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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

#### **Washington, D.C. 20549**

 

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# **Form 10-Q**

 

**x**      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly periodended  March 31, 2010**

 

**o**         TRANSITION REPORT PURSUANT TO SECTION 13 OR15(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 its charter)

 

| **Delaware**                                                   | ** ** | **36-4197337**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**1280 Landmeier Road, ElkGrove Village, Illinois 60007-2410**

(Address of principal executive offices, including zip code)

 

**(847) 437-1666**

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed sincelast report)

 

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

 

Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site,if any, every Interactive Data File required to be submitted and posted pursuantto Rule 405 of Regulation S-T (§ 232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.  (Check one):

 

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

 

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

 

23,597,661shares of the registrant’s common stock, $.0001 par value per share, wereoutstanding as of May 12, 2010.

 

 

 

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**LIMEENERGY CO.**

**FORM 10-Q**

For The QuarterEnded March 31, 2010

 

#### INDEX

 
| ** **    | ** **                                                                                                       | **Page**   |
|---------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** **                                                                                                       | **Number** |
|          |                                                                                                             |       |
| Part I   | Financial Information                                                                                            |       |
|          |                                                                                                             |       |
| ITEM 1.       | Financial Statements:                                                                                            |       |
|          |                                                                                                             |       |
|          | Condensed  Consolidated Balance Sheets  March 31, 2010 (unaudited) and December 31, 2009               | 1          |
|          |                                                                                                             |       |
|          | Unaudited Condensed  Consolidated Statements of Operations  Three months ended March 31, 2010               | 3          |
|          |                                                                                                             |       |
|          | Unaudited  Condensed Consolidated Statement of Stockholders’ Equity  Three months ended March 31, 2010 | 4          |
|          |                                                                                                             |       |
|          | Unaudited  Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2010 and 2009      | 5          |
|          |                                                                                                             |       |
|          | Notes to Unaudited Condensed Consolidated Financial  Statements                                                  | 8          |
|          |                                                                                                             |       |
| ITEM 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      | 15         |
|          |                                                                                                             |       |
| ITEM 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                      | 25         |
|          |                                                                                                             |       |
| ITEM 4.       | Controls and  Procedures                                                                                         | 25         |
|          |                                                                                                             |       |
| Part II. | Other Information                                                                                                |       |
|          |                                                                                                             |       |
| ITEM 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     | 26         |
|          |                                                                                                             |       |
| ITEM 6.       | Exhibits                                                                                                         | 26         |
|          |                                                                                                             |       |
|          | Signatures                                                                                                       | 27         |

 

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#### PART I - FINANCIAL INFORMATION

####  

ITEM 1. FinancialStatements

 

**Lime Energy Co.**

**Unaudited CondensedConsolidated Balance Sheets**

**(in thousands)**

 
| ** **                                                                   | ** ** | **March 31,** | ** ** | ** **            | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2010**           | ** ** | **December 31,** | ** ** |
| ** **                                                                   | ** ** | **(unaudited)**    | ** ** | **2009****(1)**       | ** ** |
|                                                                         |       |               | ** ** | ** **            | ** ** |
| **Assets**                                                                   |       |               |       |                  |       |
|                                                                         |       |               |       |                  |       |
| **Current assets**                                                           |       |               |       |                  |       |
| Cash  and cash equivalents                                                   | ** ** | **$**              | **20,345** | ** **            | **$**      | **22,870** | ** ** |
| Restricted  cash                                                             | ** ** | **1,000**          | ** ** | **500**               | ** ** |
| Accounts  receivable, net                                                    | ** ** | **16,340**         | ** ** | **19,330**            | ** ** |
| Inventories                                                                  | ** ** | **305**            | ** ** | **230**               | ** ** |
| Costs  and estimated earnings in excess of billings on uncompleted contracts | ** ** | **5,210**          |       | **5,532**             |       |
| Prepaid  expenses and other                                                  | ** ** | **985**            | ** ** | **752**               | ** ** |
| **Total Current Assets**                                                     | ** ** | **44,185**         | ** ** | **49,214**            | ** ** |
|                                                                         | ** ** | ** **         |       |                  |       |
| **Net Property and Equipment**                                               | ** ** | **1,902**          | ** ** | **1,917**             | ** ** |
|                                                                         | ** ** | ** **         |       |                  |       |
| **Long Term Receivables**                                                    | ** ** | **441**            | ** ** | **545**               | ** ** |
| **Intangibles, net**                                                         | ** ** | **3,220**          | ** ** | **3,382**             | ** ** |
| **Goodwill**                                                                 | ** ** | **18,627**         | ** ** | **18,627**            | ** ** |
| ** **                                                                   | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                         | ** ** | **$**              | **68,375** | ** **            | **$**      | **73,685** | ** ** |

 

*See accompanying notes tocondensed consolidated financial statements*

 

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**Lime Energy Co.**

**Condensed Consolidated BalanceSheets**

**(in thousands)**

* *
| ** **                                                                                                                                                                           | ** ** | **March 31,** | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **2010**           | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                           | ** ** | **(unaudited)**    | ** ** | **2009****(1)**       | ** ** |
|                                                                                                                                                                                 |       |               | ** ** | ** **            | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                                        |       |               |       |                  |       |
|                                                                                                                                                                                 |       |               |       |                  |       |
| **Current liabilities**                                                                                                                                                              |       |               |       |                  |       |
| Current  maturities of long-term debt                                                                                                                                                | ** ** | **$**              | **185**    | ** **            | **$**      | **187** | ** ** |
| Accounts  payable                                                                                                                                                                    | ** ** | **6,086**          | ** ** | **8,424**             | ** ** |
| Accrued  expenses                                                                                                                                                                    | ** ** | **5,923**          | ** ** | **4,892**             | ** ** |
| Billings  in excess of costs and estimated earnings on uncompleted contracts                                                                                                         | ** ** | **981**            | ** ** | **634**               | ** ** |
| Customer  deposits                                                                                                                                                                   | ** ** | **802**            | ** ** | **799**               | ** ** |
| **Total Current Liabilities**                                                                                                                                                        | ** ** | **13,977**         | ** ** | **14,936**            | ** ** |
|                                                                                                                                                                                 | ** ** | ** **         |       |                  |       |
| **Long-Term Debt,** less current maturities                                                                                                                                          | ** ** | **514**            | ** ** | **544**               | ** ** |
|                                                                                                                                                                                 | ** ** | ** **         |       |                  |       |
| **Total Liabilities**                                                                                                                                                                | ** ** | **14,491**         | ** ** | **15,480**            | ** ** |
|                                                                                                                                                                                 | ** ** | ** **         |       |                  |       |
| **Stockholders’ Equity**                                                                                                                                                        | ** ** | ** **         |       |                  |       |
| Common  stock, $0.0001 par value; 50,000,000 shares authorized 23,597,591 and  23,510,622 issued and outstanding as of March 31, 2010 and  December 31, 2009, respectively | ** ** | **2**              | ** ** | **2**                 | ** ** |
| Additional  paid-in capital                                                                                                                                                          | ** ** | **182,040**        | ** ** | **181,665**           | ** ** |
| Accumulated  deficit                                                                                                                                                                 | ** ** | **(128,158**       | **)**      | **(123,462**          | **)**      |
|                                                                                                                                                                                 | ** ** | ** **         |       |                  |       |
| **Total Stockholders’ Equity**                                                                                                                                                  | ** ** | **53,884**         | ** ** | **58,205**            | ** ** |
|                                                                                                                                                                                 | ** ** | ** **         |       |                  |       |
|                                                                                                                                                                                 | ** ** | **$**              | **68,375** | ** **            | **$**      | **73,685** | ** ** |

 

*Seeaccompanying notes to condensed consolidated financial statements*

 

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*(1)**                              **Derived from auditedfinancial statements in the Company’s annual report on Form 10-K for theyear ended December 31, 2009*

 

