##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 001-16265
 
 LIME ENERGY CO.
  Delaware
    
    36-4197337(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, Illinois 60007-2410
 (847) 437-1666
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



LIME ENERGY CO.
FORM 10-Q  For The Quarter Ended September 30, 2008
 INDEX
 PageNumberPart I            Financial InformationITEM 1. Financial Statements:Condensed Consolidated Balance Sheets
September 30, 2008 (unaudited) and December 31, 2007
    
    
    1Condensed Consolidated Statement of Operations
Three Months Ended September 30, 2008 and 2007 (unaudited)
    
    
    3Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2008 and 2007 (unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity
Nine Months Ended September 30, 2008 (unaudited)
    
    
    5Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2008 and 2007 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    22ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32ITEM 4. Controls and Procedures
    
    
    32Part II Other Information:ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33ITEM 6. Exhibits
    
    
    33Signatures
    
    
    35EX-31.1EX-31.2EX-32.1EX-32.2




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LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,2008
    
    
    December 31,(unaudited)
    
    
    2007(1)AssetsCurrent AssetsCash and cash equivalents
    
    $
    879,385
    
    
    $
    4,780,701Accounts receivable, net
    
    
    20,201,338
    
    
    
    6,382,060Inventories
    
    
    826,507
    
    
    
    1,067,940Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    2,909,521
    
    
    
    952,997Prepaid expenses and other
    
    
    1,013,625
    
    
    
    250,169Total Current Assets
    
    
    25,830,376
    
    
    
    13,433,867Net Property and Equipment
    
    
    2,175,185
    
    
    
    1,542,327Long Term Receivables
    
    
    839,166
    
    
    
    224,568Deferred Financing Costs, net
    
    
    4,745
    
    
    
    6,885Intangibles, net
    
    
    7,852,035
    
    
    
    3,979,052Goodwill
    
    
    17,717,811
    
    
    
    6,757,133$
    54,419,318
    
    
    $
    25,943,832
 1




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##### Table of Contents



LIME ENERGY CO.
CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,2008
    
    
    December 31,(unaudited)
    
    
    2007(1)Liabilities and Stockholders EquityCurrent LiabilitiesLines-of-credit
    
    $
    17,023,235
    
    
    $
    Notes payable
    
    
    948,260
    
    
    
    150,000Current maturities of long-term debt
    
    
    674,804
    
    
    
    81,954Accounts payable
    
    
    10,924,426
    
    
    
    3,092,226Accrued expenses
    
    
    3,039,592
    
    
    
    1,571,683Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    2,498,671
    
    
    
    636,867Deferred revenue
    
    
    436,642
    
    
    
    894,550Customer deposits
    
    
    1,133,339
    
    
    
    1,180,834Total Current Liabilities
    
    
    36,678,969
    
    
    
    7,608,114Deferred Revenue
    
    
    130,922
    
    
    
    244,792Long-Term Debt, less current maturities, net of unamortized
discount of $1,662,904 and $2,412,305 at September
30, 2008 and
December 31, 2007, respectively
    
    
    4,078,851
    
    
    
    3,187,680Deferred Tax Liability
    
    
    1,034,000
    
    
    
    1,034,000Total Liabilities
    
    
    41,922,742
    
    
    
    12,074,586Stockholders EquityCommon stock, $.0001 par value; 200,000,000 shares
authorized, 8,700,209 and 7,720,269 issued as
of September 30, 2008 and December 31, 2007,
respectively
    
    
    870
    
    
    
    773Additional paid-in capital
    
    
    116,797,234
    
    
    
    106,267,336Accumulated deficit
    
    
    (104,301,528
    )
    
    
    (92,398,863
    )Total Stockholders Equity
    
    
    12,496,576
    
    
    
    13,869,246$
    54,419,318
    
    
    $
    25,943,832
 
 (1)
    
    Derived from audited financial statements in the Companys annual
report on Form 10-K for the year ended December 31, 2007 See accompanying notes to condensed consolidated financial statements
 2




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 Three months ended September 30
    
    2008
    
    
    2007Revenue
    
    $
    18,332,079
    
    
    $
    5,461,090Cost of sales
    
    
    13,803,648
    
    
    
    4,026,655Gross profit
    
    
    4,528,431
    
    
    
    1,434,435Selling, general and administrative
    
    
    6,002,082
    
    
    
    2,965,965Amortization of intangibles
    
    
    733,357
    
    
    
    713,881Operating loss
    
    
    (2,207,008
    )
    
