e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2007
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-16265
LIME ENERGY CO.
(Exact name of Registrant as specified in its charter)
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| Delaware
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36-4197337 |
| (State or other jurisdiction of incorporation or
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(I.R.S. Employer Identification No.) |
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| 1280 Landmeier Road, Elk Grove Village, IL
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60007-2410 |
| (Address of principal executive offices)
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(Zip Code) |
Issuer’s telephone number (847) 437-1666
Securities registered under Section 12(b) of the Exchange Act:
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| Title of each class
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Name of each exchange on which registered |
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| Common Stock $0.0001 par value
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The NASDAQ Stock Market LLC |
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Securities registered under Section 12(g) of the Exchange Act:
None
(Title of class)
Indicate by checkmark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
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Accelerated
filer o
Non-accelerated filer o Smaller reporting company þ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the registrant’s common stock held by non-affiliates was $59,794,414
based on the reported last sale price of common stock on June 30, 2007, which was the last business
day of the registrant’s most recently completed second fiscal quarter. For purposes of this
computation, all executive officers, directors and 10% stockholders were deemed affiliates. Such a
determination should not be construed as an admission that such executive officers, directors or
10% stockholders are affiliates.
As of March 26, 2008, there were 7,738,074 shares of common stock, $0.0001 par value, of the
Company issued and outstanding.
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| DOCUMENTS INCORPORATED BY REFERENCE |
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| DOCUMENT DESCRIPTION |
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10-K PART |
Portions of the Registrant’s notice of annual meeting of
shareowners and proxy statement to be filed pursuant to
Regulation 14A within 120 days after Registrant’s fiscal year
end of December 31, 2007 are incorporated by reference into
Part II, Item 5 and Part III of this Report.
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II, ITEM 5
III |
PART I
Item 1. Business.
Included in this report, exhibits and associated documents are “forward-looking” statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, as well as historical information. Although we believe
that the expectations reflected in such forward-looking statements are reasonable, we can give no
assurances that such expectations reflected in such forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated in forward-looking
statements as a result of certain factors, including matters described in the section titled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements include those that use forward-looking terminology, such as the words
“anticipate,” “believe,” “estimate,” “expect,” “hope,” “intend,” “may,” “project,” “plan,”
“should,” and similar expressions, including when used in the negative. Although we believe that
the expectations reflected in these forward-looking statements are reasonable and achievable, such
statements involve risks and uncertainties and no assurance can be given that the actual results
will be consistent with these forward-looking statements.
Unless the context otherwise requires, “Lime Energy,” the “Company,” “we,” “our,” “us” and
similar expressions refers to Lime Energy Co. and its subsidiaries.
Overview
We are a provider of energy services and technologies that improve the energy efficiency of
our clients’ facilities and reduce their ongoing maintenance costs. Services we offer include the
design, engineering and installation of energy efficient lighting systems and energy engineering
consulting. We also market a proprietary line of controllers that provide intelligent control and
continuous monitoring of HVAC and lighting equipment via wireless communication technology to
reduce energy usage and improve system reliability.
History
Our business has evolved substantially over time. In December 2006, we discontinued the
marketing of what had been our original core product and, through an acquisition, launched our
Energy Services business in June 2006. Through both organic growth and additional acquisitions in
2006 and 2007, our Energy Services business grew to the point that it represented approximately 81%
of 2007 revenue. The balance of our consolidated 2007 revenue was derived from our Energy
Technology business. The details of our history follow.
On December 5, 1997, we were formed as Electric City LLC, a Delaware limited liability
company, for the purpose of marketing a line of lighting controllers (which we marketed under the
EnergySaver name) the core technology of which was developed in Italy. On June 5, 1998, we changed
from a limited liability company into a corporation by merging Electric City LLC into Electric City
Corp., a Delaware corporation.
On June 10, 1998, we issued shares of our common stock representing approximately six (6%)
percent of our then issued and outstanding common stock, to the shareholders of Pice Products
Corporation, an inactive, unaffiliated company with minimal assets, pursuant to a merger agreement.
The purpose of the merger was to substantially increase the number of our shareholders to
facilitate the establishment of a public trading market for our common stock. Trading in our
common stock commenced on August 14, 1998 on the OTC Bulletin Board.
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On May 3, 2005, we acquired Maximum Performance Group, Inc. (“MPG”), a technology-based
provider of energy and asset management products and services. MPG manufactures and markets its
eMAC line of controllers for HVAC and lighting applications.
In June 2006 we established our Energy Services business through the acquisition of Parke
P.A.N.D.A. Corporation (“Parke”). Parke is an energy services provider specializing in the design,
engineering and installation of energy efficient lighting upgrades for commercial and industrial
users. We expanded this business through the acquisition of Kapadia Consulting, Inc. in September
2006. Kapadia is an engineering firm that specializes in energy management consulting and energy
efficient lighting upgrades for commercial and industrial users. During 2007 we added to this
segment through two small acquisitions and the opening of additional offices.
In December 2006 we discontinued the active marketing of the EnergySaver due to changes in
lighting technology, which in our view limited the future market for the product.
On September 13, 2006 we changed our name to Lime Energy Co. to reflect our new focus. On
September 22, 2006 our stock began trading on the OTC Bulletin Board under the trading symbol
“LMEC.”
On February 25, 2008, our stock began trading on the NASDAQ Capital Market under the trading
symbol “LIME.”
Products and Services
Energy Services
Through our wholly-owned subsidiaries we market, design, engineer and install energy efficient
lighting upgrades for commercial and industrial users. As part of our services, we seek to
determine the best lighting solutions for our customer, taking into consideration factors such as
lighting requirements, building environmental conditions, hours of operation, energy costs,
available utility and/or tax incentives, and installation, operating and maintenance costs of
various lighting alternatives. We then remove the existing lighting system and replace it with a
new lighting system manufactured by third party manufacturers. Our customer typically realize
paybacks of 12 to 24 months on their lighting system upgrade as the result of lower energy
consumption, reduced maintenance costs, utility rebates and tax incentives. A lighting upgrade
will also very often improve the overall quality of lighting in a customer’s facility.
We also provide energy engineering services to assist customers in improving the energy
efficiency of their facilities and to better manage their energy costs. Some of the energy
engineering services we offer include:
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building energy audits; |
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energy management planning; |
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engineering design review with a view to optimizing energy efficiency and energy
rebates; |
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project management of energy related construction or upgrade projects; |
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HVAC and boiler system optimization; and |
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incentive and rebate application processing and procurement. |
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eMAC & uMAC
The eMAC system is comprised of a heating, ventilating and air conditioning (“HVAC”)
controller with wireless communication capabilities and a central, server-based,
Internet-accessible software that monitors and controls the operation of the connected HVAC units.
The eMAC system is designed for use in commercial and industrial applications with packaged
(primarily rooftop) HVAC equipment of 2 to 40 tons (1 ton = 12,000 Btu/hr cooling capacity) and up
to 500,000 Btu/hr of heating capacity.
The eMAC controller is contained in a small box that is mounted on the exterior of a
customer’s HVAC unit. The controller is wired into the HVAC equipment and monitors up to 126
points of the equipment’s operation. In addition, each eMAC contains a Pentech Energy Recovery
Controller (“PERC”), our patented third generation microprocessor-based technology.
PERC was developed by Pentech Solutions, a predecessor company to MPG, and is designed to
dynamically match an HVAC system’s output to any given load condition, thereby improving the
operating efficiency of the equipment. Since most HVAC systems are designed to maintain
comfortable environmental conditions on both the hottest and coldest days likely to be experienced,
there exists substantial excess system capacity on most days of the year. Due to this excess
capacity, the system quickly satisfies a thermostat’s call for heating or cooling, and in doing so
overshoots the thermostat set point and leaves Btu’s of heat or cooling in the heat exchanger,
cooling coils and air ducts. The PERC controller acts to correct this by periodically turning off
the air conditioner’s compressor and condenser fan while continuing to run the evaporator fan,
thereby continuing to deliver cooling to the conditioned space utilizing the energy stored in the
cooling coils, heat exchanger and air ducts. In heating applications, PERC periodically closes the
gas valve while continuing to operate the indoor air fan, delivering heated air into the space
utilizing the heat stored in the heat exchanger and air ducts. At the same time, the PERC
controller is monitoring the rate of temperature change in the conditioned space in order to avoid
overshooting the desired temperature setting. The PERC technology can deliver energy savings of
15% to 20% for our end user customers.
The wireless communication capabilities of the eMAC allow us to monitor and remotely manage
the operation of a customer’s HVAC equipment. A customer can log on to our eMAC web site and
obtain information regarding the operation of its HVAC equipment and change equipment operating
parameters, such as hours of operation and temperature. The eMAC will also send alarms to our
central server when any of the up to 126 monitored points of operation fall outside predetermined
operating ranges. This often permits us to react to a potential equipment problem before the
occupants of the space are aware of an equipment malfunction. We charge our customers for this
ability to communicate and remotely monitor and mange their equipment, though we often include an
initial monitoring period with the purchase of the eMAC so that our customers can become familiar
with the benefits of this service.
The uMAC is a version of the eMAC which has been simplified to remotely control the operation
of a facility’s lights via wireless communications. Using the uMAC a customer can remotely, via
the Internet, turn lights on and off and change the daily schedule for the operation of a
facility’s lighting.
Marketing, Sales and Distribution
The majority of our sales are derived through the efforts of our internal sales force. We
currently have 33 employees whose primary responsibility is sales and marketing working out of ten
sales offices, some of which are home offices. Our sales people have been trained to sell all of
our products and services, regardless of the subsidiary that employs them or the office that they
work out of. Our sales leads are developed from a combination of cold calls, referrals, trade
shows and repeat customers.
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Customers
During 2007, one customer, Washington Mutual, Inc. accounted for approximately 10% of our
consolidated billings. During 2006, three customers, Kohl’s Department Stores, Modell’s Sporting
Goods and Automated Building Controls accounted for 14%, 13% and 13% of our consolidated billings,
respectively. During 2005, two customers, Kohl’s Department Stores and Duane Read Inc., accounted
for approximately 37% and 11% of our consolidated billings, respectively.
Competition
There are many competitors in the energy services business, including small regional lighting
retrofit companies, electrical contractors and large national energy service companies. The large
national energy service companies tend to market to large national companies and compete for large
energy retrofit projects in which lighting is one piece of the total project. We focus on
providing lighting retrofit services to small to mid-sized commercial and industrial users (which
we believe are under-served) and to niche markets, where installations are more difficult. In
these markets we market our services based on the financial return to our customers and we
differentiate ourselves through our thorough upfront analysis of the application, our experience,
our reputation for quality work, our superior service, our ability to provide complete energy
engineering services through our engineering group and our ability to provide extended payment
terms.
