all the revenue lost earlier in the year, as a resultwe expect that full-year revenue from this market will end the year slightlylower than 2009.

 

***Gross Profit. ***Our gross profit for the nine-month period ended September 30,2010 was $12.0 million, a $1.9 million, or 18.8%, increase over the $10.1million earned during the same period in 2009. The increase in our gross profit was the result of higher revenue incombination with higher gross margins earned during the period.  Our gross profit margin was 21.0% for thenine-month period ended September 30, 2010, compared to 20.0% for the ninemonths ended September 30, 2009. The increase in the gross margin was the result of improved margins inour C&I business and contributions from our new utility program managementdivision.

 

***Selling, General and AdministrativeExpense. ***Our selling, general and administrativeexpense for the nine-month period increased $2.3 million or 13.8%, to $18.8million compared to $16.5 million for the same period during 2009.  Our SG&A expense as a percentage of revenueremained unchanged at 32.7%  of revenuefor the nine month period.  We have takensteps to reduce SG&A expense in our C&I and public sector businesses asboth of these markets are expected to experience slight declines in their fullyear revenue.  These reductions were morethan offset by SG&A expense associated with our two new businessinitiatives — our utility program management business and direct governmentbusiness through the FRR contract.

 

***Amortization of Intangibles.*** Amortization expense declined $455 thousand to $472 thousand during thefirst nine months of 2010 from $927 thousand during the first nine months of2009.  Amortization expense has declinedas intangible assets associated with acquisitions we made over the past fouryears have become fully amortized.

 

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***Other Non-Operating (Expense) Income.***  Otherexpense declined $2.9 million, resulting in income of $129 thousand during thenine-month period ended September 30, 2010 when compared to $2.8 millionof expense for the year earlier period. Interest expense was $25 thousand for the first nine months of 2010compared to $2.9 million for the first nine months of 2009.  The components of interest expense for thenine-month periods ended September 30, 2010 and 2009 are as follows:

 
| **Nine months ended September 30,**                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                             |       |     |       |     |       |
| Lines of credit                                                                  |       | $        | —     |     | $          | 53 |   |
| Note payable                                                                     |       | —   |       | 75       |       |
| Mortgage                                                                         |       | 15       |       | 14       |       |
| Subordinated convertible  notes                                                  |       | —   |       | 329      |       |
| Other                                                                            |       | 10       |       | 72       |       |
|                                                                             |       |     |       |     |       |
| Total contractual interest                                                       |       | 25       |       | 543      |       |
|                                                                             |       |     |       |     |       |
| Amortization of deferred  issuance costs and debt discount                       |       | —   |       | 1,426    |       |
|                                                                             |       |     |       |     |       |
| Beneficial conversion  value of change in conversion price of subordinated notes |       | —   |       | 938      |       |
|                                                                             |       |     |       |     |       |
| Total interest expense                                                           |       | $        | 25         |     | $          | 2,907 |   |

 

Total contractual interest(the interest on outstanding loan balances) decreased $518 thousand to $25thousand during the first nine months of 2010 from $543 thousand during thefirst nine months of 2009.  The reductionin contractual interest was the result of the repayment of our line of creditand notes payable and the conversion of our subordinated notes to common stockduring the second half of 2009.  Totalinterest expense for the nine-month period ended September 30, 2009included $1.4 million of amortization expense associated with the deferredissuance costs on our subordinated convertible notes and a $938 thousandnon-cash charge resulting from the conversion of the subordinated notes toshares of common stock at a conversion price which was lower than their statedconversion price.

 

Interest income increased$62 thousand to $154 thousand during the first nine months of 2010, from $92thousand during the first nine months of 2009. Approximately $124 thousand of the 2010 interest income was amortizationof the discount on our long-term receivables, compared to $70 thousand during2009.  The balance of the increase ininterest income was due to higher average invested cash balances during 2010.

 

***Discontinued Operations.***  Duringthe first nine months of 2009 we reported a $1.4 million loss from discontinuedoperations related to our former Energy Technology business.  We sold this business in August 2009,therefore there was no loss from discontinued operations reported during the2010 period.