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**Lime Energy Co.**

**Unaudited Condensed ConsolidatedStatements of Operations**

**(in thousands, except per share data)**

** **
| ** **                                                          | ** ** | **Three Months**         | ** ** |
|---------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                          | ** ** | **Ended March 31,** | ** ** |
| ** **                                                          | ** ** | **2010**                 | ** ** | **2009** | ** ** |
|                                                                |       |                     |       |   |   |
| **Revenue**                                                         | ** ** | **$**                    | **11,813** | ** ** | **$** | **13,725** | ** ** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Cost  of sales                                                      | ** ** | **9,953**                | ** ** | **10,920** | ** ** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Gross Profit**                                                    | ** ** | **1,860**                | ** ** | **2,805** | ** ** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Selling,  general and administrative                                | ** ** | **6,433**                | ** ** | **5,233** | ** ** |
| Amortization  of intangibles                                        | ** ** | **163**                  | ** ** | **345** | ** ** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Operating Loss**                                                  | ** ** | **(4,736**               | **)**      | **(2,773** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Other  Income (Expense)                                             | ** ** | ** **               | ** ** | ** ** | ** ** |
| Interest  income                                                    | ** ** | **50**                   | ** ** | **33** | ** ** |
| Interest  expense                                                   | ** ** | **(10**                  | **)**      | **(476** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Total  other income (expense)                                       | ** ** | **40**                   | ** ** | **(443** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Loss  from continuing operations before discontinued operations     | ** ** | **(4,696**               | **)**      | **(3,216** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Discontinued Operations:**                                        | ** ** | ** **               | ** ** | ** ** | ** ** |
| Loss  from operation of discontinued business                       | ** ** | **—**               | ** ** | **(392** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Net Loss**                                                        | ** ** | **(4,696**               | **)**      | **(3,608** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Preferred  Stock Dividends                                          | ** ** | **—**               | ** ** | **(556** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Net Loss Available to Common Stockholders**                       | ** ** | **$**                    | **(4,696** | **)** | **$** | **(4,164** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Basic  and diluted loss per common share from Continuing operations | ** ** | **$**                    | **(0.20**  | **)** | **$** | **(0.34** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Discontinued  operations                                            | ** ** | **—**               | ** ** | **(0.04** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Basic  and Diluted Loss Per Common Share                            | ** ** | **$**                    | **(0.20**  | **)** | **$** | **(0.38** | **)** |
|                                                                | ** ** | ** **               | ** ** | ** ** | ** ** |
| Weighted  Average Common Shares Outstanding (in thousands)          | ** ** | **23,592**               | ** ** | **11,018** | ** ** |

 

*See accompanying notes to condensedconsolidated financial statements*

 

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**LimeEnergy Co.**

**Unaudited CondensedConsolidated Statement of Stockholders’ Equity**

**(in thousands, unaudited)**

** **
| ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** **  | ** **      | ** ** | **Total**              | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|----------------|-------------|-----------------|------------|------------------------|------------|
| ** **                                               | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** **  | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                               | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** **  | **Deficit**     | ** ** | **Equity**             | ** ** |
|                                                     |       |       |       |       |       |           |        |            |       |                   |       |
| **Balance,**  December 31, 2009                     | ** ** | **23,511** | ** ** | **$**      | **2**      | ** **     | **181,665** | ** **      | **$**      | **(123,462**           | **)**      | **$** | **58,205** | ** ** |
|                                                     |       |       |       |       |       |           |        |            |       |                   |       |
| Share based compensation                                 |       | —     |       | —     |       | 375            |        | —          |       | 375                    |       |
|                                                     |       |       |       |       |       |           |        |            |       |                   |       |
| Shares issued for benefit plans and option  exercises    |       | 87         |       | —     |       | —         |        | —          |       | —                 |       |
|                                                     |       |       |       |       |       |           |        |            |       |                   |       |
| Net loss for the three months ended March 31,  2010 |       | —     |       | —     |       | —         |        | (4,696          | )          | (4,696                 | )          |
|                                                     |       |       |       |       |       |           |        |            |       |                   |       |
| **Balance, March 31, 2010**                         | ** ** | **23,598** | ** ** | **$**      | **2**      | ** **     | **182,040** | ** **      | **$**      | **(128,158**           | **)**      | **$** | **53,884** | ** ** |

 

*Seeaccompanying notes to condensed consolidated financial statements.*

 

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**Lime Energy Co.**

**Unaudited CondensedConsolidated Statements of Cash Flows**

**(in thousands, unaudited)**

** **
| **Three Months Ended March 31,**                                                                                                      | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                       |       |       |       |       |       |
| **Cash Flows from Operating Activities**                                                                                                   |       |       |       |       |       |
| Net  Loss                                                                                                                                  | ** ** | **$**      | **(4,696** | **)**      | **$**      | **(3,608** | **)** |
| ** **                                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjustments  to reconcile net loss to net cash used in operating activities, net of assets  acquired (Recovery of) provision for bad debts | ** ** | **(18**    | **)**      | **46**     | ** ** |
| Share  based compensation                                                                                                                  | ** ** | **375**    | ** ** | **474**    | ** ** |
| Preferred  stock dividends                                                                                                                 | ** ** | **—** | ** ** | **(173**   | **)**      |
| Depreciation  and amortization                                                                                                             | ** ** | **281**    | ** ** | **603**    | ** ** |
| Amortization  of deferred financing costs                                                                                                  | ** ** | **—** | ** ** | **1**      | ** ** |
| Amortization  of issuance discount                                                                                                         | ** ** | **—** | ** ** | **246**    | ** ** |
| Accrued  dividend satisfied through the issuance of preferred stock                                                                        | ** ** | **—** | ** ** | **115**    | ** ** |
| Accrued  interest satisfied through the issuance of common stock                                                                           | ** ** | **—** | ** ** | **63**     | ** ** |
| PIK  notes issued for interest                                                                                                             | ** ** | **—** | ** ** | **21**     | ** ** |
| Loss  on disposition of fixed assets                                                                                                       | ** ** | **7**      | ** ** | **—** | ** ** |
| Changes  in assets and liabilities                                                                                                         |       |       |       |       |       |
| Accounts  receivable                                                                                                                       | ** ** | **3,112**  | ** ** | **7,450**  | ** ** |
| Inventories                                                                                                                                | ** ** | **(75**    | **)**      | **37**     | ** ** |
| Costs  and estimated earnings in excess of billings on uncompleted contracts                                                               | ** ** | **322**    | ** ** | **690**    | ** ** |
| Prepaid  expenses and other                                                                                                                | ** ** | **(233**   | **)**      | **394**    | ** ** |
| Accounts  payable                                                                                                                          | ** ** | **(2,338** | **)**      | **(7,376** | **)**      |
| Accrued  expenses                                                                                                                          | ** ** | **1,031**  | ** ** | **(775**   | **)**      |
| Billings  in excess of costs and estimated earnings on uncompleted contracts                                                               | ** ** | **347**    | ** ** | **(83**    | **)**      |
| Deferred  revenue                                                                                                                          | ** ** | **—** | ** ** | **(19**    | **)**      |
| Customer  deposits                                                                                                                         | ** ** | **3**      | ** ** | **(381**   | **)**      |
|                                                                                                                                       |       |       |       |       |       |
| Net  cash used in operating activities                                                                                                     | ** ** | **(1,882** | **)**      | **(2,275** | **)**      |
|                                                                                                                                       |       |       |       |       |       |
| **Cash Flows From Investing Activities**                                                                                                   |       |       |       |       |       |
| Acquisition  costs, net of cash acquired                                                                                                   | ** ** | **—** | ** ** | **(614**   | **)**      |
| Proceeds  from sale of fixed assets                                                                                                        | ** ** | **5**      | ** ** | **11**     | ** ** |
| Purchase  of property and equipment                                                                                                        | ** ** | **(116**   | **)**      | **(32**    | **)**      |
| Increase  in Restricted cash                                                                                                               | ** ** | **(500**   | **)**      | **—** | ** ** |
|                                                                                                                                       |       |       |       |       |       |
| Net  cash used in investing activities                                                                                                     | ** ** | **(611**   | **)**      | **(635**   | **)**      |
|                                                                                                                                       |       |       |       |       |       |
| **Cash Flows From Financing Activities**                                                                                                   |       |       |       |       |       |
| Net  (payments) advances on line of credit                                                                                                 | ** ** | **—** | ** ** | **(1,850** | **)**      |
| Payments  of long-term debt                                                                                                                | ** ** | **(32**    | **)**      | **(57**    | **)**      |
| Proceeds  from issuance of common stock                                                                                                    | ** ** | **—** | ** ** | **10,676** | ** ** |
| Costs  related to stock issuances                                                                                                          | ** ** | **—** | ** ** | **(770**   | **)**      |
|                                                                                                                                       |       |       |       |       |       |
| Net  cash (used in) provided by financing activities                                                                                       | ** ** | **(32**    | **)**      | **7,999**  | ** ** |
|                                                                                                                                       |       |       |       |       |       |
| **Net (Decrease) Increase in Cash and Cash Equivalents**                                                                                   | ** ** | **(2,525** | **)**      | **5,089**  | ** ** |
|                                                                                                                                       |       |       |       |       |       |
| Cash  and Cash Equivalents, at beginning of period                                                                                         | ** ** | **22,870** | ** ** | **3,734**  | ** ** |
|                                                                                                                                       |       |       |       |       |       |
| Cash  and Cash Equivalents, at end of period                                                                                               | ** ** | **$**      | **20,345** | ** ** | **$**      | **8,823** | ** ** |