Energy engineering services such as those provided by our engineering group are also generally
widely available. The certifications held by our engineers include: Professional Engineer (“PE”);
Certified Energy Engineer (“CEM”); and Certified Lighting Efficiency Professional (“CLEP”). To
obtain these certifications an individual must have a high level of experience and demonstrated
knowledge of engineering and energy engineering concepts. Kapadia, our energy engineering company,
differentiates itself from its competitors through its reputation for quality work and its 27 years
of experience as an energy engineering firm. A significant amount of energy engineering business
comes from repeat customers or referrals.
While there are other HVAC controllers that provide energy saving benefits similar to the
eMAC, we are not aware of any competing product available at a comparable cost to the eMAC that
provides the communications, remote monitoring and diagnostic features of the eMAC. Large,
national control companies provide systems that overlap with the capabilities of the eMAC, but the
installed cost of such systems make them impractical for smaller applications, which is the market
we are targeting with the eMAC.
Manufacturing
The eMAC is manufactured for us by a contract manufacturer in southern California. We believe
that this contract manufacturer has sufficient capacity to handle our anticipated growth in eMAC
sales for the foreseeable future. In addition, we believe that there are many contract
manufacturers across the country that could manufacture the eMAC for us if for some reason our
current contract manufacturer could not meet our needs.
Most components of the eMAC are sourced from multiple suppliers, though some components are
proprietary to a single manufacturer. We periodically engage in discussions with additional parts
suppliers, seeking to ensure lowest cost pricing and reliability of supply.
Our lighting products are purchased from third party suppliers and manufacturers. These
products are generally widely available and are selected based on a combination of price,
performance, features and availability.
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During 2007, approximately 27% of our consolidated materials and subcontracted labor came from
two suppliers. During 2006 approximately 12% of our consolidated purchases were made from one
supplier. During 2005, approximately 20% of our consolidated material purchases were made from
four suppliers. Purchases from any one supplier will vary year-to-year depending on sales and
inventory levels. None of our largest suppliers sell the Company proprietary products that we
could not purchase from other vendors.
Compliance With Environmental Laws
Neither the production, nor the sale of our products in any material way generates activities
or materials that require compliance with federal, state or local environmental laws. Our Energy
Services businesses use licensed disposal firms to dispose of old lamps, lighting ballasts or other
products that may contain heavy metals or other potential environmental hazards.
Research and Development
Our engineering staff, in conjunction with outside engineering consultants, based on the
day-to-day use of the eMAC and its components and various testing sites around the country,
develops modifications and improvements to the product line. Total research and development costs
charged to operations were approximately $700,000, $535,000 and $395,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Intellectual Property
As of December 31, 2007, we had nine issued patents and two patents pending before the U.S.
Patent and Trademark Office, as well as foreign patent offices on various aspects of the eMAC and
EnergySaver technologies. In addition we have registered four trademarks and have two additional
trademark registrations pending.
Employees
As of March 15, 2008, we had 110 full time employees and six part time employees, of which 18
were management and corporate staff, 11 were engineers, 33 were engaged in sales and marketing and
48 were engaged in project management, product installation, customer support and field service.
Item 1A. Risk Factors.
The following disclosure of risk factors includes all material risks known to us at this time.
Additional risks we are not presently aware of or that we currently believe are immaterial may
prove to impair our business and financial performance. Our business could be harmed by any of
these risks, whether stated or unstated. We operate in a continually changing business environment
and may as a result enter into new businesses and product lines. We cannot predict new risk factors
that may arise in the future, and we cannot assess the impact, if any, of these new risk factors on
our businesses or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those projected in any forward-looking statements. Accordingly,
you should not rely on forward-looking statements as a prediction of actual results. In addition,
our estimates of future operating results are based on our current complement of businesses, which
is subject to change as we continue to assess and refine our business strategy. If any of the
following risks actually occur, our business, results of operations, and financial condition could
be adversely affected in a material manner.
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Risks Related to Our Business
We have incurred significant operating losses since inception and may not achieve or sustain
profitability in the future.
We have experienced operating losses and negative cash flow from operations since our
inception in December 1997 and we currently have an accumulated deficit. Our ability to continue
as a going concern is ultimately dependent on our ability to increase sales to a level that will
allow us to operate profitably and sustain positive operating cash flows. Although we are
continuing our efforts to improve profitability through expansion of our business in both current
and new markets, we must overcome marketing hurdles, including gaining market acceptance, in order
to sell large quantities of our products and services. In addition, we may be required to reduce
the prices of our products in order to increase sales. If we reduce prices, we may not be able to
reduce costs sufficiently to achieve acceptable profit margins. As we strive to grow our business,
we have spent and expect to continue to spend significant funds (1) for general corporate purposes,
including working capital, marketing, recruiting and hiring additional personnel; and (2) for
research and development. To the extent that our revenues do not increase as quickly as these costs
and expenditures, our results of operations and liquidity will be materially adversely affected. If
we experience slower than anticipated revenue growth or if our operating expenses exceed our
expectations, we may not achieve profitability. Even if we achieve profitability in the future, we
may not be able to sustain it.
Failure to effectively market our energy management products and services could impair our
ability to sell significant quantities of these products and services.
We operate in competitive markets. One of the challenges we face in commercializing our
energy management products and services is demonstrating the advantages of our products and
services over competitive products and services. To do this, we will need to further develop our
marketing and sales force. If we do not successfully develop and expand our internal sales force,
we may not be able to generate significant revenues.
If our products and services do not achieve or sustain market acceptance, our ability to
compete will be adversely affected.
To date, we have not sold our eMAC product line in very large quantities and a sufficient
market may not develop for it. Significant marketing will be required in order to establish a
sufficient market for these products. The technology underlying our products may not become or
remain a preferred technology to address the energy management needs of our customers and potential
customers. Failure to successfully develop, manufacture and commercialize products on a timely and
cost-effective basis will have a material adverse effect on our ability to compete in the energy
management market or survive as a business.
The failure to effectively maintain and upgrade our proprietary products could adversely
affect our business.
A recent effort to upgrade the eMAC technology has taken significantly longer and cost more
than initially anticipated. This delay has adversely affected eMAC sales, resulting in significant
losses at MPG which contributed to the impairment of its goodwill. The situation has also diverted
a significant amount of management’s attention from the operation of our other businesses. While
we have taken steps to address the situation, if they prove ineffective we may continue to
experience losses and a drain on our management and cash resources. Maintenance of proprietary
technology will be an ongoing issue that we must effectively handle without impacting sales and
profitability.
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Failure to replace a significant customer could materially and adversely affect our results
of operations and financial condition.
We have historically derived a significant portion of our annual revenue from a limited number
of customers. Seldom has any one customer represented 10% or more of our revenues for more than
one year in a row. This requires that we continually replace major customers, whose needs we have
satisfied, with one or more new customers. The failure to replace a major customer could have a
significant negative effect on our results of operations and financial condition. We believe that
as a result of recent acquisitions we will experience an increased diversification of our customer
base, reducing the amount of our revenue associated with several large customers, but this remains
to be seen.
We expect our quarterly revenue and operating results to fluctuate. If we fail to meet the
expectations of market analysts or investors, the market price of our common stock could
decline substantially, and we could become subject to securities litigation.
Our business is seasonal and can be affected by cyclical factors outside of our control. Our
quarterly revenue and operating results have fluctuated in the past and will likely vary from
quarter to quarter in the future. You should not rely upon the results of one quarter as an
indication of our future performance. Our revenue and operating results may fall below the
expectations of market analysts or investors in some future quarter or quarters. Our failure to
meet these expectations could cause the market price of our common stock to decline substantially.
If the price of our common stock falls significantly we may be the target of securities litigation.
If we become involved in this type of litigation, regardless of the outcome, we could incur
substantial legal costs, management’s attention could be diverted from the operation of our
business, and our reputation could be damaged, which could adversely affect our business, results
of operations and/or financial condition.
A decrease in electric retail rates could lessen demand for our products.
Our products and services have the greatest sales and profit potential in areas where
commercial electric rates are relatively high. However, retail electric rates for commercial
establishments in the United States may not remain at their current levels. Due to a potential
overbuilding of power generating stations in certain regions of the United States, wholesale power
prices may decrease in the future. Because the price of commercial retail electric power is largely
attributed to the wholesale cost of power, it is reasonable to expect that commercial retail rates
may decrease as well. In addition, much of the wholesale cost of power is directly related to the
price of certain fuels, such as natural gas, oil and coal. If the prices of those fuels decrease,
the prices of the wholesale cost of power may also decrease. This could result in lower electric
retail rates and reduced demand for our energy saving products and services.
If we are not able to protect our intellectual property rights against infringement, or if
others obtain intellectual property rights relating to energy management technology, we
could lose our competitive advantage in the energy management market.
We regard our intellectual property rights, such as patents, licenses of patents, trademarks,
copyrights and trade secrets, as somewhat important to our success. Although we have entered into
confidentiality and rights to inventions agreements with our employees and consultants, the steps
we have taken to protect our intellectual property rights may not be adequate. Third parties may
infringe or misappropriate our intellectual property rights or we may not be able to detect
unauthorized use and take appropriate steps to enforce our rights. Failure to take appropriate
protective steps could materially adversely affect any competitive advantage we may have in the
energy management market. In addition, patents held by third parties may limit our ability to
manufacture, sell or otherwise commercialize products and could result in the assertion of claims
of patent infringement against us. If that were to
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happen, we could try to modify our products to be non-infringing, but we might not be successful or
such modifications might not avoid infringing on the intellectual property rights of third parties.
Claims of patent infringement against us, regardless of merit, could result in the expenditure
of significant financial and managerial resources by us. We could be forced to seek to enter into
license agreements with third parties to resolve claims of infringement by our products of the
intellectual property rights of third parties. Such licenses may not be available on acceptable
terms or at all. The failure to obtain such licenses on acceptable terms could have a negative
effect on our business.
If we are unable to achieve or manage our growth, it will adversely affect our business, the
quality of our products and services, and our ability to attract and retain key personnel.