 

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**Liquidity and Capital Resources**

 

As of September 30, 2010, we had cash and cashequivalents (including restricted cash) of $15.8 million, compared to $23.4million on December 31, 2009. Our debt obligations as of September 30,2010 consisted of a mortgage of $391 thousand on our facility in Elk Grove Village, Illinoisand various vehicle loans totaling $170 thousand.

 

Our principal cash requirements are for operatingexpenses, the funding of inventory and accounts receivable, and capitalexpenditures. We have financed our operations since inception primarily throughthe sale of equity, as well as through various forms of secured debt.

 

The following table summarizes, for the periodsindicated, selected items in our consolidated statements of cash flows:

 
| **Nine months ended September 30,** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Net cash used in operating  activities                  |       | $        | (7,023     | )        | $          | (8,083 | ) |
| Net cash used in investing  activities                  |       | (3,734   | )          | (1,341   | )          |
| Net cash (used in)  provided by financing activities    |       | (97      | )          | 29,907   |       |
|                                                    |       |     |       |     |       |
| Net (Decrease) Increase in  Cash and Cash Equivalents   |       | (10,854  | )          | 20,483   |       |
|                                                    |       |     |       |     |       |
| Cash and Cash Equivalents,  at beginning of period      |       | 22,870   |       | 3,734    |       |
|                                                    |       |     |       |     |       |
| Cash and Cash Equivalents,  at end of period            |       | $        | 12,016     |     | $          | 24,217 |   |

 

**Nine months Ended September 30,2010 Compared to Nine months Ended September 30, 2009**

 

Net unrestricted cash decreased $10.9 million duringthe first nine months of 2010 as compared to increasing $20.5 million duringthe same period in 2009.

 

*Operating Activities*

 

Operating activities consumed cash of $7.0 millionduring the nine-month period ended September 30, 2010 as compared toconsuming cash of $8.1 during the same period of 2009.

 

Whether cash is consumed or generated by operatingactivities is a function of the profitability of our operations and changes inworking capital.  To get a better understandingof cash sources and uses, management splits the cash used or provided byoperating activities into two pieces: the cash consumed or generated byoperating activities before changes in assets and liabilities; and the cashconsumed or generated from changes in assets and liabilities.  By splitting the cash used or provided byoperating activities this way our management believes it is easier tounderstand how much of our operating cash flow is the result of the Company’scurrent period cash earnings or loss and how much of our operating cash flow isdue to changes in working capital.  Thesetwo measures are calculated as follows (in thousands):

 

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| **Nine Months Ended September 30,**                         | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Loss                                                                        | ** ** | **$**      | **(7,106** | **)**      | **$**      | **(11,554** | **)** |
| Provision for bad debts                                                         | ** ** | **26**     | ** ** | **130**    | ** ** |
| Share-based compensation                                                        | ** ** | **1,078**  | ** ** | **1,326**  | ** ** |
| Preferred stock dividends                                                       | ** ** | **—** | ** ** | **(1,499** | **)**      |
| Depreciation and  amortization                                                  | ** ** | **847**    | ** ** | **1,495**  | ** ** |
| Amortization of deferred  financing costs                                       | ** ** | **—** | ** ** | **15**     | ** ** |
| Amortization of issuance  discount                                              | ** ** | **—** | ** ** | **1,411**  | ** ** |
| Issuance of stock and  warrants in exchange for services received               | ** ** | **—** | ** ** | **13**     | ** ** |
| Accrued dividend satisfied  through the issuance of preferred stock             | ** ** | **—** | ** ** | **781**    | ** ** |
| Accrued interest satisfied  through the issuance of common stock                | ** ** | **—** | ** ** | **204**    | ** ** |
| Beneficial value of change  in conversion price of subordinated notes           | ** ** | **—** | ** ** | **938**    | ** ** |
| PIK notes issued for  interest                                                  | ** ** | **—** | ** ** | **21**     | ** ** |
| Asset impairment                                                                | ** ** | **—** | ** ** | **503**    | ** ** |
| Loss on disposition of  fixed assets                                            | ** ** | **9**      | ** ** | **13**     | ** ** |
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash consumed by operating  activities before changes in assets and liabilities | ** ** | **$**      | **(5,146** | **)**      | **$**      | **(6,203** | **)** |
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Changes in assets and  liabilities:                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts receivable                                                             | ** ** | **$**      | **(6,327** | **)**      | **$**      | **493** | ** ** |
| Inventories                                                                     | ** ** | **(285**   | **)**      | **(310**   | **)**      |
| Costs and estimated  earnings in excess of billings on uncompleted contracts    | ** ** | **(2,682** | **)**      | **454**    | ** ** |
| Prepaid expenses and other                                                      | ** ** | **(234**   | **)**      | **526**    | ** ** |
| Accounts payable                                                                | ** ** | **1,174**  | ** ** | **(2,217** | **)**      |
| Accrued expenses                                                                | ** ** | **4,928**  | ** ** | **124**    | ** ** |
| Billings in excess of  costs and estimated earnings on uncompleted contracts    | ** ** | **1,599**  | ** ** | **(420**   | **)**      |
| Deferred revenue                                                                | ** ** | **—** | ** ** | **(90**    | **)**      |
| Customer deposits                                                               | ** ** | **(50**    | **)**      | **(440**   | **)**      |
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash consumed by changes  in assets and liabilities                             | ** ** | **$**      | **(1,877** | **)**      | **$**      | **(1,880** | **)** |