 

*See accompanying notes to condensed consolidatedfinancial statements.*

 

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| **As of March 31,**                                                                                    | ** ** | **2010**                 | ** ** | **2009**   | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------|------------|
|                                                                                                        | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Supplemental Disclosure of Cash Flow Information (in  thousands)**                                        | ** ** | ** **               | ** ** | ** ** | ** ** |
|                                                                                                        | ** ** | ** **               | ** ** | ** ** | ** ** |
| Cash  paid during the period for interest:                                                                  |       |                     |       |       |       |
|                                                                                                        | -          | Continuing  operations   |       | $          | 10         |   | $ | 167 | ** ** |
|                                                                                                        | -          | Discontinued  operations |       | —     |       | 1 |   |
|                                                                                                        |       |                     |       | ** ** |       |
| Interest  obligation satisfied through the issuance of common stock                                         |       | —                   |       | 63         |       |
|                                                                                                        |       |                     |       | ** ** |       |
| Accrued  earn-out satisfied through the issuance of common stock                                            |       | —                   |       | 293        |       |
|                                                                                                        |       |                     |       |       |       |
| Satisfaction  of accrued dividends through the issuance of 2,810 shares of Series A-1  preferred stock |       | —                   |       | 115        |       |
|                                                                                                        |       |                     |       |       |       |
| Extinguishment  of line of credit                                                                           |       | —                   |       | 21         |       |
|                                                                                                        |       |                     |       | ** ** |       |
| Issuance  of line of credit note in satisfaction of interest payable                                        |       | —                   |       | 21         |       |
|                                                                                                             |            |                          |            |            |            |  |  |  |  |

 

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Lime Energy Co.

Notes to Unaudited Condensed Consolidated Financial Statements

 

***Note 1 — Basis of Presentation***

 

The accompanying unauditedcondensed consolidated financial statements (the “Financial Statements”) ofLime Energy Co. (“Lime Energy” and, together with its subsidiaries, the “Company”,“we”, “us” or “our”) have been prepared in accordance with Rule 10-01 ofRegulation S-X promulgated by the Securities and Exchange Commission (the “SEC”)and, therefore, do not include all information and footnotes necessary for afair presentation of financial position, results of operations and cash flowsin conformity with accounting principles generally accepted in the UnitedStates of America (“GAAP”).  In ouropinion, however, the Financial Statements contain all adjustments, consistingonly of normal recurring adjustments, necessary to present fairly our financialposition, results of operations and cash flows as of and for the interimperiods.

 

The results of operationsfor the three months ended March 31, 2010 and 2009 are not necessarilyindicative of the results to be expected for the full year.

 

For further information,refer to the audited financial statements and the related footnotes included inthe Lime Energy Co. Annual Report on Form 10-K for the year ended December 31,2009.

 

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

 

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

 

Acommittee of the Board of Directors grants stock options and restricted stockunder the Company’s 2008 Long Term Incentive Plan, as amended (the Plan”). Allof the options have been granted at a price equal to or greater than the marketprice of the Company’s stock on the date of grant. Substantially all stockoption grants outstanding under the Plan vest ratably over three years andexpire 10 years from the date of grant. In addition to the Plan, the Companygives employees the right to purchase shares at a discount to the market priceunder its employee stock purchase plan (“ESPP”).

 

TheCompany accounts for employee share based awards in accordance with Accounting Standards Codification (ASC) 718. Thispronouncement requires companies to measure the cost of employee servicereceived in exchange for a share based award based on the fair value of theaward at the date of grant, with expense recognized over the requisite serviceperiod, which is generally equal to the vesting period of the grant.

 

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Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

Thefollowing table summarizes the Company’s total share-based compensationexpense:

** **
| ** **        | ** ** | **Three months ended March 31, 2010** | ** ** | **Three months ended March 31, 2009** | ** ** |
|-------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **Cost of**                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Cost of** | ** ** | ** ** | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Sales**                                  | ** ** | **SG&A**                               | ** ** | **Total** | ** ** | **Sales** | ** ** | **SG&A** | ** ** | **Operations** | ** ** | **Total** | ** ** |
|              |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Stock  options    |       | $                                          | 5          |                                       | $          | 300 |   | $ | 305 |   | $ | 34 |   | $ | 427 |   | $ | 6 |   | $ | 467 |   |
|              |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Restricted  stock |       | —                                     |       | 55                                         |       | 55 |   | — |   | — |   | — |   | — |   |
|              |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| ESPP              |       | —                                     |       | 15                                         |       | 15 |   | — |   | 13 |   | — |   | 13 |   |
|              |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
|              |       | $                                          | 5          |                                       | $          | 370 |   | $ | 375 |   | $ | 34 |   | $ | 440 |   | $ | 6 |   | $ | 480 |   |

 

TheCompany uses an Enhanced Hull-White Trinomial model to value its employeeoptions.  The weighted-average,grant-date fair value of stock options granted to employees and theweighted-average significant assumptions used to determine those fair values,using an Enhanced Hull-White Trinomial model for stock options under ASC 718,are as follows:

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** |
| ** **                                      | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                            |       |                   |       |   |   |
| Weighted  average fair-value per option granted |       | $                      | 2.06       |   | $ | 2.26 |   |
|                                            |       |                   |       |   |   |
| Significant  assumptions (weighted average):    |       |                   |       |   |   |
| Risk-free  rate                                 |       | 0.07                   | %          | 0.10 | % |
| Dividend  yield                                 |       | 0.00                   | %          | 0.00 | % |
| Expected  volatility                            |       | 83.4                   | %          | 84.7 | % |
| Expected  life (years) (1)                      |       | 5.9                    |       | 4.6 |   |
| Expected  turn-over rate                        |       | 8.90                   | %          | 10.40 | % |
| Expected  exercise multiple                     |       | 2.20                   |       | 2.20 |   |
|                                                 |            |                        |            |  |  |  |  |

 

----

(1)      The Company continues to use the simplified method toestimate expected term due to the historical structural changes to its businesssuch that historical exercise data may no longer provide a reasonable basis onwhich to estimate expected term.

 

The risk-free interest rate is based on theU.S. Treasury Bill rates at the time of grant. The dividend yield reflects thefact that the Company has never paid a dividend on its common stock and doesnot expect to in the foreseeable future. The Company estimated the volatilityof its common stock at the date of grant based on the historical volatility ofits stock. The expected term of the options is based on the simplified methodas described in the Staff Accounting Bulletin No. 107, which is theaverage of the vesting term and the original contract term.  The expected turn-over 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).

 

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Lime Energy Co.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Optionactivity under the Company’s stock option plans as of March 31, 2010 andchanges during the three months then ended are presented below:

 
| ** **                                  | ** ** | ** ** | ** ** | ** **              | ** ** | **Weighted**          | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | ** ** | ** ** | **Exercise  Price Per** | ** ** | **Average  Exercise** | ** ** |
| ** **                                  | ** ** | **Shares** | ** ** | **Share**               | ** ** | **Price**             | ** ** |
|                                        |       |       |       |                    |       |                  |       |
| Outstanding at  December 31, 2009      |       | 2,441,344  |       | $3.29 - $1,363.95       |       | $                     | 9.66       |   |
|                                        |       |       |       |                    |       |                  |       |
| Granted                                     |       | 301,638    |       | $4.42 - $4.96           |       | $                     | 4.43       |   |
| Exercised                                   |       | (15,061    | )          | $3.29 - $3.30           |       | $                     | 3.30       |   |
| Forfeited                                   |       | (28,129    | )          | $3.50 - $945.00         |       | $                     | 80.60      |   |
|                                        |       |       |       |                    |       |                  |       |
| Outstanding at  March 31, 2010         |       | 2,699,792  |       | $3.30 - $1,363.95       |       | $                     | 8.37       |   |
|                                        |       |       |       |                    |       |                  |       |
| Options exercisable at  March 31, 2010 |       | 1,959,761  |       | $3.30 - $1,363.95       |       | $                     | 9.48       |   |

 