If we succeed in growing our sales as we need to do, we will be subject to the risks inherent
in the expansion and growth of a business enterprise. Growth in our business will place a strain on
our operational and administrative resources and increase the level of responsibility for our
existing and new management personnel. To manage our growth effectively, we will need to:
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further develop and improve our operating, information, accounting, financial
and other internal systems and controls on a timely basis; |
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improve our business development, marketing and sales capabilities; and |
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expand, train, motivate and manage our employee base. |
Our systems currently in place may not be adequate if we grow and may need to be modified and
enhanced. The skills of management currently in place may not be adequate if we experience
significant growth.
If our management fails to properly identify companies to acquire and to effectively
negotiate the terms of these acquisition transactions, our growth may be impaired.
As part of our growth strategy, we intend to seek to acquire companies with complementary
technologies, products and/or services. Our management, including our board of directors, will have
discretion in identifying and selecting companies to be acquired by us and in structuring and
negotiating these acquisitions. In general, our common stockholders may not have the opportunity to
approve these acquisitions. In addition, in making acquisition decisions, we will rely, in part,
on financial projections developed by our management and the management of potential target
companies. These projections will be based on assumptions and subjective judgments. The actual
operating results of any acquired company or the combination of us and an acquired company may fall
significantly short of projections.
We may be unable to acquire companies that we identify as targets for various reasons,
including:
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our inability to interest such companies in a proposed transaction; |
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our inability to agree on the terms of an acquisition; |
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incompatibility between our management and management of a target company; and |
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our inability to obtain the approval of the holders of our common stock, if
required. |
If we cannot consummate acquisitions on a timely basis or agree on terms at all, or if we
cannot acquire companies with complementary technologies, products and/or services on terms
acceptable to us, our future growth may be impaired.
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Our growth may be impaired and our current business may suffer if we do not successfully
address risks associated with acquisitions.
Since January 1, 2000, we have acquired seven companies, two of which we subsequently sold at
a loss and one of which performed below expectation necessitating a write-off of the associated
goodwill. Our future growth may depend, in part, upon our ability to successfully identify, acquire
and operate other complementary businesses. We may encounter problems associated with such
acquisitions, including the following:
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difficulties in integrating acquired operations and products with our existing
operations and products; |
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difficulties in meeting operating expectations for acquired businesses; |
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diversion of management’s attention from other business concerns; |
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adverse impact on earnings of amortization or write-offs of goodwill and other
intangible assets relating to acquisitions; and |
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issuances of equity securities that may be dilutive to existing stockholders to
pay for acquisitions. |
In addition, often an acquired company’s performance is largely dependent on a few key people,
particularly in smaller companies. If these key people leave the company, become less focused on
the business or less motivated to make the business successful after the acquisition, the
performance of the acquired company may suffer.
If sufficient additional funding is not available to us, the commercialization of our
products and services and our ability to grow is likely to be hindered.
Our operations have not generated positive cash flow since the inception of the Company in
1997. We have funded our operations through the issuance of common and preferred stock and secured
debt. Our ability to continue to operate until our cash flow turns positive may depend on our
ability to continue to raise funds through the issuance of equity or debt. If we are not
successful in raising additional funds, we might have to significantly scale back or delay our
growth plans, sell or shut down some of our businesses or possibly cease operations altogether. Any
reduction or delay in our growth plans could materially adversely affect our ability to compete in
the marketplace, take advantage of business opportunities and develop or enhance our products and
services. If we should have to cease operations altogether, our stockholders’ investment is likely
to be lost.
Raising additional capital or consummation of additional acquisitions through the issuance
of equity or equity-linked securities could dilute your ownership interest in us.
We may find it necessary to raise capital again some time in the future. If we raise
additional funds in the future through the issuance of equity securities or convertible debt
securities, our existing stockholders will likely experience dilution of their present equity
ownership position and voting rights. Depending on the number of shares issued and the terms and
conditions of the issuance, new equity securities could have rights, preferences, or privileges
senior to those of our common stock. Depending on the terms, common stock holders may not have
approval rights with respect to such issuances.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
Our headquarters are located at 1280 Landmeier Road in Elk Grove Village, Illinois. This
facility is approximately 13,000 square feet and houses the corporate headquarters and a warehouse.
We acquired this facility in August 1998. There is a mortgage on the building that matures in
February 2010. Lime Midwest, Inc., which is in the Energy Services segment, also operates out of
this building.
Other properties which are used for sales and administration include:
| |
|
|
|
|
|
|
|
|
| Location: |
|
Business Segment |
|
Square Feet |
|
Lease Expiration |
Austin, TX
|
|
Energy Services
|
|
|
2,000 |
|
|
June 2008 |
Dallas, TX
|
|
Energy Services
|
|
|
2,900 |
|
|
January 2009 |
Glendora, CA
|
|
Energy Services
|
|
|
9,350 |
|
|
December 2009 |
New York, NY
|
|
Energy Technology
|
|
|
2,800 |
|
|
September 2010 |
Peekskill, NY
|
|
Energy Services
|
|
|
2,000 |
|
|
Month-to-month |
San Diego, CA
|
|
Energy Technology
|
|
|
8,200 |
|
|
September 2012 |
Seattle, WA
|
|
Energy Services
|
|
|
1,877 |
|
|
December 2009 |
Ventura, CA
|
|
Energy Services
|
|
|
1,776 |
|
|
November 2010 |
We believe that the space and location of our current facilities in combination with the
current and planned outsourcing of our manufacturing will be sufficient to reach a level of sales
and production projected for the current year.
Item 3. Legal Proceedings.
From time to time, the Company has been a party to pending or threatened legal proceedings and
arbitrations that are routine and incidental to its business. Based upon information presently
available, and in light of legal and other defenses available to the Company, management does not
consider the liability from any threatened or pending litigation to be material to the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
On November 13, 2007, we received a written consent in lieu of a meeting of Stockholders from
the holders of shares representing 67.1% of the total issued and outstanding shares of our common
stock authorizing our Board of Directors, in its discretion, to effect a reverse stock split at an
exchange ratio ranging from one-for-two to one-for-ten of our issued and outstanding shares of
common stock. We sought approval to effect this reverse split for the purpose of qualifying for
listing of our common stock on the NASDAQ Capital Market.
On November 29, 2007, we distributed an information statement to all stockholders of record as
of November 26, 2007, informing them of this written consent in lieu of a meeting.
On January 16, 2008, our Board of Directors authorized a 1 for 7 reverse split of our stock,
effective at the opening of business on January 28, 2008. All share figures in this annual report
reflect this reverse stock split.
10
PART II
|
|
|
| Item 5. |
|
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
From December 12, 2000 to June 9, 2006, our common stock was listed on the American Stock
Exchange under the trading symbol “ELC”. From June 12, 2006 through September 21, 2006, our common
stock traded on the OTC Bulletin Board under the trading symbol “ELCY.” From September 22, 2006
until January 28, 2008 our stock traded on the OTC Bulletin Board under the symbol “LMEC.”
Following a 1 for 7 reverse split of our stock on January 28, 2008 and until February 25, 2008 our
trading symbol was “LMEG.” On February 25, 2008 our stock began trading on the NASDAQ Capital
Market with the trading symbol “LIME.”
The closing price of our common stock on March 27, 2008 was $10.84. The following table sets
forth the quarterly high and low selling prices for our common stock as reported on The American
Stock Exchange and OTC Bulletin Board since January 1, 2006, adjusted for the reverse splits.
| |
|
|
|
|
|
|
|
|
| |
|
Common Stock |
| |
|
High |
|
Low |
Fiscal Year Ended December 31, 2006: |
|
|
|
|
|
|
|
|
Fiscal Quarter Ended March 31, 2006 |
|
$ |
117.60 |
|
|
$ |
58.80 |
|
Fiscal Quarter Ended June 30, 2006 |
|
$ |
71.40 |
|
|
$ |
4.90 |
|
Fiscal Quarter Ended September 30, 2006 |
|
$ |
9.80 |
|
|
$ |
5.25 |
|
Fiscal Quarter Ended December 31, 2006 |
|
$ |
9.03 |
|
|
$ |
5.32 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2007: |
|
|
|
|
|
|
|
|
Fiscal Quarter Ended March 31, 2007 |
|
$ |
7.70 |
|
|
$ |
6.30 |
|
Fiscal Quarter Ended June 30, 2007 |
|
$ |
15.05 |
|
|
$ |
5.81 |
|
Fiscal Quarter Ended September 30, 2007 |
|
$ |
14.21 |
|
|
$ |
9.45 |
|
Fiscal Quarter Ended December 31, 2007 |
|
$ |
15.75 |
|
|
$ |
5.60 |
|
Holders
As of March 26, 2008 we had approximately 5,000 holders of record of our common stock and
7,738,074 shares of common stock outstanding.
Dividends
No dividends were declared or paid during the three month period ended December 31, 2007.
We have never declared or paid any cash dividends on our common stock and we do not anticipate
paying any cash dividends in the foreseeable future.