 

The reconciliation to net cash used in operatingactivities as reported on our Consolidated Statement of Cash Flows is asfollows (in thousands):

 
| **Nine Months Ended September 30,**                         | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash consumed by operating  activities before changes in assets and liabilities |       | **$**      | **(5,146** | **)**      | **$**      | **(6,203** | **)** |
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash consumed by changes  in assets and liabilities                             | ** ** | **(1,877** | **)**      | **(1,880** | **)**      |
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash used in operating  activities                                          | ** ** | **$**      | **(7,023** | **)**      | **$**      | **(8,083** | **)** |

 

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The cash consumed by operating activities beforechanges in assets and liabilities declined $1.1 million to $5.1 million duringthe first nine months of 2010 as compared to consuming $6.2 million during thefirst nine months of 2009.  The declinein the cash consumed by operating activities before changes in assets andliabilities was the result of the lower cash operating loss (excludingdepreciation, amortization and share-based compensation) largely due to higherrevenue and elimination of the loss from discontinued operations.  We believe that we will see additionalimprovements in the cash consumed by operating activities before changes inassets and liabilities if our revenue and profitability improve as we believethey will during the fourth quarter of this year.

 

The cash consumed by changes in assets and liabilitieswas $1.9 million during the first nine months of 2010, as well as during thefirst nine months of 2009.  The use ofcash during both periods were the result of increases in revenue.  We expect our working capital requirementswill peak during the fourth quarter of this year as our revenue peaks, thendecline during the first quarter of 2011. As it declines it will generate cash. Over the longer term we expect our working capital needs to increasewith increases in our sales, though we believe that our new businessinitiatives will have lower working capital requirements than our existingbusinesses, which will help to keep the growth in working capital needs to arate that is lower than the growth of our future sales.

 

*Investing Activities*

 

We used $3.7 million in investing activities duringthe nine-month period ended September 30, 2010, compared to using $1.3million during the nine-month period ended September 30, 2009.  During 2010 we pledged $3.3 million as collateral to support certain letters ofcredit which are used to obtain surety bonds. Surety bonds are often required for our government contracts.  These letters of credit are expected todecline to approximately $1 million by the end of 2010 and should be terminatedcompletely during 2011.  As the lettersof credit are reduced or terminated our collateral will be released. We alsomade a net investment in property and equipment of $430 thousand during thefirst nine months of 2010, compared to $294 thousand during the same period of2009.  Most of the 2010 purchases wererelated to the opening of a new office to support our utility programmanagement initiative, for enhancements to our accounting system and for newconstruction equipment.  During the firstnine months of 2009, we paid $1 million for the AEM earn-out and costsassociated with the acquisition of AEM.

 

*Financing Activities*

 

Financing activities consumed cash of $97 thousandduring the nine-month period ended September 30, 2010 as compared togenerating $29.9 million during the same period in 2009.  During the first nine months of 2010 we madeprincipal payments of $169 thousand on our debt.  This was partially offset by $72 thousandreceived from the sale of shares of our common stock to our employees throughour Employee Stock Purchase Plan.