    
    (2,245,411
    )Other Expense:Interest income
    
    
    13,143
    
    
    
    75,332Interest expense
    
    
    (944,838
    )
    
    
    (395,346
    )Total other expense
    
    
    (931,695
    )
    
    
    (320,014
    )Net Loss
    
    
    (3,138,703
    )
    
    
    (2,565,425
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (0.36
    )
    
    $
    (0.33
    )Weighted average common shares outstanding
    
    
    8,683,978
    
    
    
    7,673,710
 See accompanying notes to condensed consolidated financial statements
 3




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 Nine months ended September 30
    
    2008
    
    
    2007Revenue
    
    $
    28,173,327
    
    
    $
    12,092,330Cost of sales
    
    
    22,586,492
    
    
    
    9,127,859Gross profit
    
    
    5,586,835
    
    
    
    2,964,471Selling, general and administrative
    
    
    14,311,751
    
    
    
    8,869,749Amortization of intangibles
    
    
    1,377,016
    
    
    
    1,652,710Operating loss
    
    
    (10,101,932
    )
    
    
    (7,557,988
    )Other Expense:Interest income
    
    
    70,268
    
    
    
    195,667Interest expense
    
    
    (1,871,001
    )
    
    
    (557,595
    )Total other expense
    
    
    (1,800,733
    )
    
    
    (361,928
    )Net Loss
    
    
    (11,902,665
    )
    
    
    (7,919,916
    )Basic and Diluted Net Loss Per Common Share
    
    $
    (1.46
    )
    
    $
    (1.05
    )Weighted average common shares outstanding
    
    
    8,124,997
    
    
    
    7,508,926
 See accompanying notes to condensed consolidated financial statements
 4




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##### Table of Contents



LIME ENERGY CO.
 
 STATEMENT OF CONDENSED CONSOLIDATED STOCKHOLDERS EQUITY
(Unaudited)
 Additional
    
    
    
    
    
    
    TotalCommon
    
    
    Common
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance,December 31, 2007
    
    
    7,720,269
    
    
    $
    773
    
    
    $
    106,267,336
    
    
    $
    (92,398,863
    )
    
    $
    13,869,246Acquisition of Applied Energy Management, Inc.
    
    
    882,725
    
    
    
    88
    
    
    
    6,999,912
    
    
    
    
    
    
    
    7,000,000Share based compensation
    
    
    
    
    
    
    
    
    
    
    2,862,320
    
    
    
    
    
    
    
    2,862,320Conversion of note payable
    
    
    32,848
    
    
    
    3
    
    
    
    200,370
    
    
    
    
    
    
    
    200,373Satisfaction of interest obligation through
issuance of common stock
    
    
    32,581
    
    
    
    3
    
    
    
    250,167
    
    
    
    
    
    
    
    250,170Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    97,000
    
    
    
    
    
    
    
    97,000Proceeds from exercise of options and warrants
    
    
    31,786
    
    
    
    3
    
    
    
    120,129
    
    
    
    
    
    
    
    120,132Net loss for the nine months ended
September 30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,902,665
    )
    
    
    (11,902,665
    )Balance,September 30, 2008
    
    
    8,700,209
    
    
    $
    870
    
    
    $
    116,797,234
    
    
    $
    (104,301,528
    )
    
    $
    12,496,576
 See accompanying notes to condensed consolidated financial statements.
 5




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##### Table of Contents



LIME ENERGY CO.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine months ended September 30
    
    2008
    
    
    2007Cash Flow from Operating ActivitiesNet loss
    
    $
    (11,902,665
    )
    
    $
    (7,919,916
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of acquisitionsDepreciation and amortization
    
    
    1,686,768
    
    
    
    1,771,012Share based compensation
    
    
    2,862,320
    
    
    
    2,211,421Warrants issued in exchange for services received
    
    
    97,000
    
    
    
    162,000(Recoveries) provision for bad debt
    
    
    (24,068
    )
    
    
    121,216Liquidated damages satisfied through issuance of common stock
    
    
    
    
    
    
    613,708Amortization of deferred financing costs
    
    
    2,140
    
    
    
    968Amortization of original issue discount
    
    
    749,401
    
    
    
    339,145Accrued interest satisfied through the issuance of common stock
    
    
    250,170
    
    
    
    83,827PIK notes issued for interest
    
    
    25,685
    
    
    
    Loss on disposal of fixed assets
    
    
    1,580
    
    
    
    Warrant repricing
    
    
    
    
    