11
Securities Authorized for Issuance Under Equity Compensation Plans
The following information reflects certain information about our equity compensation plans as
of December 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Equity Compensation Plan Information |
|
| |
|
(a) |
|
|
(b) |
|
|
(c) |
|
| |
|
|
|
|
|
|
|
|
|
Number of |
|
| |
|
|
|
|
|
|
|
|
|
securities |
|
| |
|
|
|
|
|
|
|
|
|
remaining available |
|
| |
|
Number of |
|
|
|
|
|
|
for future issuance |
|
| |
|
securities to be |
|
|
|
|
|
|
under equity |
|
| |
|
issued upon |
|
|
Weighted-average |
|
|
compensation plans |
|
| |
|
exercise of |
|
|
exercise price of |
|
|
(excluding |
|
| |
|
outstanding |
|
|
outstanding |
|
|
securities |
|
| |
|
options, warrants |
|
|
options, warrants |
|
|
reflected in column |
|
| Plan Category |
|
and rights |
|
|
and rights |
|
|
(a)) |
|
Equity compensation plans approved
by security holders |
|
|
90,672 |
|
|
$ |
29.88 |
|
|
|
16,948 |
|
Equity compensation plans not
approved by security holders (1) |
|
|
2,079,676 |
|
|
$ |
23.02 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,170,348 |
|
|
$ |
23.31 |
|
|
|
16,948 |
|
|
|
|
| (1) |
|
We grant stock options to our non-employee directors pursuant to a Directors Stock
Option Plan (See “Compensation of Directors”), which grants are included in this category. |
Recent Sales of Unregistered Securities
During the twelve months ended December 31, 2007, we issued the securities listed below:
| |
• |
|
In January 2007, pursuant to the Directors’ Stock Option Plan we granted options to
certain outside directors with an exercise price of $6.30 per share, which was the market
price on the date of issuance. Warrants held by 12 investors, including Messrs. Asplund
and Kiphart, contained anti-dilution provisions that automatically adjust the exercise
price on the warrants to the issuance price of any security convertible into our common
stock if the price of the newly issued security is less than the exercise price on the
holder’s warrant. Prior to the granting of the directors’ options in January 2007, the
exercise price on these warrants was $7.00 per share. The grant of the director options
caused the exercise price on these warrants to automatically be reduced to $6.30 per share. |
| |
| |
• |
|
During January 2007, we issued warrants to consultants with terms of two to three years
to purchase 38,571 shares of our common stock at prices of $7.00 to $7.56 per share as
partial consideration for services provided to us. |
| |
| |
• |
|
A provision of our June 2006 PIPE transaction required us to file and have declared
effective by no later than November 3, 2006, a registration statement registering the
shares issued as part of the transaction. To the extent that we failed to have the
registration statement declared effective by this date, we were required to pay penalties
to the PIPE investors at the rate of 1% per month of the purchase price paid by the
investors. Largely as a result of the questions regarding the need to amend our
Certificate of Incorporation to effect the 2006 reverse split of our common stock, we were
not able to have the registration statement declared effective until February 14, |
12
| |
|
|
2007. All of the investors in the PIPE transaction agreed to accept shares of our common
stock as payment of this registration penalty. As of December 31, 2006, we had accrued
$345,583 in penalties related to our failure to register these shares. These accrued
penalties, along with $268,125 of penalties for the period from January 1, 2007 through
February 14, 2007, were satisfied through the issuance of 87,673 shares of our common stock
in January and February 2007. |
| |
| |
• |
|
On February 23, 2007, we commenced a rights offering to stockholders in which we
distributed to each holder of record as of February 23, 2007 (other than the former Series
E Preferred stockholders and Daniel Parke, who waived their rights to participate),
non-transferable subscription rights to purchase shares of our common stock at $7.00 per
share. Stockholders that participated in the rights offering were also able to subscribe
for any shares that were not purchased by other stockholders pursuant to their subscription
rights. The rights offering closed on March 30, 2007 and raised $2,796,700 (net of
issuance costs of $202,932) through the issuance of 428,519 shares of common stock to 260
of our existing stockholders. We received the proceeds from the offering and issued the
common stock to the participants during the first week of April 2007. |
| |
| |
• |
|
In connection with the placement of the subordinated convertible term notes during the
second quarter of 2007 we issued four-year warrants to eight investors, including Richard
Kiphart, our chairman and largest individual stockholder, to purchase 206,043 shares of our
common stock at $7.28 per share. |
| |
| |
• |
|
As part of the MPG acquisition, 23,735 shares of common stock were deposited in escrow
for the benefit of the selling stockholders of MPG to be released over the two-year period
following the April 30, 2005 purchase of MPG if it achieved certain revenue targets during
the period. During May 2007 we issued 2,818 shares to the former MPG stockholders which
we determined we owed them pursuant to the MPG merger agreement. |
| |
| |
• |
|
Delano Group Securities LLC acted as an advisor on the acquisition of MPG in 2005. Part
of Delano’s compensation for its services was tied to the purchase price paid for MPG.
David Asplund owned and operated Delano prior to joining Lime Energy as our CEO in January
2006. Since the release of the escrow shares was considered a payment of additional
consideration to the former stockholders of MPG, we issued Mr. Asplund 141 shares of our
common stock in May 2007 in satisfaction of the commission owed Delano. |
| |
| |
• |
|
On June 6, 2007, retroactive to May 31, 2007, we acquired the assets and assumed certain
liabilities of George Bradley Boyett dba Texas Energy Products. The purchase consideration
consisted of 28,571 shares of our common stock and cash of $312,787. |
| |
| |
• |
|
On August 6, 2007, retroactive to July 31, 2007, we acquired the assets and assumed
certain liabilities of Preferred Lighting, Inc. for 15,069 shares of our common stock and
cash of $409,953 in cash (including $109,953 paid in 2008 pursuant to an earn-out based on
2007 earnings). We also issued five year warrants to the former owners of Preferred
Lighting to purchase 21,429 shares of our common stock at $13.23 per share. |
| |
| |
• |
|
During 2007, we issued 7,088 shares of our common stock to the holders of our
subordinated convertible term notes in satisfaction of 50% of the interest owed on the
notes. |
| |
| |
• |
|
During 2007 certain employees and a former director exercised options to purchase 33,005
shares of our common stock at prices ranging from $6.30 to $7.14 per share. |
13
| |
• |
|
During 2007 six investors exercised their warrants to purchase 5,011 shares of our
common stock at $6.30 per share. One of these investors elected to exercise its warrant on
a cashless basis, surrendering 569 shares it would have otherwise be entitled to receive on
exercise to cover the exercise price. |
The sales and issuances of common stock, debt instruments and warrants to purchase common stock
in private placements listed above were made by us in reliance upon the exemptions from
registration provided under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended,
and Rule 506 of Regulation D, promulgated by the SEC under federal securities laws and
comparable exemptions for sales to “accredited” investors under state securities laws. The
offers and sales were made to accredited investors as defined in Rule 501(a) under the
Securities Act and no general solicitation was made by us or any person acting on our behalf;
the securities sold were subject to transfer restrictions, and the certificates for those shares
contained an appropriate legend stating that they had not been registered under the Securities
Act and may not be offered or sold absent registration unless sale is pursuant to an exemption
therefrom.
14
Item 6. Selected Financial Data
The information set forth below is not necessarily indicative of results of future operations,
and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and the Consolidated Financial Statements and notes thereto
included in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K, which are
incorporated herein by reference, in order to understand further the factors that may affect the
comparability of the financial data presented below.
LIME ENERGY CO. AND SUBSIDIARIES
Selected Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2007 (1) |
|
|
2006 (1) |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
19,481,130 |
|
|
$ |
8,143,624 |
|
|
$ |
3,693,429 |
|
|
$ |
733,630 |
|
|
$ |
2,280,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
15,082,400 |
|
|
|
6,931,294 |
|
|
|
3,691,854 |
|
|
|
862,366 |
|
|
|
1,945,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
4,398,730 |
|
|
|
1,212,330 |
|
|
|
1,575 |
|
|
|
(128,736 |
) |
|
|
334,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
13,072,381 |
|
|
|
12,165,700 |
|
|
|
5,363,503 |
|
|
|
4,234,240 |
|
|
|
3,921,121 |
|
Amortization of intangibles |
|
|
2,011,878 |
|
|
|
1,210,006 |
|
|
|
471,765 |
|
|
|
— |
|
|
|
— |
|
Impairment loss |
|
|
4,181,969 |
|
|
|
1,183,525 |
|
|
|
242,830 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(14,867,498 |
) |
|
|
(13,346,901 |
) |
|
|
(6,076,523 |
) |
|
|
(4,362,976 |
) |
|
|
(3,586,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
(685,230 |
) |
|
|
(3,079,188 |
) |
|
|
(544,253 |
) |
|
|
(626,049 |
) |
|
|
(354,941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(15,552,728 |
) |
|
|
(16,426,089 |
) |
|
|
(6,620,776 |
) |
|
|
(4,989,025 |
) |
|
|
(3,941,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
— |
|
|
|
(21,425 |
) |
|
|
(251,962 |
) |
|
|
(170,337 |
) |
|
|
(1,540,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,552,728 |
) |
|
$ |
(16,447,514 |
) |
|
$ |
(6,872,738 |
) |
|
$ |
(5,159,362 |
) |
|
$ |
(5,481,942 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
from continuing operations (2)(3) |
|
$ |
(2.06 |
) |
|
$ |
(10.60 |
) |
|
$ |
(18.59 |
) |
|
$ |
(25.34 |
) |
|
$ |
(27.30 |
) |
Basic and diluted loss per common share (2)(3) |
|
$ |
(2.06 |
) |
|
$ |
(10.61 |
) |
|
$ |
(19.14 |
) |
|
$ |
(25.76 |
) |
|
$ |
(32.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding (2)(3) |
|
|
7,541,960 |
|
|
|
3,844,087 |
|
|
|
455,809 |
|
|
|
380,013 |
|
|
|
321,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,780,701 |
|
|
$ |
4,663,618 |
|
|
$ |
4,229,150 |
|
|
$ |
1,789,808 |
|
|
$ |
2,467,023 |
|
Working capital |
|
|
5,825,753 |
|
|
|
3,606,419 |
|
|
|
646,483 |
|
|
|
263,304 |
|
|
|
2,050,157 |
|
Total assets |
|
|
25,943,832 |
|
|
|
25,396,865 |
|
|
|
17,098,974 |
|
|
|
6,479,320 |
|
|
|
7,353,627 |
|
Long-term debt, including current portion |
|
|
3,269,634 |
|
|
|
567,091 |
|
|
|
4,980,032 |
|
|
|
1,230,353 |
|
|
|
1,348,645 |
|
Total stockholders’ equity |
|
|
13,869,832 |
|
|
|
18,184,756 |
|
|
|
4,377,637 |
|
|
|
1,780,271 |
|
|
|
3,040,932 |
|
|
|
|
| (1) |
|
Effective January, 1, 2006, we adopted SFAS 123(R) which requires companies to record stock
compensation expense for equity-based awards granted, including stock options and restricted
stock unit grants, over the service period of the equity-based award based on the fair value
of the award at the date of grant. We recognized $3,726,731 and $4,828,955 of stock
compensation expense during 2007 and 2006, respectively. |
| |
| (2) |
|
During 2006 we effected a 1 for 15 reverse split of our common stock. The weighted average
common shares outstanding and the earnings per share values have all been adjusted to reflect
the reverse split. |
| |
| (3) |
|
During 2008 we effected a 1 for 7 reverse split of our common stock. The weighted average
common shares outstanding and the earnings per share values have all been adjusted to reflect
the reverse split. |
15
|
|
|
| Item 7. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion should be read in conjunction with the consolidated financial
statements and related notes which appear elsewhere in this report on Form 10-K. The discussion
contains “forward-looking statements” within the meaning of the Private Securities Litigation Act
of 1995. Such statements consist of any statement other than a recitation of historical fact and
can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,”
“estimate” or “continue” or the negative of such terms or other variations of such terms or
comparable terminology. You are cautioned that all forward-looking statements are necessarily
speculative and there are certain risks and uncertainties that could cause actual events or results
to differ materially from those referred to in such forward-looking statements. We do not have a
policy of updating or revising forward-looking statements and, therefore, you should not assume
that our silence over time means that actual events are bearing out as estimated in such
forward-looking statements.