 

In March 2009 we closed on the acquisition ofAdvanced Biotherapy, Inc. (“ADVB”) and gained access to its cash balancesof $7.4 million.  We treated thisacquisition as an offering because we acquired ADVB for its cash, and wediscontinued all its operations upon the closing of the acquisition.  In January 2009 we closed on tranche Bof the November 2008 PIPE, generating cash proceeds of $3.3 million.  In September 2009, we completed afollow-on public offering of our common stock generating gross proceeds of$27.5 million.  We also received $45thousand from the exercise of options and $27 thousand from new vehicleloans.  The proceeds from thesetransactions were partially offset by a $4 million net pay down on our line ofcredit; $2.8 million in transaction costs related to the acquisition of ADVB andthe public offering; and $1.6 million in scheduled principal payments on ourdebt.

 

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** **

**SOURCES OF LIQUIDITY**

 

Our primary sources of liquidity are our availablecash.

 

Our ability to continue to expand our sales willrequire the continued commitment of significant funds. The actual timing andamount of our future funding requirements will depend on many factors,including the amount, timing and profitability of future revenues, workingcapital requirements and the level and amount of our sales and marketingefforts, among other things.

 

We have raised a significant amount of capital sinceour formation through the issuance of shares of our common and preferred stockand notes, which has allowed us to acquire companies and to continue to executeour business plan.  Most of these fundshave been consumed by operating activities, either to fund our losses or forworking capital requirements.  In anattempt to move the Company to a position where it can start to generatepositive cash flow our management has set the following key strategies for cashflow improvement during the second half of 2010 and beyond:

 

·                  Focus on increasing the sales and profitability of our products andservices while controlling the growth in our SG&A expense.  We believe that to a greatdegree our ability to generate positive cash flow is dependent on our abilityto increase sales while limiting the growth of our SG&A expense and controllingchanges in our gross margins.  We believethat we have built a corporate infrastructure over the past three years that iscapable of supporting a large, diversified national company.  We believe that this infrastructure cansupport significantly higher revenue without a proportional increase in ourSG&A expense.  We are focused oncontinually reducing our SG&A expense as a percentage of revenue with atarget of reducing it to 14% or less within the next few years. We believe this is a sustainableSG&A expense ratio for the business over the longer term and reflects ourexpectations with respect to our ability to achieve additional operatingleverage.  To achieve this target SG&A expense ratio wewill need to significantly increase our revenue.   If we are able to begin to achieve thisgoal, while holding or improving our gross margins, we believe we will continueto generate positive cash flow, as we have done in this most recent quarter,and eventually positive earnings.

 

·                  Aggressively manage our costs in order to conserve cash.  The prudent use of the capitalresources available to us remains one of our top priorities.  We are constantly reviewing our operationslooking for more efficient ways to achieve our objectives.

 

We believe that if we are successful in increasing ourrevenue while controlling the growth in our operating expenses we should havesufficient liquidity to allow us to operate until our operations turn cash flowpositive.

 

**Cautionary Note RegardingForward-Looking Statements**

 

Our disclosure and analysis in this report, includingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains “forward-looking” information within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, adopted pursuant to the PrivateSecurities Litigation Reform Act of 1995. Statements that are not purelyhistorical may be forward-looking. You can identify these forward-lookingstatements by the use of words such as “anticipate,” “believe,” “estimate,” “expect,”“hope,” “intend,” 

 

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“may,” “project,” “plan,”  “goal,” “target,’ “should,” and similarexpressions, including when used in the negative.

 

Forward-looking statements are subject to variousrisks and uncertainties. Accordingly, there are or will be important factorsthat could cause actual results to differ materially from those indicated inthese statements, including but not limited to those described in our AnnualReport on Form 10-K filed with the Securities and Exchange Commissionunder “Part II, Item 1A—Risk Factors” and the following:

 

·                  wehave a limited operating history under our current business model in a rapidlyevolving market, which may make it difficult to evaluate our business andprospects, and may expose us to increased risks and uncertainties;

·                  wehave incurred significant operating losses since inception and may not achieveor sustain profitability in the future;

·                  thecurrent economic downturn could diminish the demand for our services andproducts;

·                  itis difficult for us to estimate our future quarterly results;

·                  weoperate in a highly competitive industry and if we are unable to competesuccessfully our revenue; and profitability will be adversely affected; and

·                  wemay be unable to obtain sufficient bonding capacity to support certain serviceofferings.