    
    19,204Changes in assets and liabilities, net of acquisitionsAccounts receivable and long term receivables
    
    
    (8,933,145
    )
    
    
    (3,044,830
    )Inventories
    
    
    241,433
    
    
    
    (1,488,806
    )Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    (1,117,154
    )
    
    
    (273,267
    )Prepaid expenses and other current assets
    
    
    (512,671
    )
    
    
    30,511Accounts payable
    
    
    2,526,493
    
    
    
    734,754Accrued expenses
    
    
    660,658
    
    
    
    (198,943
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    1,340,556
    
    
    
    89,808Deferred revenue
    
    
    (571,778
    )
    
    
    (254,105
    )Customer deposits and other current liabilities
    
    
    (47,495
    )
    
    
    76,684Net cash used in operating activities
    
    
    (12,664,772
    )
    
    
    (6,925,609
    )Cash Flows Used In Investing ActivitiesAcquisitions (including acquisition costs), net of cash acquired
    
    
    (3,789,120
    )
    
    
    (593,586
    )Expenses related to 2007 acquisitions
    
    
    (12,059
    )Proceeds from the sale of fixed assets
    
    
    2,200
    
    
    
    Purchase of property and equipment
    
    
    (357,464
    )
    
    
    (376,152
    )Net cash used in investing activities
    
    
    (4,156,443
    )
    
    
    (969,738
    )Cash Flows Provided by Financing ActivitiesAdvances on lines of credit
    
    
    13,236,572
    
    
    
    Proceeds from long-term debt
    
    
    133,553
    
    
    
    5,121,207Payment on long-term debt
    
    
    (570,358
    )
    
    
    (39,458
    )Cash paid for deferred financing costs
    
    
    
    
    
    
    (8,572
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    2,999,632Issuance costs related to stock issuances
    
    
    
    
    
    
    (248,293
    )Proceeds from exercise of options and warrants
    
    
    120,132
    
    
    
    39,725Net cash provided by financing activities
    
    
    12,919,899
    
    
    
    7,864,241Net Decrease in Cash and Cash Equivalents
    
    
    (3,901,316
    )
    
    
    (31,106
    )Cash and Cash Equivalents, at beginning of period
    
    
    4,780,701
    
    
    
    4,663,618Cash and Cash Equivalents, at end of period
    
    $
    879,385
    
    
    $
    4,632,512Supplemental Disclosure of Cash Flow InformationCash paid during the periods for interest
    
    $
    479,132
    
    
    $
    58,660Value of warrants issued in exchange for services received
    
    $
    97,000
    
    
    $
    162,000Note payable converted to common stock
    
    $
    150,000
    
    
    $
    
 6




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##### Table of Contents



Supplemental Disclosures of Noncash Investing and Financing Activities:
  Cash
    
    $
    2,091Accounts receivable
    
    
    5,476,663Costs and estimated profits in excess of amounts billed
    
    
    839,370Other current assets
    
    
    250,785Property and equipment
    
    
    588,925Identifiable intangible assets
    
    
    5,250,000Goodwill
    
    
    10,948,619Total assets acquired
    
    
    23,356,453Line of credit
    
    
    (3,760,978
    )Accounts payable
    
    
    (5,305,707
    )Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    (521,248
    )Accrued expenses
    
    
    (857,624
    )Long term debt
    
    
    (2,119,685
    )Total liabilities assumed
    
    
    (12,565,242
    )Net assets acquired
    
    
    10,791,211Less valuation of shares issued for acquisition
    
    
    (7,000,000
    )Acquisition costs
    
    
    (291,211
    )Total cash paid
    
    $
    3,500,000
 See accompanying notes to condensed consolidated financial statements
 7




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##### Table of Contents



Lime Energy Co.
 
 Notes to Condensed Consolidated Financial Statements
 Note 1  Basis of Presentation
     Note 2  Stock-based Compensation
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302008
    
    2007
    
    2008
    
    2007Energy Efficiency Services
    
    $
    369,924
    
    
    $
    112,132
    
    
    $
    1,108,991
    
    
    $
    277,978Energy Technology
    
    
    26,536
    
    
    
    116,315
    
    
    
    110,484
    
    
    
    345,002Corporate Overhead
    
    
    520,940
    
    
    
    494,858
    
    
    
    1,642,845
    
    
    