Overview
We are a provider of energy services and technologies that improve the energy efficiency of
our clients’ facilities and reduce their ongoing maintenance costs. Services we offer include the
design, engineering and installation of energy efficient lighting systems and energy engineering
consulting. We also market a proprietary line of controllers that provide intelligent control and
continuous monitoring of HVAC and lighting equipment via wireless communication technology to
reduce energy usage and improve system reliability.
The Company consists of three reporting segments: Energy Services, Energy Technology and
Financial Services.
Our Energy Services segment markets, designs, engineers and installs energy efficient lighting
upgrades for commercial and industrial users. As part of our services, we seek to determine the
best lighting solutions for our customers, taking into consideration factors such as lighting
requirements, building environmental conditions, hours of operation, energy costs, available
utility and/or tax incentives, and installation, operating and maintenance costs of various
lighting alternatives.
Our Energy Technology segment sells our proprietary line of HVAC controllers to commercial and
industrial users under the eMAC brand name. The eMAC, which we added through the acquisition of
Maximum Performance Group, Inc. in May 2005, provides remote monitoring and control, and reduces
the energy consumed by commercial rooftop HVAC units. Prior to 2007 we also actively marketed the
EnergySaver line of lighting controllers to commercial and industrial customers. The EnergySaver
reduced the energy consumed by ballasted commercial lighting fixtures. We discontinued the active
marketing of the EnergySaver in December 2006 due to changes in lighting technology which we felt
would reduce the future market for the product.
Our Financial Services segment was created in 2007 to provide liquidity to our operating
subsidiaries by purchasing certain long term receivables from them. The ability to offer extended
payment terms to our customers can be an important differentiating factor in certain markets and
with certain types of customers. By consolidating all of these long term receivables under Lime
Finance, we hope to better manage them and eventually leverage them with debt financing to reduce
the cost of capital used to fund them. As of December 31, 2007 we had approximately $400,000 of
receivables in this portfolio.
Our Company has evolved considerably since it was formed in 1997 as an energy technology
company to manufacture and sell the EnergySaver. The eMAC line of HVAC and lighting controllers
has
16
replaced the EnergySaver as our energy technology product, and energy technology is no longer
our primary source of revenue. Our Energy Services segment, which was formed in June 2006, has
grown rapidly through acquisitions and organic growth, such that it represented 81% of our
consolidated revenue in 2007. The growth of this segment is expected to continue to outpace that
of our Energy Technology segment such that it will be the primary contributor to our growth in
2008.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at
the date of our financial statements. Actual results may differ from these estimates under
different assumptions or conditions. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that our critical
accounting policies are limited to those described below. For a detailed discussion on the
application of these and other accounting policies, see Note 3 in the notes to the consolidated
financial statements.
Use of Estimates
Preparation of the consolidated financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenues and expenses and related contingent
liabilities. On an on-going basis, the Company evaluates its estimates, including those related to
revenues, bad debts, warranty accrual, income taxes and contingencies and litigation. The Company
bases its estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
Revenue Recognition
We recognize revenue when all four of the following criteria are met: (i) persuasive evidence
has been received that an arrangement exists; (ii) delivery of the products and/or services has
occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably
assured. In addition, we follow the provisions of the Securities and Exchange Commission’s Staff
Accounting Bulletin No. 104, Revenue Recognition, which sets forth guidelines in the timing of
revenue recognition based upon factors such as passage of title, installation, payments and
customer acceptance. Any amounts received prior to satisfying our revenue recognition criteria is
recorded as deferred revenue.
Our MPG subsidiary often bundles contracts to provide monitoring services and web access with
the sale of its eMAC hardware. As a result, these sales are considered to be contracts with
multiple deliverables which at the time the hardware is delivered and installed includes
undelivered services essential to the functionality of the product. Accordingly, we defer the
revenue for the product and services and the cost of the equipment and installation and recognize
them over the term of the monitoring contract. The monitoring contracts vary in length from one
month to five years.
Profit Recognition on Long-Term Contracts
We account for revenue on most of our long-term contracts on the completed contract method,
whereby revenue is recognized once the project is substantially complete. However, we account for
revenues on some long-term contracts under the percentage of completion method in conjunction with
the
17
cost-to-cost method of measuring the extent of progress toward completion. Any anticipated
losses on contracts are charged to operations as soon as they are determinable.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. The allowance is largely based upon specific
knowledge of customers from whom collection is determined to be doubtful and our historical
collection experience with such customers. If the financial condition of our customers or the
economic environment in which they operate were to deteriorate, resulting in an inability to make
payments, or if our estimates of certain customers’ ability to pay are incorrect, additional
allowances may be required. During 2007, we increased our allowance by $126,000 and wrote off
receivables of $341,000. As of December 31, 2007 our allowance for doubtful accounts was
approximately $151,000, or 2.4% of our outstanding accounts receivable.
Impairment of Long-Lived Assets.
We record impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of those items. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate of future market
and operating conditions. The net carrying value of assets not recoverable is reduced to fair
value. Our estimates of fair value represent our best estimate based on industry trends and
reference to market rates and transactions.
During 2006, we determined that our EnergySaver based VNPP (“Virtual Negawatt Power Plan”)
Asset was completely impaired and recorded an impairment charge of $1,183,525 to reduce the
carrying value of the asset to zero.
Goodwill
We have made acquisitions in the past that included a significant amount of goodwill and other
intangible assets. Goodwill is subject to an annual (or under certain circumstances more frequent)
impairment test based on its estimated fair value. Estimated fair value is less than value based on
undiscounted operating earnings because fair value estimates include a discount factor in valuing
future cash flows. There are many assumptions and estimates underlying the determination of an
impairment loss, including economic and competitive conditions, operating costs and efficiencies.
Another estimate using different, but still reasonable, assumptions could produce a significantly
different result. In February 2006 we signed a non-binding letter of intent to sell Great Lakes
Controlled Energy. To indicate if our goodwill would be impaired as a result of the expected sale,
we compared the carrying value of the related reporting unit to the expected sale price of the
business and determined that the goodwill was impaired. As a result we recorded an impairment loss
as of December 31, 2005 of $242,830.
During the fourth quarter of 2007 we updated our projections for portions of the Energy
Services and Energy Technology businesses and estimated the fair value based on the discounted
current value of the estimated future cash flows. We then compared the calculated fair values of
the reporting units to their carrying values. The analysis did not identify any impairment for the
Energy Services business, but did determine that the value of the Energy Technology’s goodwill was
impaired. The decline in the fair value of the Energy Technology segment was primarily the result
of lower than expected sales of the
eMAC line of HVAC controllers, in large part due to delays in a project to upgrade the eMAC.
As a result of the decline in the fair value, we recorded an impairment loss of $4,181,969 during
the fourth quarter of 2007.
18
It is possible that upon completion of future impairment tests, as the result of changes in
facts or circumstances, we may have to take additional charges in future periods to recognize a
further write-down of the value of the goodwill attributed to our acquisitions to their estimated
fair values.
Stock-based Compensation
We have a stock incentive plan that provides for stock-based employee compensation, including
the granting of stock options and shares of restricted stock, to certain key employees. The plan is
more fully described in Note 25 to our financial statements. Effective January 1, 2006, we adopted
Statement of Financial Accounting Standards No. 123(R), “Share-based Payment” (“SFAS 123(R)”),
which requires that we record stock compensation expense for equity-based awards granted, including
stock options and restricted stock unit grants, over the service period of the equity-based award
based on the fair value of the award at the date of grant. Prior to the adoption of SFAS 123(R),
we accounted for stock compensation using the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
Interpretations. Under that method, compensation expense was recorded only if the current market
price of the underlying stock on the date of grant exceeded the option exercise price. Since stock
options are granted at exercise prices that are greater than or equal the market value of the
underlying common stock on the date of grant under our stock incentive plan, no compensation
expense related to stock options was recorded in the Consolidated Statements of Operations prior to
January 1, 2006. We recognized $3,726,731 and $4,828,955 of stock compensation expense during 2007
and 2006, respectively.
Material Trends and Uncertainties
From time to time changes occur in our industry or our business that make it reasonably likely
that aspects of our future operating results will be materially different than historical operating
results. Sometimes these matters have not occurred, but their existence is sufficient to raise
doubt regarding the likelihood that historical operating results are an accurate gauge of future
performance. We attempt to identify and describe these trends, events, and uncertainties to assist
investors in assessing the likely future performance of the Company. Investors should understand
that these matters typically are new, sometimes unforeseen, and often are fluid in nature.
Moreover, the matters described below are not the only issues that can result in variances between
past and future performance nor are they necessarily the only material trends, events, and
uncertainties that will affect the Company. As a result, investors are encouraged to use this and
other information to judge for themselves the likelihood that past performance will be indicative
of future performance.
The trends, events, and uncertainties set out in the remainder of this section have been
identified as those we believe are reasonably likely to materially affect the comparison of
historical operating results reported herein to either other past period results or to future
operating results. These trends, events and uncertainties include:
Recent changes in the composition of our company. In 2006 we established our energy
services business through the acquisitions of Parke and Kapadia. Additional acquisitions and the
opening of new offices have added to this business such that our Energy Services business generated
approximately 81% of our consolidated revenue in 2007. Certain characteristics of this new
business, such as seasonality, margins and working capital requirements, are fundamentally
different that those of our previous business, therefore, we believe our historical results will
not be indicative of our future performance. As
an example, the Energy Services business appears to be somewhat seasonal with the strongest sales
occurring in the second half of the year. This seasonality is likely to result in greater
fluctuations in our revenue, earnings and working capital requirements throughout the year than we
have historically
19
experienced. Because certain of our expenses are relatively fixed as described
below, seasonal fluctuations in the revenues of our energy services business are also likely to
cause fluctuations in our gross margins during the year.
Uncertainty regarding our Energy Technology Segment. The Company was founded in 1997
for the purpose of marketing the EnergySaver line of energy efficient lighting controllers. In
December 2006, due to changes in lighting technology, we discontinued the active marketing of the
EnergySaver product and wrote off most of our remaining inventory and our investment in the Virtual
Negawatt Power Plan. In May 2005, we added the eMAC and uMAC line of HVAC and lighting controllers
(the “eMAC line”) through the acquisition of Maximum Performance Group, Inc. To date, neither
product line has reached the level of sales necessary to contribute to our profitability.