Thefollowing table summarizes information about stock options outstanding at March 31,2010:

 
| ** **         | ** ** | **Options  Outstanding** | ** ** | **Options  Exercisable** | ** ** |
|--------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **         | ** ** | ** **               | ** ** | **Weighted**             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Number**               | ** ** | **Average**              | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **         | ** ** | **Outstanding**          | ** ** | **Remaining**            | ** ** | **Weighted** | ** ** | **Exercisable  at** | ** ** | **Weighted** | ** ** |
| ** **         | ** ** | **at  March 31,**   | ** ** | **Contractual**          | ** ** | **Average** | ** ** | **March 31,** | ** ** | **Average** | ** ** |
| **Exercise Price** | ** ** | **2010**                 | ** ** | **Life**                 | ** ** | **Exercise  Price** | ** ** | **2010** | ** ** | **Exercise  Price** | ** ** |
|               |       |                     |       |                     |       |   |   |   |   |   |   |
| $3.30 - $4.00      |       | 630,642                  |       | 7.4 years                |       | $ | 3.48 |   | 356,450 |   | $ | 3.44 |   |
| $4.01 - $6.00      |       | 358,639                  |       | 9.6 years                |       | $ | 4.49 |   | 67,861 |   | $ | 4.73 |   |
| $6.01 - $8.00      |       | 1,317,764                |       | 6.5 years                |       | $ | 7.07 |   | 1,261,098 |   | $ | 7.03 |   |
| $8.01 - $10.00     |       | 19,569                   |       | 8.0 years                |       | $ | 9.15 |   | 17,836 |   | $ | 9.20 |   |
| $10.01 - $20.00    |       | 357,131                  |       | 7.5 years                |       | $ | 11.15 |   | 240,469 |   | $ | 11.15 |   |
| $20.01 - $1,363.95 |       | 16,047                   |       | 1.6 years                |       | $ | 331.48 |   | 16,047 |   | $ | 331.48 |   |
|               |       |                     |       |                     |       |   |   |   |   |   |   |
| $3.30 - $1,363.95  |       | 2,699,792                |       | 7.3 years                |       | $ | 8.37 |   | 1,959,761 |   | $ | 9.48 |   |

 

Theaggregate intrinsic value of the outstanding options (the difference betweenthe closing stock price on the last trading day of the first quarter of 2010 of$4.55 per share and the exercise price, multiplied by the number ofin-the-money options) that would have been received by the option holders hadall option holders exercised their options on March 31, 2010 wasapproximately $712,000. The aggregate intrinsic value of exercisable options asof March 31, 2010 was approximately $398,000.  These amounts will change based on changes inthe fair market value of the Company’s common stock.

 

Asof March 31, 2010, there was approximately $1.0 million of totalunrecognized compensation cost related to stock options which is expected to berecognized over a weighted-average period of 1.0 year and unrecognized cost of$305,000 related to restricted stock which will be recognized over a weighted-averageperiod of 11.4 months.

 

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Lime Energy Co.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

OnMarch 3, 2009, the Company exchanged 2,252,341 shares of its common stockfor 1,060,421,884 shares of Advanced Biotherapy, Inc. (“ADVB”) held bycertain stockholders of ADVB (the “Sellers”) representing approximately 90.8%of ADVB’s issued and outstanding shares pursuant to a Stock Purchase Agreementdated November 18, 2008.  TheCompany then completed a short-form merger in which it merged ADVB with andinto a newly formed merger subsidiary, with the merger subsidiary continuing asthe surviving entity.  Upon the closingof the merger the Company obtained access to ADVB’s assets, includingapproximately $7.4 million of cash and a revolving credit note issued by theCompany that had an outstanding balance of $42,000 and accrued interest payableof $28,000.  Upon the closing of thetransaction the Company has cancelled the revolving credit note anddiscontinued the operations of ADVB.

 

ADVB had no revenue generating operations and didnot have employees capable of developing a product that would be considered abusiness. Therefore the Company did not consider ADVB a business as defined byRegulation S-X, Rule 11-01(d) or by generally accepted accountingprinciples. Consequently, the merger was not accounted for as a businesscombination under the guidance of ASC 805, Business Combinations.  The substance of the ADVB acquisitionincludes two distinct events. First, as a result of the transaction, theCompany has settled the amounts due to ADVB under its revolving credit note(see Note 7).  In addition, the Companyreceived approximately $7.4 million of cash in exchange for the shares ofcommon stock it issued in connection with the ADVB acquisition. As a result ofthe merger, the Company eliminated any debt due to ADVB, recorded the assetsacquired (consisting primarily of cash and cash equivalents) at fair value andcredited equity for the value of its common shares issued in connection withthe ADVB acquisition.

 

***Note 4 — Discontinued Operations***

 

On August 10, 2009, the Company sold itsEnergy Technology business.  During thequarter ended June 30, 2009, in anticipation of the sale of the EnergyTechnology business, the Company reduced the carrying value of the relatedassets to their expected fair value, incurring an impairment loss of$503,000.  The Company has reported theoperating results of this business for the three month period ended March 31,2009 as discontinued operations in the accompanying financial statements.

 

***Note 5 — Recent Accounting Pronouncements***

 

In June 2009, the FASB issued AccountingStandards Codification (“ASC”) 810, “Amendment to FASB Interpretation No. 46(R)”to revise the approach to determine when a variable interest entity (VIE)should be consolidated. The new consolidation model for VIEs considers whetherthe Company has the power to direct the activities that most significantlyimpact the VIE’s economic performance and shares in the significant risks andrewards of the entity. The guidance on VIE’s requires companies to continuallyreassess VIEs to determine if consolidation is appropriate and provideadditional disclosures. The guidance is effective for the Company’s 2010 fiscalyear. The adoption of this statement is not expected to have a material impacton the Company’s consolidated results of operations and financial condition.

 

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Lime Energy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

ASC 605-25—In October 2009,the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsUpdate (“ASU”) No. 2009-13 for updated revenue recognition guidance underthe provisions of ASC 605-25, “Multiple-Element Arrangements”. The previousguidance has been retained for criteria to determine when delivered items in amultiple-deliverable arrangements should be considered separate units ofaccounting, however the updated guidance removes the previous separationcriterion that objective and reliable evidence of fair value of any undelivereditems must exist for the delivered items to be considered a separate unit orseparate units of accounting. This guidance is effective for fiscal yearsbeginning on or after June 15, 2010. The Company does not expect that theadoption of this guidance will have a material effect on the Company’sconsolidated results of operations, financial position or cash flows.

 

ASC 820—In January 2010,the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures(Topic 820): Improving Disclosures About Fair Value Measurements.” Thisguidance amends Subtopic 820-10 to require new disclosures and clarify existingdisclosures. This guidance requires new disclosures of amounts and reasons forsignificant transfers between Level 1 and Level 2 fair value measurements.Additionally, in the reconciliation for fair value measurements usingsignificant unobservable inputs (Level 3), separate presentation of informationabout purchases, sales, issuances and settlements is required. The guidanceclarifies that fair value measurement disclosures for each class of assets andliabilities may constitute a subset of assets and liabilities within a lineitem on a reporting entity’s balance sheet. The guidance also clarifiesdisclosure requirements about inputs and valuation techniques for bothrecurring and nonrecurring fair value measurements (Level 2 or Level 3). TheASU also amends guidance on employers’ disclosures about postretirement benefitplan assets under ASC 715 to require that disclosures be provided by classes ofassets instead of by major categories of assets. The new disclosures andclarifications of existing disclosures are effective for interim and annualreporting periods beginning after December 15, 2009, except for thedisclosures about purchases, sales, issuances and settlements in the rollforward of activity for Level 3 fair value measurements. Those disclosures areeffective for fiscal years beginning after December 15, 2010, including interimperiods within those fiscal years. The Company does not expect that theadoption of this guidance will have a material effect on the Company’sconsolidated results of operations, financial position or cash flows.

 

ASC 815—In March 2010,the FASB issued ASU 2010-11, “Scope Exception Related to Embedded CreditDerivatives” to address questions that have been raised in practice about theintended breadth of the embedded credit derivative scope exception inparagraphs 815-15-15-8 through 815-15-15-9 of ASC 815, “Derivatives and Hedging”.  The amended guidance clarifies that the scopeexception applies to contracts that contain an embedded credit derivative thatis only in the form of subordination of one financial instrument to another.This guidance is effective on July 1, 2010 for the Company.  The adoption of this guidance is not expectedto have a material impact on the Company’s consolidated financial position,results of operations or cash flows.