    1,588,441$
    917,400
    
    
    $
    723,305
    
    
    $
    2,862,320
    
    
    $
    2,211,421
 8




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302008
    
    2007
    
    2008
    
    2007Weighted average fair value
per option granted
    
    $
    4.41
    
    
    $
    8.75
    
    
    $
    5.08
    
    
    $
    6.30Significant assumptions
(weighted average):Risk-free rate
    
    
    1.90
    %
    
    
    4.44
    %
    
    
    2.24
    %
    
    
    4.84
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    86.0
    %
    
    
    88.2
    %
    
    
    87.5
    %
    
    
    88.3
    %Expected life (years)
    
    
    5.9
    
    
    
    5.8
    
    
    
    5.6
    
    
    
    5.6
   WeightedExercise

    
    AveragePrice Per

    
    ExerciseShares
    
    
    Share

    
    PriceOutstanding at June 30, 2008
    
    
    2,171,144
    
    

    $ 6.30  $1,363.95

    
    $
    21.52Granted
    
    
    5,000
    
    

    $ 6.13  $6.13

    
    $
    6.13Exercised
    
    
    
    
    

   

    
    
    Forfeited
    
    
    (14,823
    )
    

    $ 6.13  $115.50

    
    $
    30.33Outstanding at September 30, 2008
    
    
    2,161,321
    
    

$ 6.13  $1,363.95

    
    $
    21.44Options exercisable at
September 30, 2008
    
    
    1,171,035
    
    

    $ 6.30  $1,363.95

    
    $
    31.58
 9




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  WeightedExercise

    
    AveragePrice Per

    
    ExerciseShares
    
    
    Share

    
    PriceOutstanding at December 31, 2007
    
    
    2,170,348
    
    

    $ 6.30  $1,363.95

    
    $
    23.31Granted
    
    
    171,567
    
    

    $ 6.13  $10.00

    
    $
    8.22Exercised
    
    
    (13,414
    )
    

    $ 7.14  $7.14

    
    $
    7.14Forfeited
    
    
    (167,180
    )
    

    $ 6.13  $115.50

    
    $
    33.30Outstanding at September 30, 2008
    
    
    2,161,321
    
    

    $ 6.13  $1,363.95

    
    $
    21.44Options exercisable at
September 30, 2008
    
    
    1,171,035
    
    

    $ 6.30  $1,363.95

    
    $
    31.58
  Options Outstanding
    
    
    Options ExercisableNumber
    
    
    WeightedAverage
    
    
    Weighted
    
    
    Number
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    
    Average
    
    
    Exercisable at
    
    
    AverageSeptember 30,
    
    
    Contractual
    
    
    Exercise
    
    
    September 30,
    
    
    ExerciseExercise Price
    
    2008
    
    
    Life
    
    
    Price
    
    
    2008
    
    
    Price$6.13  $7.00
    
    
    549,142
    
    
    7.6 years
    
    
    $
    6.74
    
    
    
    318,570
    
    
    $
    6.75$7.01  $8.50
    
    
    936,578
    
    
    7.2 years
    
    
    
    7.29
    
    
    
    758,801
    
    
    
    7.21$8.51  $11.00
    
    
    41,567
    
    
    9.3 years
    
    
    
    9.35
    
    
    
    14,284
    
    
    
    9.45$11.01  $12.00
    
    
    558,108
    
    
    9.0 years
    
    
    
    11.14
    
    
    
    5,239
    
    
    
    11.56$12.01  $13.50
    
    
    3,570
    
    
    8.8 years
    
    
    
    12.88
    
    
    
    1,785
    
    
    
    12.88$13.51  100.00
    
    
    14,286
    
    
    7.3 years
    
    
    
    65.10
    
    
    
    14,286
    
    
    
    65.10$100.01  $1,363.95
    
    
    58,070
    
    
    2.4 years
    
    
    
    485.91
    
    
    
    58,070
    
    
    
    485.912,161,321
    
    
    7.7 years
    
    
    $
    21.44
    
    
    
    1,171,035
    
    
    $
    31.58
   10




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 3  Acquisitions of Applied Energy Management, Inc.
   Cash
    
    $
    2,091Accounts receivable
    
    
    5,476,663Costs and estimated profits in excess of billings
on uncompleted contracts
    
    
    839,370Other current assets
    
    
    250,785Property and equipment
    
    
    588,925Identifiable intangible assets
    
    
    5,250,000Goodwill
    
    $
    10,948,619Line of credit
    
    $
    3,760,978Accounts payable
    
    
    5,305,707Billings in excess of costs and estimated earnings on
uncompleted contracts
    