In late 2006, we commissioned an independent review of the market for the eMAC which concluded
that there appears to be a good market for the product. We therefore began an engineering project
to replace certain components that were being discontinued by their manufacturers, to add cellular
communications capabilities and to enable LEED certification and UL listing approval. The project
has experienced delays and cost overruns and, due to the limited availability of certain
discontinued components for the existing version of the eMAC line, resulted in lower than expected
sales of the eMAC during 2007. The Energy Technology segment incurred a significant loss during
2007, in part due to the fact that the sales and administrative overhead of this segment was
positioned to support a higher level of eMAC sales than was actually achieved during the year.
These events contributed to the determination that MPG’s goodwill was impaired, resulting in the
$4,181,969 impairment charge at the end of 2007.
We have retained an engineering consulting firm to assume responsibility for completing the
eMAC upgrades with the objective of completing an upgraded version of the product in the second
half of 2008. We have also reduced the overhead of this segment in an attempt to reduce its 2008
loss. While we continue to believe there is a good market for the eMAC product line, we have not
determined whether we can achieve the scale necessary for it to become a profitable business. The
successful completion of the eMAC engineering project during 2008 will be key to determining the
future of this business. We are committed to turning around the performance of this segment and
are carefully reviewing all of our alternatives for this business.
Results of Operations
Our revenue reflects the sale of our products and services, net of allowances for returns and
other adjustments. Our revenue is generated from the sale of services and products, primarily in
the U.S. Nine customers collectively accounted for approximately 50% of our consolidated billings
during 2007, while three customers collectively accounted for approximately 40% of our consolidated
billings during 2006.
The cost of goods sold for our Energy Services business consists primarily of materials, our
internal labor and the cost of subcontracted labor. The costs of goods sold for our Energy
Technology business include charges from the contract manufacturer that manufactures the eMAC line
of controllers, charges from outside contractors used to install our product in our customers’
facilities, depreciation, freight and charges for potential future warranty claims.
Sales and gross profits depend in part on the volume and mix of products and services sold
during any given period. A portion of our expenses, such as the cost of certain supervisory
personnel, are
relatively fixed. Accordingly, an increase in the volume of sales will generally result in an
increase to our margins since these fixed expenses do not increase proportionately with sales.
20
Selling, general and administrative (“SG&A”) expenses include the following components:
| |
• |
|
direct labor and commission costs related to our employee sales force; |
| |
| |
• |
|
expenses related to our non-manufacturing management, supervisory and staff
salaries and employee benefits, including the costs of share based compensation; |
| |
| |
• |
|
commission costs related to our independent sales representatives and our
distributors; |
| |
| |
• |
|
costs related to insurance, travel and entertainment and office supplies and the
cost of non-manufacturing 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 the existing
businesses of the Company, as well as to provide the infrastructure for future
growth. |
Interest expense includes the costs and expenses associated with the mortgage on our
headquarters building, the subordinated convertible term notes (including amortization of the
related debt discount and issuance costs) and various vehicle loans, all as reflected on our
current and prior financial statements. Also included in interest expense for 2006 are the costs
and expenses associated with working capital indebtedness and two convertible term loans (including
amortization of the related debt discount and deferred financing costs). The working capital line
and convertible term loans were retired in full in June 2006.
Twelve-Month Period Ended December 31, 2007 Compared With the Twelve-Month Period Ended December 31, 2006
Revenue. Our revenue increased $11,337,506, or 139%, to $19,481,130 during the year ended
December 31, 2007, as compared to $8,143,624 for the year ended December 31, 2006. Of our 2007
revenue approximately 81% was derived from our Energy Services business and 19% was derived from
our Energy Technology business. During 2006 Energy Services and Energy Technology generated 41%
and 59% of our total revenue, respectively.
Revenue for our Energy Services segment was $16,182,172 during 2007, an increase of
$12,880,158, or 390% over the $3,302,014 recognized in 2006. Contributing to the increase in
revenue for the Energy Services segment was inclusion of Parke and Kapadia for a full year in 2007
(both were acquired during 2006), and the acquisitions of Texas Energy and Preferred Lighting
during 2007. Revenue also benefited from an increase in the number of salespeople working in the
segment and increased experience of our salespeople. Revenue for the Energy Services segment is
expected to continue to grow as the salespeople added and the acquisitions made in 2007 contribute
for a full year.
Revenue for the Energy Technology segment was $3,609,816 in 2007, a decline of $1,231,794 or
25%, from the $4,841,610 recorded in 2006. The decline in revenue was the result of our decision
in December 2006 to discontinue the active marketing of the EnergySaver. Our eMAC related revenue
was approximately flat in 2007 when compared to 2006. While the segment benefited from utility
energy rebates for certain eMAC projects, eMAC sales declined approximately 25% due to limited
availability of product resulting from delays in the development of a new version of the eMAC. We
hope that the new version of the eMAC will be ready for distribution in the second half of 2008, in
the meantime availability of the product will continue to be limited. As a result, we expect the
2008 revenue for the Energy Technology segment to be lower than the level achieved in 2007.
21
During 2007 we recorded intercompany sales of $319,150 which represented sales from our Energy
Technology segment to the Energy Services segment which resold the product to its customer.
The seasonality of revenue during 2008 is expected to be similar to that of 2007, with
significantly higher revenue realized in the third and fourth quarters of the year compared to the
first and second quarters.
Gross Profit. Our gross profit for 2007 was $4,398,730, an increase of $3,186,400, or 263%,
from the gross profit of $1,212,330 earned in 2006. Our gross profit margin was 22.6% in 2007,
compared to 14.9% in 2006. The improvement in our gross profit was the result of increased revenue
in our Energy Services segment. We believe that certain fixed costs contained in our cost of sales
will not increase at the same rate as future revenue, which will contribute to increases in our
gross margins in future periods. These same fixed costs will also cause fluctuations in our
margins on a quarterly basis due to the seasonality of our sales.
SG&A Expense. Our selling, general and administrative expense increased $906,681, or
approximately 7%, to $13,072,381 in 2007 when compared to $12,165,700 in 2006. All of this
increase was attributable to the inclusion of a full year of expenses for Parke and Kapadia (both
of which were both acquired in 2006) and the additions of Texas Energy and Preferred Lighting
during 2007. Our SG&A expense did not grow as fast as our revenue during 2007. As a result, SG&A
expense as a percentage of our total revenue declined to 67% in 2007 from 149% in 2006. SG&A
expense is expected to increase moderately in 2008 due to the inclusion of a full year of expense
for our 2007 acquisitions and new hires, but is expected to continue to decline as a percentage of
our total consolidated revenue.
Amortization of Intangibles. Expense associated with the amortization of intangible assets
increased $801,872, or 66%, to $2,011,878 in 2007, from $1,210,006 in 2006. This increase was
primarily due to the increase in intangible assets added with the acquisitions of Texas Energy and
Preferred Lighting during 2007. Absent any further acquisitions, amortization expense will decline
to approximately $858,000 in 2008.
Impairment Loss. During the fourth quarter of 2007, we completed an impairment analysis of
our subsidiary, Maximum Performance Group Inc., and determined that its carrying value exceeded its
fair value to the degree that the goodwill associated with this business was completely impaired.
As a result we recorded an impairment charge of $4,181,969 in December 2007 to reduce the carrying
value of the asset to zero.. The decline in the fair value at Maximum Performance Group was
largely due to delays in an engineering project to upgrade the eMAC. Delays in completing this
project adversely impacted the sales of the product during 2007, due to limited availability of
components, and set back our marketing plans for the product.
22
Other Non-Operating Income (Expense). Other expense declined $2,393,958 during 2007 to
$685,230, compared to $3,079,188 for 2006. Interest expense declined $2,321,277 to $952,093 in
2007 from $3,273,370 in 2006. The components of interest expense for the years ended December 31,
2007 and 2006 are as follows:
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|
|
|
|
|
|
|
|
| Year ended December 31 |
|
2007 |
|
2006 |
| |
Line of credit |
|
$ |
— |
|
|
$ |
50,344 |
|
Note payable |
|
|
16,547 |
|
|
|
16,563 |
|
Mortgage |
|
|
43,931 |
|
|
|
46,495 |
|
Subordinated convertible notes |
|
|
293,683 |
|
|
|
— |
|
Convertible term loans |
|
|
— |
|
|
|
249,065 |
|
Other |
|
|
5,476 |
|
|
|
1,772 |
|
Amortization of deferred issuance
costs and debt discount |
|
|
592,456 |
|
|
|
1,175,970 |
|
Prepayment penalty |
|
|
— |
|
|
|
516,071 |
|
Value of adjustment in conversion
Price |
|
|
— |
|
|
|
950,865 |
|
Termination of post re-payment
interest obligation |
|
|
— |
|
|
|
266,225 |
|
| |
Total Interest Expense |
|
$ |
952,093 |
|
|
$ |
3,273,370 |
|
| |
Total contractual interest expense (the interest on outstanding loan balances) declined $4,602
in 2007 to $359,637, as compared to $364,239 in 2006. In June 2006 we repaid two convertible terms
loans and our convertible revolving note was converted to common stock, which contributed to the
decline in contractual interest expense. This was largely offset by new $5 million subordinated
convertible term notes which we issued in June 2007.
Upon the repayment of the convertible term loans in June 2006, we were required to pay a
prepayment penalty of $516,071 and to recognize as interest expense the remaining unamortized
balance of the capitalized issuance costs and the debt discount totaling $978,525. During June
2006 we also incurred a charge of $266,225 related to the termination of our obligation to pay the
term loan lender a portion of certain cash flows for a five-year period. Upon the closing of a
PIPE transaction in June 2006 and the repayment of the term loans, the holder of a convertible
revolving note elected to convert the outstanding balance on the note into shares of our common
stock. The revolving note contained anti-dilution provisions which automatically adjusted the
conversion price of the note to $7.00 per share, which is the price at which we issued shares as
part of the June 2006 PIPE transaction. The lender would have received 5,557 shares of common
stock upon conversion of the revolving note utilizing the conversion price prior to this
adjustment, but as a result of the adjustment it received 134,779 shares. The market value of the
126,222 additional shares it received as a result of the adjustment was recorded as interest
expense in the amount of $950,865.