 

***Note 6 — Net Loss Per Share***

 

The Company computes lossper share under ASC 260 “Earnings Per Share,” which requires presentation oftwo amounts: basic and diluted loss per common share. Basic loss per commonshare is computed by dividing loss available to common stockholders by thenumber of weighted average common shares outstanding, and includes all commonstock issued.  Diluted earnings wouldinclude all common stock equivalents. The Company has not included the outstanding options, warrants or sharesissuable upon 

 

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Lime Energy Co.

Notes to Unaudited Condensed Consolidated Financial Statements

 

conversion of theconvertible debt as common stock equivalents in the computation of diluted lossper share for the three months ended March 31, 2010 and 2009 because theeffect would be antidilutive.

 

The following table setsforth the weighted average shares issuable upon exercise of outstanding optionsand warrants and conversion of convertible debt that are not included in thebasic and diluted loss per share available to common stockholders because to doso would be antidilutive:

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **March 31,**     | ** ** |
| ** **                                                                  | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                                        |       |                   |       |   |   |
| Weighted  average shares issuable upon exercise of outstanding options      |       | 2,709,782              |       | 2,524,669 |   |
|                                                                        |       |                   |       |   |   |
| Weighted  average shares issuable upon exercise of outstanding warrants     |       | 807,696                |       | 707,118 |   |
|                                                                        |       |                   |       |   |   |
| Weighted  average shares issuable upon conversion of convertible debt *(1)* |       | —                 |       | 714,286 |   |
|                                                                        |       |                   |       |   |   |
| Total                                                                       |       | 3,517,478              |       | 3,946,073 |   |

 

----

(1) *All of the convertible debtwas converted to common shares during the 3**rd** quarter of 2009.*

 

***Note 7 — Revolving Line ofCredit***

** **

OnMarch 12, 2008, the Company entered into a revolving line of credit notewith Advanced Biotherapy, Inc. (“ADVB”) and Richard Kiphart, the Company’sChairman and largest individual investor. On November 14, 2008, Mr. Kiphart agreed to convert his noteinto shares of the Company’s Series A-1 preferred stock.  On November 18, 2008, the Companyentered an agreement to acquire 90.8% of the shares of ADVB and it completed ashort-form merger on March 3, 2009, whereby it merged ADVB with a newlycreated acquisition subsidiary. Following the merger it canceled the outstanding balance of $42,000 andaccrued interest of $28,000 on the ADVB line of credit.

 

***Note 8 — Subordinated Convertible Term Notes***

** **

Duringthe second quarter of 2007, eight investors, including Richard Kiphart, theCompany’s Chairman and largest individual stockholder (collectively the “Investors”),and the Company entered into a loan agreement under which the Investors lentthe Company $5 million in the form of subordinated convertible term notes (the “TermNotes”).  Before the conversion discussedbelow, the Term Notes were to mature on May 31, 2010, and accrued interestat the rate of 10% per year.  Interestwas payable quarterly, 50% in cash and 50% in shares of the Company’s commonstock valued at the market price of the Company’s common stock on the interestdue date.

 

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Lime Energy Co.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Aspart of the transaction, the Company issued the Investors four-year warrants topurchase 206,044 shares of its common stock at $7.28 per share.  These warrants were valued at $1,137,000utilizing a modified Black-Scholes option pricing model utilizing the followingassumptions: risk free rate of 4.846%; expected volatility of 93.3%; expecteddividend of $0; and expected life of four years.

 

Inrecording the transaction, the Company allocated the value of the proceeds tothe Term Notes and warrants based on their relative fair values.  In doing so, it determined that the TermNotes contained a beneficial conversion feature since the fair market value ofthe common stock issuable upon conversion of the Term Notes (determined on theTerm Note issuance date) exceeded the value allocated to the Term Notes of$3,863,000.  The Term Notes wereconvertible into 714,286 shares of common stock, which at the market price of$8.02 per share on date of issuance of the Term Notes was worth $5,730,000.  The difference between the market value ofthe shares issuable upon conversion and the value allocated to the Term Notesof $1,867,000 was considered to be the value of the beneficial conversionfeature.

 

Thevalue of the beneficial conversion feature and the value of the warrants wererecorded as a discount to the Term Notes which was then amortized over the termof the Term Notes using the effective interest method.  Amortization of the discount of $246,000 wasincluded in interest expense during the three-month period ended March 31,2009.

 

Inaddition, the Company incurred costs of $9,000 relative to the Term Noteoffering.  These costs were capitalizedand were also being amortized over the term of the Term Notes using theeffective interest method.  Amortizationof the deferred issuance costs of $1,000 was included in interest expenseduring the three-month period ended March 31, 2009.

 

OnAugust 10, 2009, the Company and Mr. Kiphart agreed to convert hisTerm Notes, totaling $3.1 million, into 484,375 shares of the Company’s commonstock at the prior day’s closing market price of $6.40 per share.  Also on August 10, 2009, the holders ofthe remaining Term Notes all elected to convert their notes into common stockupon the closing of the then pending underwritten public offering at the lowerof the offering price less the underwriters’ discount and the stated conversionprice of the notes of $7.00 per share. The public follow-on offering closed on September 25, 2009, atwhich time the $1.9 million in Term Notes were converted into 367,504 shares ofcommon stock.

 

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

 

On November 13,2008, the Company entered into Subscription Agreements with 15 investors tosell 1,787,893 units, each comprised of one share of the Company’s common stockand a warrant to purchase an additional quarter share of common stock (the “Units”).  The sale price was $3.51 per Unit, which wasequal to 75% of the volume-weighted average price of the Company’s stock forthe ten days prior to closing.  Thewarrants allow holders to purchase a share of common stock for $4.10 per share,which was the closing price of the Company’s common stock on the day prior tothe closing, and the warrants are exercisable any time after May 13, 2009and before November 13, 2011.  Thetotal gross proceeds raised in the offering were $6,275,500.

 

The private offeringclosed in two tranches: tranche A, which was comprised of unaffiliatedinvestors; and tranche B which was comprised of affiliated investors, primarilyexecutive officers and directors of the Company.  The Company raised $3,000,500 in tranche A,which closed on November 13, 2008 and

 

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Lime Energy Co.

Notes to Unaudited Condensed Consolidated Financial Statements

 

$3,275,000 in tranche B,which closed on January 30, 2009. The issuance of the Units sold intranche B required approval by holders of a majority of the Company’soutstanding voting stock pursuant to the NASDAQ Marketplace Rules.  The Company received the written consent inlieu of a meeting of stockholders from the holders of shares representing 58.7%of the total outstanding shares of its common stock on November 13, 2008,which was sufficient under the Delaware General Corporation Law, the Company’sBy-Laws and the NASDAQ Marketplace Rules to approve the transaction.

 

Securities and ExchangeCommission rules require that any corporate actions requiring thestockholder 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***

 

OnNovember 14, 2008, Richard Kiphart agreed to convert his $14.5 millionrevolving line of credit note and $207,104 of accrued interest into 358,710shares of Series A-1 preferred stock. Each outstanding share of preferred stock was entitled to cumulativequarterly dividends at a rate of (i) 15% per annum of its stated value(which was $41.00) on or prior to March 31, 2009 (9% in cash and 6% inadditional shares of preferred stock); and (ii) 17% per annum of itsstated value, at any time on or after April 1, 2009 (9% in cash and 8% inadditional shares of preferred stock). The preferred stock was convertible at the holder’s election any timeafter December 31, 2009 into shares of the Company’s common stock at therate of 10 shares of common stock for each share of preferred stock.

 

OnAugust 10, 2009, to facilitate the anticipated public offering of itscommon stock, the Company and Mr. Kiphart converted his Series A-1preferred stock into 3,777,705 shares of the Company’s common stock.  Following this conversion there were noshares of Series A-1 Preferred Stock outstanding.

 

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

 

TheCompany is made up of 17 separate companies, but with the sale of the EnergyTechnology business in August 2009, all of the remaining businessesoperate in the same business segment, the Energy Efficiency Services segment.

 

***Note 12 — Other Equity Issuances***

 

(a)          During the first quarter of2010, holders of options to purchase 15,061 shares of the Company’s commonstock exercised their options on a cashless basis, exchanging 9,626 shares theywere entitled to purchase pursuant to the options to satisfy the exerciseprice, receiving 5,435 shares in exchange.

 

(b)         During the first quarter of2010 the Company issued 81,494 shares of restricted stock to its executiveofficers.  These shares vest ratably on December 31,2010, 2011 and 2012 if the executive is still employed by the Company on thevesting date.