    
    521,248Accrued expenses
    
    
    857,624Long term debt
    
    $
    2,119,685
  Estimated
    
    EstimatedAsset Class
    
    Value
    
    Useful LifeContract backlog
    
    $
    252,000
    
    
    12 monthsSales pipeline
    
    
    1,862,000
    
    
    18 monthsCustomer list
    
    
    3,011,000
    
    
    
    5 to 15 yearsTechnology
    
    
    125,000
    
    
    5 years
   11




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
   Nine MonthsEndedSeptember 30,2008Revenue:As Reported
    
    $
    28,173,327Pro-forma
    
    
    38,309,999Net Operating Loss:As Reported
    
    
    (10,101,932
    )Pro-forma
    
    
    (13,337,710
    )Basic and Diluted Loss per Share From
Continuing Operations:As Reported
    
    
    (1.46
    )Pro-forma
    
    
    (1.84
    )
 Note 4  Recent Accounting Pronouncements
   12




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
    Note 5  Goodwill
  TotalBalance at December 31, 2007
    
    $
    6,757,133Costs related to acquisition of Texas Energy Product, Inc.
    
    
    6,029Costs related to acquisition of Preferred Lighting , Inc.
    
    
    6,030Acquisition of Applied Energy Management
    
    
    10,948,619Balance at September 30, 2008
    
    $
    17,717,811
  13




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 6  Net Loss Per Share
   Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302008
    
    2007
    
    2008
    
    2007Weighted average shares
issuable upon exercise of
outstanding options
    
    
    2,167,388
    
    
    
    1,619,373
    
    
    
    2,142,236
    
    
    
    1,595,262Weighted average shares
issuable upon exercise of
outstanding warrants
    
    
    379,890
    
    
    
    420,312
    
    
    
    402,838
    
    
    
    303,145Weighted average shares
issuable upon conversion of
convertible debt
    
    
    714,286
    
    
    
    714,286
    
    
    
    714,286
    
    
    
    319,859Total
    
    
    3,261,564
    
    
    
    2,753,971
    
    
    
    3,259,360
    
    
    
    2,218,266
 Note 7  Warranty Obligations
  14




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302008
    
    2007
    
    2008
    
    2007Balance, beginning of period
    
    $
    249,363
    
    
    $
    208,749
    
    
    $
    377,902
    
    
    $
    196,783Warranties issued
    
    
    2,320
    
    
    
    3,840
    
    
    
    36,020
    
    
    
    25,663Settlements
    
    
    (48,810
    )
    
    
    (5,525
    )
    
    
    (211,049
    )
    
    
    (15,382
    )Balance, as of September 30
    
    $
    202,873
    
    
    $
    207,064
    
    
    $
    202,873
    
    
    $
    207,064
 Note 8  Inventories
  September 30,
    
    December 31,2008
    
    2007Raw materials
    
    $
    897,678
    
    
    $
    1,056,315Work in process
    
    
    
    
    
    
    13,463Reserve for obsolescence
    
    
    (71,171
    )
    
    
    (1,838
    )$
    826,507
    
    
    $
    1,067,940
 Note 9  Revolving Lines of Credit
   15




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
    i)
    
    failure to pay interest or unused funds fees within 10 days of written demand;ii)
    
    failure to pay outstanding principal and accrued interest thereon on the maturity date;iii)
    
    failure to pay termination fees on the termination date;iv)
    
    the Company makes an assignment for the benefit of creditors or admits in
writing its inability to pay its debts generally as they become due; or an order,
judgment or decree is entered adjudicating the Company bankrupt or insolvent; or any
order for relief with respect to the Company is entered under the Federal Bankruptcy
Code; or the Company petitions or applies to any tribunal for the appointment of a
custodian, trustee, receiver or liquidator of the Company, or of any substantial part
of the assets of the Company, or commences any proceeding relating to the Company under
bankruptcy reorganization, arrangement, insolvency, readjustment of debt, dissolution
or liquidation law of any jurisdiction; or any such petition or application is filed,
or any such proceeding is commenced, against the Company and such petition, application
or proceeding is not dismissed within sixty (60) days; orv)
    
    the Company sells substantially all of its assets.
    16




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Note 10  Subordinated Convertible Term Notes
     17




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Value Allocated to Term Notes:Proceeds from issuance
    
    $
    5,000,000Less value allocated to warrants
    
    
    (1,136,537
    )Value allocated to Term Notes
    
    $
    3,863,463Market Value of Shares Issuable Upon Conversion:Shares issuable upon conversion of the Term Notes
    