23
Twelve-Month Period Ended December 31, 2006 Compared With the Twelve-Month Period Ended December 31, 2005
Revenue. Our revenue increased $4,450,195, or 120% to $8,143,624 during the year ended
December 31, 2006, as compared to $3,693,429 for the year ended December 31, 2005. Revenue
generated by our Energy Services segment was responsible for $3,302,014 or 74% of the increase in
our revenue for 2006. The Energy Services segment was created in 2006 through the acquisitions of
Parke and Kapadia. During 2006 59% of our revenue was generated by the Energy Technology segment
and 41% was generated by our Energy Services segment, while in 2005 100% of our revenue came from
the Energy Technology segment.
The balance of the increase in revenue was generated by our Energy Technology segment due to
increased eMAC sales, which was partially offset by lower EnergySaver sales. The increase in the
eMAC revenue was due to the inclusion of a full year of results for MPG (MPG was acquired in May
2005) and higher unit sales.
Gross Profit. Our gross profit increased $1,210,755 to $1,212,330 for the year ended December
31, 2006, as compared to $1,575 for the year ended December 31, 2005, while our gross profit margin
increased to 14.9% for 2006 as compared to 0.04% earned in 2005. Included in the 2006 cost of
sales was a $568,577 one time charge to write-off most of our EnergySaver inventory due to our
decision to terminate the active marketing of this product. Adjusting for this charge, our gross
profit for 2006 was $1,780,907, or 21.9% of sales. The increase in gross profit from 2005 was
primarily attributable to increased sales of the eMAC and the acquisition of Parke on June 29,
2006. The 2006 cost of goods sold includes $296,953 of share based compensation expense resulting
from our adoption of SFAS 123(R) on January 1, 2006. No share based compensation was included in
the 2005 cost of goods sold.
SG&A Expense. Our selling, general and administrative expense increased $6,802,197 or 127% to
$12,165,700 for 2006, as compared to $5,363,503 for 2005. Approximately 67% or $4,532,001 of the
increase in the 2006 SG&A was related to our adoption of SFAS 123(R) on January 1, 2006. We did
not record stock compensation expense in 2005. Other significant items contributing to the
increase in SG&A expense was $531,000 in penalties resulting from our inability to have the Laurus
registration and the June PIPE registration declared effective within the timeframes required under
the related documents, approximately $660,000 of SG&A expense resulting from the inclusion of Parke
and Kapadia for portions of 2006 and approximately $680,000 from the inclusion of MPG for the full
year.
Amortization of Intangibles. Intangible Amortization expense increased $738,241 to $1,210,006
in 2006 from $471,765 in 2005. The increase in amortization expense was due to the acquisitions of
Parke and Kapadia in 2006.
Impairment Loss. During the quarter ended September 30, 2006, we completed a preliminary
impairment analysis and determined that the carrying value of our VNPP (“Virtual Negawatt Power
Plan”) asset exceeded its fair value by $760,488. In order to reduce the carrying value to the
fair value we recorded a non-cash impairment charge of $760,488 in September 2006. During the
fourth quarter of 2006 we updated our analysis based on new information and revised assumptions and
determined that the asset was completely impaired. As a result we reduced the carrying value of
the asset to $0 and recorded an additional impairment charge of $423,037 in December 2006. During
2005 recorded an impairment loss of $242,830 related to the reduction in carrying value of goodwill
associated with Great Lakes Controlled Energy due to our decision to sell the company.
24
Other Non-Operating Income (Expense). Other Expense increased $2,534,935 during 2006 to
$3,079,188, compared to $544,253. Interest expense increased $2,670,380 to $3,273,370 during 2006
from $602,990 during 2005. The components of interest expense for the years ended December 31,
2006 and 2005 are as follows:
| |
|
|
|
|
|
|
|
|
| Twelve months ended December 31, |
|
2006 |
|
2005 |
| |
Contractual interest |
|
$ |
364,239 |
|
|
$ |
277,577 |
|
Amortization of deferred issuance costs
and debt discount |
|
|
1,175,970 |
|
|
|
165,413 |
|
Value of warrant |
|
|
— |
|
|
|
160,000 |
|
Value of adjustment in conversion price |
|
|
950,865 |
|
|
|
— |
|
Prepayment penalties |
|
|
516,071 |
|
|
|
— |
|
Termination of post re-payment interest
Obligation |
|
|
266,225 |
|
|
|
— |
|
| |
Total Interest Expense |
|
$ |
3,273,370 |
|
|
$ |
602,990 |
|
| |
Contractual interest expense (the interest on outstanding loan balances) increased $86,662 or
31% to $364,239 during 2006 from $277,577 in 2005. The increase in contractual interest was the
result of higher average outstanding balances, due in part to the issuance of the $5 million term
loan in November 2005 (which was repaid in June 2006), and higher average interest rates.
Amortization of the deferred issuance costs and the debt discount related to the Laurus revolver
and convertible term loans, which is included in interest expense, increased $1,010,557 to
$1,175,970 during 2006 from $165,413 during 2005. With the early repayment of all of the Laurus
loans in June 2006, we were required to recognize as interest expense the remaining unamortized
balances of the capitalized issuance costs and the debt discount of $1,009,277. The balance of the
increase in amortization expense was related to the amortization of deferred issuance costs
associated with the $5 million term loan issued in November 2005. 2006 interest expense also
includes prepayment penalties of $516,071 for the early repayment of the Laurus term loans and
$266,225 for the cost of terminating the obligation to pay Laurus a portion of the cash flows
generated by certain VNPP projects for the next five years. Upon the closing of the PIPE
Transaction and repayment of the term loans in June 2006, Laurus elected to convert the outstanding
balance on the revolving note into shares of our common stock. The revolving note contained
anti-dilution provisions which automatically adjusted the conversion price of the note to $7.00 per
share, which is the price at which we issued shares as part of the June 2006 PIPE transaction. The
lender would have received 5,557 shares of common stock upon conversion of the revolving note
utilizing the conversion price prior to this adjustment, but as a result of the adjustment it
received 134,779 shares. The market value of the 126,222 additional shares it received as a result
of the adjustment was recorded as interest expense in the amount of $950,865.
During April 2005 we issued a warrant to purchase 57,143 shares of our common stock to Laurus
in exchange for its consent to a private equity issuance and the acquisition of MPG, as well as
waiving its right to adjust the conversion price on its convertible term note and convertible
revolving note. The warrant was valued at $160,000 using a modified Black-Scholes option pricing
model and charged to interest expense during the period.
25
Preferred Stock Dividends. Dividend expense recognized during the years ended December 31,
2005 and 2006 is comprised of the following:
| |
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
2006 |
|
2005 |
| |
Accrual of Series E Convertible Preferred
dividend |
|
$ |
698,000 |
|
|
$ |
1,366,900 |
|
Deemed dividend associated with change in
conversion price of the Series E Convertible
Preferred Stock |
|
|
23,085,467 |
|
|
|
— |
|
Deemed dividend associated with change in the
exercise price of warrants to purchase shares
of common stock |
|
|
564,258 |
|
|
|
484,445 |
|
| |
Total |
|
$ |
24,347,725 |
|
|
$ |
1,851,345 |
|
| |
Dividend expense increased $22,496,380 to $24,347,725 in 2006, from $1,851,345 in 2005.
Dividends accrued on the outstanding Series E Convertible Preferred declined $668,900 to $698,000
in 2006 from $1,366,900 in 2005, due to the conversion of all of the outstanding Series E
Convertible Preferred to common stock on June 29, 2006.
We have issued certain securities in the past that contain anti-dilution provisions (commonly
referred to as ratchets) which automatically adjust the exercise or conversion price of the
security if we issue any new equity security, or securities convertible into equity, at a price
below the exercise or conversion price of the security with the anti-dilution provision. Primarily
as a result of our declining stock price, we had three instances during 2006 where we had to adjust
the exercise price or the conversion price on one or more securities, each of which resulted in us
recording a charge for a non-cash deemed dividend. In January 2006 we issued stock options at the
then current market price of $65.10 per share, which was less than the $96.60 exercise price on a
warrant held by one of our former Series E Preferred stock holders. Adjusting the exercise price
of this warrant resulted in a non-cash deemed dividend of $266,390.
On June 29, 2006, we issued shares in the PIPE Transaction at $7.00 per share (as discussed in
Note 20 to our financial statements). The issuance price of the securities issued in this
transaction was less than the conversion price on our Series E Convertible Preferred stock, which
contained anti-dilution provisions. Prior to the anti-dilution adjustment the holders of the
Series E Convertible Preferred stock would have been entitled to 224,861 shares of common stock on
conversion, whereas after the adjustment they were entitled to 3,092,621 shares of common stock on
conversion. The market value of the additional 2,867,760 shares receivable upon conversion was
recorded as a non-cash deemed dividend in the amount of $23,085,467 on June 29, 2006.
In addition, a number of the outstanding common stock warrants, most of which were held by
former holders of our Series E Convertible Preferred Stock, also contained similar anti-dilution
provisions. Prior to the June 2006 PIPE Transaction the exercise price on these warrants ranged
from $94.50 per share to $105.00 per share. The issuance of common stock in the June 2006 PIPE
Transaction caused the exercise price on these warrants to automatically be reduced to $7.00 per
share. We compared the value of the warrants with the old exercise price to the value of the
warrants with the reduced exercise price, using a modified Black-Scholes option pricing model and
determined that the reduction in the
26
exercise price had increased the value of the warrants by $297,868. We recognized the expense
as a deemed dividend by offsetting charges and credits to additional paid-in capital, without any
effect on total stockholders equity.
On April 28, 2005, in exchange for $5,625,000 in gross proceeds, we issued a package of
securities to five institutional investors. The package of securities included 59,524 shares of
our common stock and 42-month warrants to purchase 29,762 additional shares of common stock at
$110.25 per share. The issuance of these shares caused the exercise price of certain warrants with
anti-dilution provisions to automatically adjust to $94.50 per share. We compared the value of the
warrants with the old exercise price to the value of the warrants with the reduced exercise price,
through the use of a modified Black-Scholes option pricing model, and determined that the reduction
in the exercise price had increased the value of the warrants by $484,445. Since these warrants
were issued as part of a securities offering the increase in value is considered to be a deemed
dividend to the security holders. We recorded the deemed dividend by offsetting charges and
credits to additional paid-in capital, without any effect on total stockholders equity.
Liquidity and Capital Resources
During the twelve-month period ended December 31, 2007 we incurred a net loss of $15.6 million
and used $6.8 million of cash for operating activities. We have taken steps to improve our current
liquidity and provide the growth capital necessary to fund our plan for 2008 and for future growth.