 

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

 

You should read the followingdiscussion regarding the Company along with our financial statements andrelated notes included in this quarterly report.  This quarterly report, including thefollowing discussion, contains forward-looking statements that are subject torisks, uncertainties and assumptions. Our actual results, performance and achievements in 2010 and beyond maydiffer materially from those expressed in, or implied by, these forward-lookingstatements.  See Cautionary NoteRegarding Forward-Looking Statements.

 

**Overview**

 

We are a leading provider ofintegrated energy engineering, consulting and implementation solutionsspecializing in improving the energy efficiency of our clients’ facilities, reducing their operating costs andcarbon emissions.  We operate in threespecific markets: the commercial and industrial (C&I) market, the publicsector market and the utility market.  Inthe C&I market we sell directly to commercial and industrial clients.  In the public sector market we work withenergy service companies (“ESCOs”), but we have also recently begun to act as aprime contractor to the federal government when they do not need the servicesof our ESCO partners.  In the utilitymarket we act as an energy efficiency program manager for utilities.  Our clients include commercial and industrialbusinesses, property owners and managers, utilities, ESCOs serving U.S.government and educational institutions, and the federal government.  We focus on deploying solutions to reduce theenergy-related expenditures of our clients’ facilities and the impact of theirenergy use on the environment, including energy efficient lighting upgrades,energy efficiency mechanical and electrical retrofit and upgrade services,water conservation, weatherization and renewable project development andimplementation.  We provide energyefficiency solutions across all of our clients’ facilities, ranging fromhigh-rise office buildings to manufacturing plants, retail sites, mixed usecomplexes and large, government sites to small, local facilities.

 

Weoffer our clients a full range of services to address the energy efficiencyneeds of their facilities based on our ability to identify and deliversignificant return on our clients’ investments, improve the quality of theirphysical workspaces, maximize their operational savings and reduce theirmaintenance costs. Our turnkey services include**:**

 

**·**                  *Energy Engineering andConsulting*:  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:*  Weprovide complete turnkey implementation services for a range of energyefficiency and renewable energy projects, including energy efficient lightingupgrades, energy efficiency mechanical and electrical retrofit and upgradeservices, water conservation, weatherization and renewable project developmentand implementation, including solar, biomass and geothermal.  We consider factors such as current facilityinfrastructure, best available technologies, building environmental conditions,hours of operation, energy costs, available utility rebates and tax incentives,and installation, operation and maintenance costs of various efficiencyalternatives.  Our professionals’extensive knowledge in energy efficiency solutions 

 

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**enables us to apply the mostappropriate, effective and proven technologies available in the marketplace.**

 

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, as well as utilities forwhich we manage energy efficiency portfolio projects. Our public sector clientsinclude government agencies and educational institutions, which we serve boththrough our relationships with ESCOs and directly.  ESCOs are awarded project contracts with thepublic sector as prime contractors, and we provide energy efficiency expertiseto develop and implement tailored solutions under these contracts.  In addition, during the third quarter of 2009we became one of three companies qualified to bid under the US Army Corp. ofEngineers’ Facility Repair and Renewal (FRR) program.  As a result, we are now able to bid directlyon federal government projects under the FRR program as a primecontractor.  We have also recently beendirectly awarded contracts from the US Postal Service to perform energyefficiency upgrades to their facilities in several regions throughout thecountry.

 

In August 2009 we sold the assets of our Maximum Performance Group, Inc.subsidiary, which made up our Energy Technology business segment in order tofocus on our core Energy Efficiency Services business.  The Energy Technology segment, whichrepresented approximately 4% of our 2008 revenue, offered a patented line ofheating, ventilation and air conditioning and lighting controllers under theeMAC and uMAC brand names.

 

**Resultsof Operations**

 

*Revenue*

 

Wegenerate the majority of our revenue from the sale of our services and productsthat we purchase and resell to our clients. The substantial majority of our revenue is derived from fixed-pricecontracts, although we occasionally bill on a time-and-materials basis. Underfixed-price contracts, we bill our clients for each project once the project iscompleted or throughout the project as specified in the contract. Undertime-and-materials arrangements, we bill our clients on an hourly basis withmaterial costs and other reimbursable expenses passed through and recognized asrevenue. Our projects take a couple days to a year or more to complete withprojects in our commercial and industrial markets typically taking less time tocomplete than the larger projects in our public sector markets.  We recognize the revenue on smaller, shorterterm projects on a completed contract basis and on larger, longer projects weutilize the percentage of completion method for revenue recognition. All of ourrevenue is earned in the United States.

 

*Gross Profit*

 

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

 

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Gross profit is a key metric that we use toexamine our performance. Gross profit depends in large part on the volume andmix of products and services that we sell during any given period. A portion ofour expenses, such as the cost of certain salaried project management andengineering personnel, are relatively fixed. Accordingly, an increase in thevolume of sales will generally result in an increase to our margins since thesefixed expenses are not expected to increase proportionately with sales. Ourbusiness is also seasonal; as such, our margins will vary with seasonal changesin our revenue due to the fixed nature of some of our costs.

 

*Selling, General andAdministrative Expenses*

 

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

 

·                                          direct labor and commissioncosts related to our employee sales force;

 

·                                          costs of our non-productionmanagement, supervisory and staff salaries and employee benefits, including thecosts of share-based compensation;

 

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

 

·                                          costs related to marketingand advertising our products;

 

·                                          legal and accountingexpenses; and

 

·                                          costs related toadministrative functions that serve to support our existing businesses, as wellas to provide the infrastructure for future growth.

 

*Amortization of Intangibles*

 

Whenwe acquire companies we allocate the purchase price to tangible assets (such asproperty, equipment, accounts receivable, etc.), identifiable intangible assets(such as contract backlogs, customer lists, technology, trade name, etc.), withthe balance recorded as goodwill.  Weamortize the value of certain intangible assets over their estimated usefullives as a non-cash expense.

 

*Other Expense*

 

Otherexpense consists of interest expense, net of interest earned on ourinvestments. Interest expense represents the interest costs and fees associatedwith the mortgage on our headquarters, notes payable and various vehicle loans,and for periods prior to 2010, our subordinated convertible term notes(including amortization of the related debt discount and issuance costs) andour lines of credit. Interest income includes earnings on our invested cashbalances and amortization of the discount on our long term receivables.

 

*DividendExpense*

 

Dividendexpense includes dividends accrued on our Series A-1 preferred stock.  All of the Series A-1 preferred stockwas converted to common stock on August 10, 2009.

 

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**Three Months Ended March 31, 2010 Compared to ThreeMonths Ended March 31, 2009**

 

***Consolidated Results (in thousands):***

*** ***
| ** **                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **March 31,**     | ** ** | **Change** | ** ** |
| ** **                                 | ** ** | **2010**               | ** ** | **2009**   | ** ** | **$**      | ** ** | **%** | ** ** |
|                                       |       |                   |       |       |       |       |       |   |   |
| Revenue                                    |       | $                      | 11,813     |       | $          | 13,725     |       | $ | (1,912 | ) | -13.9 | % |
| Cost  of sales                             |       | 9,953                  |       | 10,920     |       | (967       | )          | -8.9 | % |
| Gross  profit                              |       | 1,860                  |       | 2,805      |       | (945       | )          | -33.7 | % |
|                                       |       |                   |       |       |       |       |       |   |   |
| Selling,  general and administrative       |       | 6,433                  |       | 5,233      |       | 1,200      |       | 22.9 | % |
| Amortization  of intangibles               |       | 163                    |       | 345        |       | (182       | )          | -52.8 | % |
| Operating  Loss                            |       | (4,736                 | )          | (2,773     | )          | (1,963     | )          | 70.8 | % |
|                                       |       |                   |       |       |       |       |       |   |   |
| Other  income (expense)                    |       | 40                     |       | (443       | )          | 483        |       | -109.0 | % |
| Loss  from continuing operations           |       | (4,696                 | )          | (3,216     | )          | (1,480     | )          | 46.0 | % |
|                                       |       |                   |       |       |       |       |       |   |   |
| Loss  from discontinued operations         |       | —                 |       | (392       | )          | 392        |       | -100.0 | % |
| Net  loss                                  |       | $                      | (4,696     | )          | $          | (3,608     | )          | $ | (1,088 | ) | 30.2 | % |
|                                       |       |                   |       |       |       |       |       |   |   |
| Preferred  stock dividends                 |       | —                 |       | (556       | )          | 556        |       | -100.0 | % |
| Net  loss available to common stockholders |       | $                      | (4,696     | )          | $          | (4,164     | )          | $ | (532 | ) | 12.8 | % |

 