    
    714,286Closing market value of stock on Term Note issuance date
    
    $
    8.022Market value of shares issuable upon conversion
    
    $
    5,730,000Beneficial Conversion Value:Market value of shares issuable upon conversion
    
    $
    5,730,000Less value allocated to Term Notes
    
    
    (3,863,463
    )Value of beneficial conversion feature
    
    $
    1,866,537
    Note 11  Notes Payable
   18




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 12  Business Segment Information
   
    
    Energy Efficiency Services. The Energy Efficiency Services segment
includes:
 o
    
    Engineering and consulting: Energy engineering and consulting services
include project development services, energy management planning, energy bill
analysis, building energy audits, e-commissioning, design review and analysis of
new construction projects to maximize energy efficiency and sustainability, project
management of energy-related construction, and processing and procurement of
incentive and rebate applications.o
    
    Implementation:Implementation services includes energy efficiency
lighting upgrade services, mechanical and electrical conservation services, water
conservation services and renewable energy solutions.
 
    
    Energy Technology. The Energy Technology segment markets a patented line of
HVAC and lighting controllers under the eMAC and uMAC brand names. The technology
provides remote monitoring, management and control of commercial rooftop HVAC units and
facility lighting via wireless communication.
    
    Financial Services. The Financial Services segment began operations in late
2007 to enable the Companys commercial and industrial clients to pay for its energy
efficiency solutions over time. The Company records these extended term receivables as
long-term receivables and consolidates them within Lime Finance for purposes of optimal
receivables management and in anticipation of potentially financing them in order to
reduce its cost of capital.
 19




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##### Table of Contents



Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Energy Efficiency Services
    
    $
    17,676,283
    
    
    $
    5,045,145
    
    
    $
    26,155,895
    
    
    $
    9,833,377Energy Technology
    
    
    625,713
    
    
    
    682,687
    
    
    
    1,977,193
    
    
    
    2,548,491Financial Services
    
    
    30,083
    
    
    
    
    
    
    
    40,239
    
    
    
    Intercompany sales
    
    
    
    
    
    
    (266,742
    )
    
    
    
    
    
    
    (289,538
    )Total
    
    
    18,332,079
    
    
    
    5,461,090
    
    
    
    28,173,327
    
    
    
    12,092,330Operating Loss:Energy Efficiency Services
    
    
    (387,388
    )
    
    
    (75,769
    )
    
    
    (3,920,442
    )
    
    
    (1,009,240
    )Energy Technology
    
    
    (413,272
    )
    
    
    (1,043,435
    )
    
    
    (1,944,890
    )
    
    
    (2,438,367
    )Financial Services
    
    
    29,602
    
    
    
    
    
    
    
    39,251
    
    
    
    Corporate overhead
    
    
    (1,435,950
    )
    
    
    (1,126,207
    )
    
    
    (4,275,851
    )
    
    
    (4,110,381
    )Total
    
    
    (2,207,008
    )
    
    
    (2,245,411
    )
    
    
    (10,101,932
    )
    
    
    (7,557,988
    )Interest Expense, net
    
    
    (931,695
    )
    
    
    (320,014
    )
    
    
    (1,800,733
    )
    
    
    (361,928
    )Net Loss
    
    $
    (3,138,703
    )
    
    $
    (2,565,425
    )
    
    $
    (11,902,665
    )
    
    $
    (7,919,916
    )
 September
    
    
    December 31,30, 2008
    
    
    2007Total Assets:Energy Efficiency Services
    
    $
    48,487,074
    
    
    $
    16,493,666Energy Technology
    
    
    1,879,863
    
    
    
    3,166,073Financial Services
    
    
    1,832,386
    
    
    
    351,297Corporate overhead
    
    
    2,219,995
    
    
    
    5,932,796Total
    
    $
    54,419,318
    
    
    $
    25,943,832
 20




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Lime Energy Co.
Notes to Condensed Consolidated Financial Statements
 Note 12  Equity Issuances
 (a)
    
    During the first nine months of 2008, the Company issued consultants warrants with terms of
three years to purchase 17,143 shares of its common stock at prices of $8.05 to $9.45 per
share as partial consideration for services provided the Company. These warrants were valued
at $97,000 using a modified Black-Sholes option pricing model utilizing the following
assumptions: risk free rate of 3.259%, expected volatility of 91.6%, expected dividend of $0
and expected life of three years. The value of the warrants was charged to operations during
the first nine months of 2008.
 (b)
    