 

All forward-looking statements in this report shouldbe considered in the context of the risk and other factors described above andas detailed from time to time in the Company’s Securities and ExchangeCommission filings. Any forward-looking statements speak only as of the datethe statement is made and we undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. It is not possible to identify all of the risks,uncertainties and other factors that may affect future results. In light ofthese risks and uncertainties, the forward-looking events and circumstancesdiscussed in this report may not occur and actual results could differmaterially from those anticipated or implied in the forward-looking statements.Accordingly, users of this report are cautioned not to place undue reliance onthe forward-looking statements.

 

Except as otherwise required by federal securitieslaws, we do not undertake any obligation to publicly update, review or reviseany forward-looking statements, whether as a result of new information, futureevents, changed circumstances or any other reason.

 

ITEM 3.                                                     **Quantitative and Qualitative Disclosures About MarketRisk**

 

Not applicable.

 

ITEM 4.                                                     **Controls and Procedures**

 

**Disclosure Controls and Procedures.**

 

Our management, including our chief executive officerand our chief financial officer, maintains our “disclosure controls andprocedures” (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) and hasevaluated the effectiveness of our disclosure controls and procedures as of theend of the period covered by this report. Based on such evaluation, our chief executive officer and chieffinancial officer have concluded that, as of September 30, 

 

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2010, such disclosure controls and procedures areeffective for the purpose of ensuring that material information required to bein the reports that we submit, file, furnish or otherwise provide to theSecurities and Exchange Commission is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate to allow timely decisions regarding required disclosure.

 

**Changes in Internal Controls.**

 

There have not been any changes in our internalcontrol over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) during the quarter ended September 30, 2010 that havematerially affected or are reasonably likely to materially affect our internalcontrol over financial reporting.

 

**Limitations of the Effectiveness of Internal Control**

 

A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the internal control system are met.  Because of the inherent limitations of anyinternal control system, no evaluation of controls can provide absoluteassurance that all control issues, if any, within a company have been detected.

 

**PART II.  OTHER INFORMATION**

 

ITEM2.                                                     **Unregistered Sales of Equity Securities and Use ofProceeds**

 

On June 3, 2010, we issued 18,359 shares of ourcommon stock to five of our outside directors who participate on various Boardcommittees.  These shares vest 50% ongrant and 50% on the first anniversary of grant if the director is stillserving on the Company’s board of directors on the vesting date.  Such shares were issued in consideration ofthe recipients’ service on the Board committees on which they serve and wereissued in a transaction exempt from registration pursuant to section 4(2) ofthe Securities Act of 1933

 

ITEM 6.                                                     **Exhibits**

 

31.1                           Certificate of Chief Executive Officer pursuant to Securities ExchangeAct Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002

 

31.2                           Certificate of Chief Financial Officer pursuant to Securities ExchangeAct Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002

 

32.1                           Certification of the Chief Executive Officer of the Corporation Pursuantto Section 1350 of Chapter 63 of Title 18 of the United States CodePursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2                           Certification of the Chief Financial Officer of the Corporation Pursuantto Section 1350 of Chapter 63 of Title 18 of the United States CodePursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                         | LIME ENERGY CO.: |
|------------------------------|------------------|
|                         |             |
|                         |             |
| Dated: November 8, 2010 | By:              | /s/ David Asplund |
|                         |             | David Asplund |
|                         |             | *Chief Executive Officer  (principal* |
|                         |             | *executive officer)* |
|                         |             |   |
|                         |             |   |
| Dated: November 8, 2010 | By:              | /s/ Jeffrey Mistarz |
|                         |             | Jeffrey Mistarz |
|                         |             | *Chief Financial Officer (principal* |
|                         |             | *financial and accounting officer)* |

 

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