The following table presents the percentage ofcertain items to revenue:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **March 31,**     | ** ** |
| ** **                                 | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                       |       |                   |       |   |   |
| Revenue                                    |       | 100.0                  | %          | 100.0 | % |
| Cost  of sales                             |       | 84.3                   | %          | 79.6 | % |
| Gross  profit                              |       | 15.7                   | %          | 20.4 | % |
|                                       |       |                   |       |   |   |
| Selling,  general and administrative       |       | 54.5                   | %          | 38.1 | % |
| Amortization  of intangibles               |       | 1.4                    | %          | 2.5 | % |
| Operating  Loss                            |       | -40.1                  | %          | -20.2 | % |
|                                       |       |                   |       |   |   |
| Other  income (expense)                    |       | 0.3                    | %          | -3.2 | % |
| Loss  from continuing operations           |       | -39.8                  | %          | -23.4 | % |
|                                       |       |                   |       |   |   |
| Loss  from discontinued operations         |       | 0.0                    | %          | -2.9 | % |
| Net  loss                                  |       | -39.8                  | %          | -26.3 | % |
|                                       |       |                   |       |   |   |
| Preferred  stock dividends                 |       | 0.0                    | %          | -4.1 | % |
| Net  loss available to common stockholders |       | -39.8                  | %          | -30.3 | % |

 

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***Revenue.***  Our revenue for the three months ended March 31,2010 was $11.8 million, representing a decline of 13.9%, or $1.9 million fromthe $13.7 million earned during the three months ended March 31,2009.  Revenue earned through sales toour commercial and industrial markets (“C&I”) declined approximately $1million while revenue from our public sector markets declined approximately$2.8 million.  These declines werepartially offset by revenue of $1.9 million from our entry into the utilityprogram management market.  C&Irevenue for the first quarter of 2009 benefited from several projects thatcarried over from a very strong fourth quarter of 2008, whereas weaker revenueduring the fourth quarter of 2009 resulted in fewer projects that carried overinto the first quarter of 2010, contributing to the decline in revenue whencompared to the first quarter of 2009. Revenue from our public sector business continues to be affected bystimulus-related project delays as our public sector clients postpone projectswhile awaiting indication of whether they will receive stimulus funds under theAmerican Recovery and Reinvestment Act of 2009. We expect revenue from this market to continue to be weak until thestimulus related delays are resolved, possibly in the third or fourth quarterof this year.  This decline in revenuefrom public sector clients is expected to be largely offset by revenue from ourUtility Program Management business and FRR contract, both of which expected tocontinue to grow throughout the year. Total revenue for the second quarter isanticipated to match or slightly exceed the revenue earned during the secondquarter of 2009.

 

***Gross Profit. ***Our gross profit for the three-month period ended March 31, 2010declined $0.9 million or 33.7% to $1.9 million compared to $2.8 million earnedduring the second quarter of 2009.  Ourgross profit margin for the first quarter of 2010 was 15.7% compared to 20.4%for the first quarter of 2009.  Thedecline in our gross profit and gross margin was the result of lower revenueand a mix of business that included a higher portion of low margin local bidwork taken on by our public sector business to offset the stimulus relatedreduction in its government contracts. We believe that margins should improve throughout the year as revenuefrom our C&I and Utility Management businesses become a larger portion ofour total revenue and as the stimulus related delays of projects in our publicsector starts to clear-up.

 

***Selling, General and Administrative Expense. ***OurSG&A expense for the first quarter of 2010 was $6.4 million, an increase of$1.2 million, or 22.9%, compared to the $5.2 million for the same period during2009.  The majority of this increase wasrelated to new initiatives, including our Utility Program Management and FRRprograms, both of which were initiated during the second half of 2009.  While the FRR program did not have materialfirst quarter revenue, both programs are expected to be significantcontributors to our 2010 results.  Wehave taken steps to reduce the growth in our SG&A expense during thebalance of the year in response to the reduced revenue resulting from stimulusrelated delays in our public sector markets. While we expect our SG&A expense for the balance of the year to behigher than the levels incurred during 2009 primarily due to our newinitiatives, we expect the expense to be lower on a quarterly basis than thatincurred during the first quarter of this year.

 

***Amortization of Intangibles.***  Amortization expense associated with ourintangible assets was $0.1 million during the first quarter of 2010, a decreaseof $0.2 million from the $0.3 million recorded during the first quarter of2009.  Our amortization expense hasdeclined as intangible assets associated with acquisitions we have made overthe past three years have become fully amortized.  Absent any new acquisitions, none of whichare currently planned, amortization expense for the second quarter of 2010 isexpected to be $163 thousand, declining to $147 thousand during the thirdquarter and $117 during the fourth quarter.

 

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***Other Non-Operating (Expense) Income.***  Other expense declined $483thousand to income of $40 thousand during the first quarter of 2010 from anexpense of $443 thousand during the first quarter of 2009.  Interest expense for the first quarter of2010 was $10 thousand, a $466 thousand decline compared to the $476 thousandfor the first quarter of 2009.  Thecomponents of interest expense for the three-month periods ended March 31,2010 and 2009 are as follows:

 
| **Three months ended  March 31,**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |
| Lines  of credit                                           |       | $        | —     |     | $          | 53 |   |
| Note  payable                                              |       | —   |       | 27       |       |
| Mortgage                                                   |       | 5        |       | 4        |       |
| Subordinated  convertible notes                            |       | —   |       | 123      |       |
| Other                                                      |       | 5        |       | 22       |       |
|                                                       |       |     |       |     |       |
| Total  contractual interest                                |       | $        | 10         |     | $          | 229 |   |
|                                                       |       |     |       |     |       |
| Amortization  of deferred issuance costs and debt discount |       | —   |       | 247      |       |
|                                                       |       |     |       |     |       |
| Total  interest expense                                    |       | $        | 10         |     | $          | 476 |   |

 

Total contractual interest (the interest onoutstanding loan balances) decreased $219 thousand during the first quarter of2010 to $10 thousand when compared to $229 thousand incurred during the firstquarter of 2009.  The decrease was theresult of the repayment of the line of credit during the first quarter of 2009and all notes payable during the third quarter of 2009, as well as theconversion of the subordinated notes to common stock during the third quarterof 2009.  Amortization expense of thedeferred issuance costs and debt discount was eliminated with the conversion ofthe subordinated notes.

 

Interest income increased $17 thousand to $50thousand during the first quarter of 2010, from $33 thousand during the firstquarter of 2009.  Approximately $42thousand of the 2010 interest income was amortization of the discount on ourlong-term receivables, compared to $22 thousand during the first quarter of2009.

 

***Discontinued Operations.***  During the first quarter of 2009 we reporteda $392 thousand loss from discontinued operations related to our former EnergyTechnology business.  We sold thisbusiness in August 2009, therefore there was no loss from discontinuedoperations during the 2010 period.

 

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**Liquidityand Capital Resources**

 

As of March 31,2010, we had cash and cash equivalents (including restricted cash) of $21.3million, compared to $23.4 million on December 31, 2009. Our debtobligations as of March 31, 2010 consisted of a mortgage of $409 thousandon our facility in Elk Grove Village Illinois and various vehicle loanstotaling $290 thousand.

 

Ourprincipal cash requirements are for operating expenses, the funding ofinventory and accounts receivable, and capital expenditures. We have financedour operations since inception primarily through the sale of our common andpreferred stock, as well as through various forms of secured debt.

 

The following tablesummarizes, for the periods indicated, selected items in our consolidatedstatement of cash flows:

 
| **Three months ended  March 31,**                | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| Net  cash used in operating activities                |       | $        | (1,882     | )        | $          | (2,275 | ) |
| Net  cash used in investing activities                |       | (611     | )          | (635     | )          |
| Net  cash (used in) provided by financing activities  |       | (32      | )          | 7,999    |       |
|                                                  |       |     |       |     |       |
| Net  (Decrease) Increase in Cash and Cash Equivalents |       | $        | (2,525     | )        | $          | 5,089 |   |
|                                                  |       |     |       |     |       |
| Cash  and Cash Equivalents, at beginning of period    |       | 22,870   |       | 3,734    |       |
|                                                  |       |     |       |     |       |
| Cash  and Cash Equivalents, at end of period          |       | $        | 20,345     |     | $          | 8,823 |   |

 

**Threemonths Ended March 31, 2010 Compared to Three months Ended March 31,2009**

 

Net cash declined $2.5million during the three month period ended March 31, 2010 as compared toincreasing $5.1 million during the same period in 2009.

 

*Operating Activities*

 

Operatingactivities consumed cash of $1.9 million during the three-month period ended March 31,2010 as compared to consuming cash of $2.3 million during the same period of2009.