    During the first nine months of 2008, the Company issued 32,581 shares of its common stock to
the holders of its subordinated convertible term notes in satisfaction of 50% of the interest
owed on the notes.
 (c)
    
    During the first nine months of 2008, holders of certain options and warrants exercised their
rights to purchase 31,786 shares of the Companys common stock at prices between $6.30 and
$7.14 per share.
 (d)
    
    In July 2008, the holder of a $150,000 demand note elected to convert the note, along with
$50,373 of accrued interest, into 32,848 shares of the Companys common stock.
 Note 13  Related Party Transactions
  Note 14  Subsequent Events
   21




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MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   
    
    Energy Efficiency Services. Our Energy Efficiency Services segment
represented approximately 93% of our revenue during the nine months
of 2008 and 94% of
our pro forma 2007 revenue (adjusted to include AEM). Our Energy Efficiency Services
segment includes:
 o
    
    Engineering and consulting: Our energy engineering and consulting
services include project development services, energy management planning, energy
bill analysis, building energy audits and e-commissioning. We also provide design
review and analysis of new construction projects to maximize energy efficiency and
sustainability, project management of energy-related construction, and processing
and procurement of incentive and rebate applications.o
    
    Implementation:We provide a range of energy efficiency and
conservation services, including energy efficient lighting upgrade services,
mechanical and electrical conservation services, water conservation services and
renewable energy solutions.
 
    
    Energy Technology. Our Energy Technology segment, which represented
approximately 7% of our revenue for the first nine months of 2008 and 6% of our pro
forma 2007 revenue (adjusted to include AEM), offers our patented line of HVAC and
lighting controllers under the eMAC and uMAC brand names. The eMAC technology provides
remote monitoring, management and control of commercial rooftop HVAC units. Our uMAC
technology is a version of the eMAC that remotely controls the operation of a
facilitys lights via wireless communications.
    
    Financial Services. Our Financial Services segment began operations in late
2007 to enable our commercial and industrial clients to pay for our energy efficiency
solutions over time. We record the extended payment receivables from our clients as
long-term receivables and consolidate them within a subsidiary for purposes of optimal
receivables management and in anticipation of potentially financing them in order to
reduce our cost of capital. Since its inception through September 30, 2008, we have
provided extended payment terms on approximately $2.3 million of our sales, and we had
approximately $2.0 million of receivables in this portfolio as of September 30, 2008.
 22




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Energy
    
    EnergyServices
    
    Technology
    
    Total2008 Q4
    
    $
    584,081
    
    
    $
    130,997
    
    
    $
    715,0782009 Q1
    
    
    344,913
    
    
    
    130,915
    
    
    
    475,8282009 Q2
    
    
    313,288
    
    
    
    48,419
    
    
    
    361,7072009 Q3
    
    
    256,738
    
    
    
    7,171
    
    
    
    263,9092009 Q4
    
    
    256,738
    
    
    
    7,171
    
    
    
    263,909
   Three months ended September 30
    
    2008
    
    2007Lines of credit
    
    $
    517,425
    
    
    
    Convertible subordinated notes
    
    
    128,426
    
    
    $
    126,027Notes payable
    
    
    30,642
    
    
    
    4,156Mortgage
    
    
    6,551
    
    
    
    11,139Vehicle loans
    
    
    3,829
    
    
    
    1,682Capital Leases
    
    
    8,366
    
    
    
    Total contractual interest
    
    $
    695,239
    
    
    $
    143,004Amortization of deferred issuance costs
and debt discount
    
    
    249,599
    
    
    
    252,342Total Interest Expense
    
    $
    944,838
    
    
    $
    395,346
   Nine month Period Ended September 30, 2008 Compared to Nine month Period Ended September 30, 2007
 Revenue
  26




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##### Table of Contents



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




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##### Table of Contents



Other Expense
  Nine months ended September 30
    
    2008
    
    2007Lines of credit
    
    
    657,399
    
    
    
    Convertible subordinated notes
    
    
    374,311
    
    
    
    167,657Notes payable
    
    
    48,259
    
    
    
    12,594Mortgage
    
    
    21,474
    
    
    
    33,818Vehicle loans
    
    
    9,036
    
    
    
    3,385Capital Leases
    
    
    8,981
    
    
    
    28Total contractual interest
    
    $
    1,119,460
    
    
    $
    217,482Amortization of deferred issuance costs
and debt discount
    
    
    751,541
    
    
    