 

Whethercash is used or generated by operating activities is a function of theprofitability of our operations and changes in working capital.  To get a better understanding of cash sourcesand uses, our management separates the cash used or provided by operatingactivities into two categories: the cash consumed (or generated) by operatingactivities before changes in working capital; and the cash consumed (orgenerated) from changes in working capital.

 

Thecash consumed by operating activities before changes in working capitalincreased $1.8 million to $4.0 million during the first three months of 2010 ascompared to consuming $2.2 million during the first three months of 2009.  The increase in cash consumption was theresult of the increase in the cash operating loss (excluding depreciation,amortization and share based compensation), partially offset by 

 

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theelimination of the loss from discontinued operations.  We believe that we will see improvements inthe cash consumed by operating activities before changes in working capital ifour revenue and profitability improve as we believe they will during thebalance of the year, such that we expect our operations will generate cashbefore changes in working capital during the second half of the year.

 

Changesin working capital generated cash of $2.0 million during the first quarter of2010, compared to consuming $63 thousand during the first quarter of 2009.  We expect our working capital requirements toincrease in future periods with increases in our sales, though we hope improvementsin our receivables turnover will keep the growth in working capital to a ratethat is lower than the growth of our future sales.

 

*Investing Activities*

 

Cash used in investingactivities decreased $24 thousand to $611 thousand during the three-monthperiod ended March 31, 2010 from $635 thousand during the same period in2009.  During the first quarter of 2010we posted an additional $500,000 of cash collateral to support the issuance ofsurety bonds. Our purchases of property and equipment increased $84 thousand to$116 thousand during the first quarter of 2010 from $32 thousand during thesame period of 2009.  Most of the 2010purchases were related to the opening of a new office to support our UtilityProgram Management initiative and for enhancements to our accountingsystem.  During the first three months of2009 we paid $614 thousand for the AEM earn-out and costs associated with theacquisition of AEM.

 

*Financing Activities*

 

Financingactivities consumed cash of $32 thousand during the first three months of 2010as compared to generating $8.0 million during the first three months of2009.  The $32 thousand consumed duringthe first quarter of 2010 was entirely used for scheduled principal payments onour mortgage and various vehicle loans. During the first quarter of 2009 we closed on the acquisition ofAdvanced Biotherapy, Inc. (“ADVB”) and gained access to its cash balancesof $7.4 million.  We have treated thisacquisition as an offering because we acquired ADVB for its cash.  We discontinued all operations of the companyupon the closing of the acquisition. During the first quarter of 2009 we also closed on tranche B of the November 2008PIPE, generating cash proceeds of $3,275,000. The proceeds from these two transactions were partially offset by a$1,850,000 net pay down on our line of credit; $770 thousand in transactioncosts related primarily to the acquisition of ADVB; and $57 thousand inscheduled principal payments on our debt.

 

**SOURCES OF LIQUIDITY**

 

Ourprimary sources of liquidity are our available cash reserves.

 

Ourability to continue to expand our sales will require the continued commitmentof significant funds. The actual timing and amount of our future fundingrequirements will depend on many factors, including the amount and timing offuture revenues, working capital requirements and the level and amount of oursales and marketing efforts, among other things.

 

Wehave raised a significant amount of capital since our formation through theissuance of shares of our common and preferred stock and notes, which hasallowed us to acquire companies and to continue to execute our businessplan.  Most of these funds have beenconsumed by operating activities, either to fund our losses or for workingcapital requirements.  In an attempt tomove the Company to a position where it 

 

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canstart to generate positive cash flow our management has set the following keystrategies for cash flow improvement in 2010:

 

·                  Focus on increasing thesales and profitability of our products and services while controlling thegrowth in our SG&A expense.  We believe that to a great degree our abilityto generate positive cash flow is dependent on our ability to increase saleswhile controlling the growth of our SG&A expense and maintaining orimproving 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 between 11% and 14% within the next three to fiveyears, which we believe is asustainable SG&A expense ratio for the business over the longer term andreflects our expectations with respect to our ability to achieve additionaloperating leverage.  If we areable to achieve this goal, while holding or improving our gross margins, webelieve we will begin to generate positive cash flow and earnings within thenext 12 to 24 months.

 

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

 

Webelieve that if we are successful in increasing our revenue while controllingthe growth in our operating expenses we should have sufficient liquidity toallow us to operate until our operations turn cash flow positive.

 

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**CautionaryNote Regarding Forward-Looking Statements**

 

Ourdisclosure and analysis in this report, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations contains “forward-looking”information within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, adopted pursuant to the Private Securities Litigation Reform Act of1995. Statements that are not purely historical may be forward-looking. You canidentify these forward-looking statements by the use of words such as “anticipate,”“believe,” “estimate,” “expect,” “hope,” “intend,” “may,” “project,” “plan,”  “goal,” “target,’ “should,” and similarexpressions, including when used in the negative.

 

Forward-lookingstatements are subject to various risks and uncertainties. Accordingly, thereare or will be important factors that could cause actual results to differmaterially from those indicated in these statements, including but not limitedto those described in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission under “Part II, Item 1A—Risk Factors”and the following:

 

·                  we have a limited operatinghistory under our current business model in a rapidly evolving market, whichmay make it difficult to evaluate our business and prospects, and may expose usto increased risks and uncertainties;

·                  we have incurred significantoperating losses since inception and may not achieve or sustain profitabilityin the future;

·                  the current economicdownturn could diminish the demand for our services and products;

·                  it is difficult for us toestimate our future quarterly results;

·                  we operate in a highlycompetitive industry and if we are unable to compete successfully our revenue;and profitability will be adversely affected; and

·                  we may be unable to obtainsufficient bonding capacity to support certain service offerings.

 

Allforward-looking statements in this report should be considered in the contextof the risk and other factors described above and as detailed from time to timein the Company’s Securities and Exchange Commission filings. Anyforward-looking statements speak only as of the date the statement is made andwe undertake no obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise. It is notpossible to identify all of the risks, uncertainties and other factors that mayaffect future results. In light of these risks and uncertainties, theforward-looking events and circumstances discussed in this report may not occurand actual results could differ materially from those anticipated or implied inthe forward-looking statements. Accordingly, users of this report are cautionednot to place undue reliance on the forward-looking statements.

 

Exceptas otherwise required by federal securities laws, we do not undertake anyobligation to publicly update, review or revise any forward-looking statements,whether as a result of new information, future events, changed circumstances orany other reason.

 

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ITEM 3.                                                     **Quantitative andQualitative Disclosures About Market Risk**

 

Notapplicable.

 

ITEM 4.                                                     **Controls and Procedures**

 

**Disclosure Controls andProcedures.**

 

Our management, includingour chief executive officer and our chief financial officer, maintains our “disclosurecontrols and procedures” (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 March 31, 2010, suchdisclosure controls and procedures are effective for the purpose of ensuringthat material information required to be in the reports that we submit, file,furnish or otherwise provide to the Securities and Exchange Commission isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate to allow timely decisionsregarding required disclosure.

 

**Changes in Internal Controls.**

 

There have not been anychanges in our internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) during the quarter ended March 31, 2010 that havematerially affected or are reasonably likely to materially affect our internalcontrol over financial reporting.

 

**Limitationsof 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.

 

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**PART II.  OTHER INFORMATION**

 

ITEM 2.                                                     **Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None

 

ITEM 6.                                                     **Exhibits**

 

31.1                           Certificate of Chief Executive Officerpursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) asAdopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2                           Certificate of Chief Financial Officerpursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) asAdopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1                           Certification of the Chief ExecutiveOfficer of the Corporation Pursuant to Section 1350 of Chapter 63 of Title18 of the United States Code Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

32.2                           Certification of the Chief FinancialOfficer of the Corporation Pursuant to Section 1350 of Chapter 63 of Title18 of the United States Code Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

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#### **SIGNATURES**

####  

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                      | LIME ENERGY CO.: |
|---------------------------|------------------|
|                      |             |
|                      |             |
| Dated: May 13,  2010 | By:              | /s/  David R. Asplund |
|                      |             | David R. Asplund |
|                      |             | *Chief  Executive Officer (principal* |
|                      |             | *executive  officer)* |
|                      |             |   |
|                      |             |   |
| Dated: May 13,  2010 | By:              | /s/  Jeffrey R. Mistarz |
|                      |             | Jeffrey R. Mistarz |
|                      |             | *Chief  Financial Officer (principal* |
|                      |             | *financial  and accounting officer)* |

 

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