    340,113Total Interest Expense
    
    $
    1,871,001
    
    
    $
    557,595
   Liquidity and Capital Resources
    28




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##### Table of Contents



Nine months ended September 30
    
    2008
    
    
    2007Net cash used in operating activities
    
    $
    (12,664,772
    )
    
    $
    (6,925,609
    )Net cash used in investing activities
    
    
    (4,156,443
    )
    
    
    (969,738
    )Net cash provided by financing activities
    
    
    12,919,899
    
    
    
    7,864,241Net decrease in cash and cash equivalents
    
    
    (3,901,316
    )
    
    
    (31,106
    )Cash and cash equivalents, at beginning of period
    
    
    4,780,701
    
    
    
    4,663,618Cash and cash equivalents, at end of period
    
    $
    879,385
    
    
    $
    4,632,512
 Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Operating Activities
     Investing Activities
  29




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##### Table of Contents



Financing Activities
   Sources of Liquidity
  Lines of Credit
   30




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##### Table of Contents



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




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##### Table of Contents



Quantitative and Qualitative Disclosures About Market Risk
  
 Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Controls.
  32




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##### Table of Contents



Limitations of the Effectiveness of Internal Controls
  
 PART II. OTHER INFORMATION
 
 Unregistered Sales of Equity Securities and Use of Proceeds
 (1)
    
    During the first nine months of 2008, we issued consultants warrants with terms of
three years to purchase 17,143 shares of our common stock at prices of $8.05 to $9.45 per
share as partial consideration for services provided to us.(2)
    
    During the first nine months of 2008, we issued 32,581 shares of our common stock to
the holders of our subordinated convertible term notes in satisfaction of 50% of the
interest owed to them.(3)
    
    In July 2008, the holder of a $150,000 demand note elected to convert the note, along
with $50,373 of accrued interest, into 32,848 shares of the our common stock.No underwriters were involved in the transactions described above. All of the securities
issued in these transactions were issued by us in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act, including Regulation D
promulgated thereunder, in that the transactions involved the issuance and sale of our
securities to financially sophisticated individuals or entities that were aware of our
activities and business and financial condition and took the securities for investment
purposes and understood the ramifications of their actions. Certain of the purchasers also
represented that they were accredited investors as defined in Regulation D and were
acquiring such securities for investment for their own account and not for distribution.
 
 Exhibits
 10.1
    
    Amended and Restated Line of Credit Note ($4,500,000) dated October 31, 2008, by the Company
in favor of Advanced Biotherapy, Inc. (Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K dated October 31, 2008 and filed on October 31, 2008)10.2
    
    AR Note Issuance Agreement dated October 31, 2008, by and among the Company, Richard P.
Kiphart and Advanced Biotherapy, Inc. (Incorporated by reference to Exhibit 10.2 of the
Companys Current Report on Form 8-K dated October 31, 2008 and filed on October 31, 2008)10.3
    
    Amendment No. 1 to Security Agreement date October 31, 2008, by and among the Company,
Richard P. Kiphart and Advanced Biotherapy, Inc. (Incorporated by reference to Exhibit 10.3 of
the Companys Current Report on Form 8-K dated October 31, 2008 and filed on October 31, 2008)
 33




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##### Table of Contents



31.1
    
    Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of the Chief Financial Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 
 34




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##### Table of Contents



SIGNATURES
  LIME ENERGY CO.Dated: November 14, 2008
    By:
    /s/ David AsplundDavid AsplundChief Executive Officer (principal
executive officer)Dated: November 14, 2008
    By:
    /s/ Jeffrey MistarzJeffrey MistarzChief Financial Officer (principal
financial and accounting officer) 35




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNo.
    
    Description10.1
    
    Third Amended and Restated Line of Credit Note ($4,500,000) dated October 31, 2008, by the
Company in favor of Advanced Biotherapy, Inc. (Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K dated October 31, 2008 and filed on October 31, 2008)10.2
    
    Amended and Restated Note Issuance Agreement dated October 31, 2008, by and among the
Company, Richard P. Kiphart and Advanced Biotherapy, Inc. (Incorporated by reference to
Exhibit 10.2 of the Companys Current Report on Form 8-K dated October 31, 2008 and filed on
October 31, 2008)10.3
    
    Amendment No. 1 to Security Agreement dated October 31, 2008, by and among the Company,
Richard P. Kiphart and Advanced Biotherapy, Inc. (Incorporated by reference to Exhibit 10.3 of
the Companys Current Report on Form 8-K dated October 31, 2008 and filed on October 31, 2008)31.1
    
    Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of the Chief Financial Officer of the Corporation Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 
 36