As of December 31, 2007, we had cash and cash equivalents of $4,780,701, compared to cash and
cash equivalents of $4,663,618 on December 31, 2006. Our contractual obligations as of December
31, 2007 totaled $9,186,480, and include: $6,909,932 of debt
(includes expected interest payments of $1,077,993); $870,541 in office leases; and
$2,634,000 under various employment agreements.
Our principal cash requirements are for operating expenses, including employee costs, the
costs related to research and development, the cost of outside services including those providing
contract manufacturing, accounting, legal, engineering and electrical contracting services, and the
funding of inventory and accounts receivable, and capital expenditures. We have financed our
operations since inception primarily through the private placement of our common and preferred
stock, as well as through various forms of secured debt.
The following table summarizes, for the periods indicated, selected items in our consolidated
statement of cash flows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31 |
|
2007 |
|
2006 |
|
2005 |
| |
Net cash used in operating activities |
|
$ |
(6,774,805 |
) |
|
$ |
(6,248,085 |
) |
|
$ |
(6,956,642 |
) |
Net cash used in investing activities |
|
|
(1,217,834 |
) |
|
|
(4,264,930 |
) |
|
|
(2,181,846 |
) |
Net cash provided by financing activities |
|
|
8,109,722 |
|
|
|
10,947,483 |
|
|
|
11,577,830 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents |
|
|
117,083 |
|
|
|
434,468 |
|
|
|
2,439,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, at beginning of period |
|
|
4,663,618 |
|
|
|
4,229,150 |
|
|
|
1,789,808 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, at end of period |
|
$ |
4,780,701 |
|
|
$ |
4,663,618 |
|
|
$ |
4,229,150 |
|
| |
27
2007 Compared to 2006
Net cash increased $117,083 and $434,468 during the years ended December 31, 2007 and 2006,
respectively.
Operating Activities
Operating activities consumed cash of $6,774,805 during the year ended December 31, 2007 as
compared to consuming cash of $6,248,085 during the year ended December 31, 2006.
Whether cash is consumed or generated by operating activities is a function of the
profitability of our operations and changes in working capital. To get a better understanding of
cash sources and uses, we like to split the cash used or provided by operating activities into two
pieces: the cash consumed (or generated) by operating activities before changes in working capital;
and the cash consumed (or generated) from changes in working capital.
The cash consumed by operating activities before changes in working capital was $3,846,148
during 2007, a $1,777,930 or 32% reduction from the $5,624,078 consumed during 2006. This
reduction was the result of increased sales and improvements in our gross profit during 2007. We
believe that we will see additional reductions in the cash consumed by operating activities before
changes in working capital if our revenue and profitability continue to improve as we believe they
will, to the point that our operations will begin to generate cash before changes in working
capital in future periods.
Changes in working capital consumed $2,928,657 during 2007 as compared to consuming $624,007
during 2006. The increase in working capital was the result of the impact of higher sales during
2007, particularly during the fourth quarter of 2007. We expect our working capital requirements
to continue to increase with increases in our sales in future periods, though we hope improvements
in our receivables turnover and reductions in our inventory will keep the growth in working capital
to a rate that is lower than the growth of our future sales.
Investing Activities
Investing activities consumed $1,217,834 during 2007 as compared to consuming $4,264,930
during 2006. During 2007 we acquired the assets and assumed certain liabilities of Texas Energy
Products and Preferred Lighting in two separate transactions. The cost of the acquisitions,
including transaction costs, net of cash acquired was $703,539. During 2006 we acquired Parke
P.A.N.D.A. Corporation and Kapadia Consulting for $4,098,377, including cash consideration and
transaction costs, net of the cash acquired. Also during 2006 we sold all of the stock of Great
Lakes Controlled Energy Corporation to the former owners of that company. Great Lakes’ cash
balances of $83,586 were transferred with the sale of the company. Fixed asset purchases increased
$431,328 to $514,295 during 2007 from $82,967 during 2006. The increase was primarily related to
purchases of additional delivery vehicles required to support our increased level of business
activity and acquisition of a new accounting system and related hardware.
Financing Activities
Financing activities generated cash of $8,109,722 during 2007 as compared to generating
$10,947,483 during 2006. In April 2007 we received the proceeds from a stockholder rights offering
which raised $2,999,632 and incurred issuance costs of $248,293. During May and June of 2007 we
raised $5,000,000 through the issuance of subordinated convertible term notes to a group of eight
investors, incurring issuance costs of $8,572 in the process. We also borrowed $171,440 during
2007 to
28
fund the purchase of new delivery vehicles, made scheduled payments of $56,592 on our mortgage and
vehicle loans and received $252,107 from the exercise of options and warrants.
2006 Compared to 2005
Net cash increased $434,468 and $2,439,342 during the years ended December 31, 2006 and 2005,
respectively.
Operating Activities
The net cash consumed in operating activities declined $708,557 or 10% to $6,248,085 in 2006
compared to $6,956,642 in 2005. The cash consumed before changes in working capital increased
$209,099 or 4% to $5,624,078 in 2006 compared to $5,414,979 in 2005. The increase in cash consumed
was primarily the result of our net loss.
The cash consumed by working capital declined 60% or $917,656 to $624,007 in 2006 from
$1,541,663 consumed in 2005. Contributing to this reduction were improvements in accounts
receivable collections, reductions in inventories and the use of the advance to suppliers.
Investing Activities
Cash consumed in investing activities increased $2,083,084 to $4,264,930 in 2006 from
$2,181,846 in 2005. During 2006 we used cash of $4,098,377 to fund the acquisitions of Parke and
Kapadia. As part of the acquisition of Parke we paid the selling stockholder $2.72 million in cash
and incurred expenses related to the transaction of $145,605, which was partially offset by cash
balances of $1,710 acquired as part of the transaction. Cash used to fund the Kapadia acquisition
included $1,250,000 for the cash portion of the purchase consideration and $31,811 for expenses,
partially offset by $47,329 of cash acquired in the transaction. We sold all of the stock of Great
Lakes Controlled Energy Corporation to the former owners of that company in March 2006. Great
Lakes’ cash balances of $83,586 were transferred with the sale of the company. We also invested
$82,967 in property, plant and equipment during the year, most of which was associated with
purchases of computer equipment for new employees and service vehicles for use in our Energy
Services segment
During 2005, we used $1,632,972 for the acquisition of Maximum Performance Group, including
$1,632,078 paid to the selling shareholders, and $137,386 of transaction costs less cash acquired
of $136,492. We also invested $478,249 in VNPP assets and purchased furniture, equipment and
vehicles totaling $70,625.
Financing Activities
During 2006 we generated net cash of $10,947,483 through financing activities as compared to
generating $11,577,830 of net cash during 2005. In June 2006 we raised $17,875,000 in gross
proceeds through the sale of our common stock, while incurring $115,107 in costs related to the
issuance. We used $5,038,030 million of the proceeds to pre-pay the principal on two Laurus
convertible term loans and Laurus converted $943,455 outstanding on the revolving note to common
stock. Also during 2006 we used $1,056,545 to pay down our revolver, $317,835 for scheduled
principal payments and $400,000 to pay off the balance on a revolving line credit assumed as part
of the acquisition of Parke.
29
LIQUIDITY
Our primary sources of liquidity are our available cash reserves of $4,780,701 and a $3
million revolving credit note which was arranged in March 2008. This new revolving credit note
matures on March 31, 2009 and bears interest at 17% per annum, with 12% payable in cash and the
remaining 5% to be capitalized and added to the principal balance on the note. The note also
requires the payment of an unused funds fee of 4% per annum on the unused portion of the note. We
may borrow any amount, at any time during the term of the note as long as it is not in default at
the time of the advance.
During fiscal 2007, operating activities consumed cash of $6.8 million.
Our ability to continue to expand the sales of our products and services will require the
continued commitment of significant funds. The actual timing and amount of our future funding
requirements will depend on many factors, including the amount, timing and profitability of future
revenues, working capital requirements, the level and amount of product marketing and sales efforts
and the magnitude of research and development, among other things.
We have raised a significant amount of capital since our formation through the issuance of
shares of our common and preferred stock and notes, which has allowed us acquire companies and to
continue to execute our business plan. Most of these funds have been consumed by operating
activities, either to fund our losses or for working capital requirements. In an attempt to move
the Company to a position where it can start to generate positive cash flow our management has set
the following key strategies for cash flow improvement in 2008:
| |
• |
|
Focus on increasing the sales and profitability of our products and services.
During the past two years we have increased our revenue by $15,787,701, or 427% and we saw
our gross profit increase from $1,575 to $4,398,720. This improvement in our gross profit
was largely offset by $7,708,878 increase in our SG&A
($3,982,147 excluding non-cash share based
compensation) over the period, the 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 doubling of revenue in 2008, without the need to increase our headcount
significantly from current levels. If we can achieve this, 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 hope that the
new version of the eMAC will be available during the second half of 2008. We have secured
a supply of discontinued parts to allow us to continue to service and sell to existing
customers on a limited basis until the new version is available. 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. Based on marketing studies commissioned in 2007,
and our experience marketing the product since forming Lime Energy, we believe there is a
good market for this segment’s products and we have an established base of customers to
build upon. We are committed to turning around the performance of this segment and are
carefully reviewing all of our alternatives for this business. |
| |
| |
• |
|
Aggressively manage our costs in order to conserve cash. The prudent use of the
capital resources available to us remains one of our top priorities. We are constantly
reviewing our operations looking for more efficient ways to achieve our objectives. |
30
We believe that if we are successful in achieving these priorities we should have sufficient
liquidity to allow us to operate until our operations turn cash flow positive. If we are not able
to achieve some or all of these priorities, we may begin to experience a liquidity shortage in the
latter half of 2008 which could force us to raise additional capital, scale back our growth plans,
or in the worst case cease operations.
If in the future we raise additional capital (which may require stockholder approval), our
existing stockholders, to the extent they do not participate in the capital raise, will likely
experience dilution of their present equity ownership position and voting rights, depending upon
the number of shares issued and the terms and conditions of the issuance. If we raise capital
through the issuance of additional equity, the new equity securities issued may have rights,
preferences or privileges senior to those of our common stock.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
Our obligations to make future payments under contracts as of December 31, 2007 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due by period |
|
| |
|
|
|
|
|
Less than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
More than |
|
| Contractual Obligations |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
Long-term debt (1)(2)(3) |
|
$ |
6,909,932 |
|
|
$ |
590,860 |
|
|
$ |
6,250,639 |
|
|
$ |
67,884 |
|
|
$ |
549 |
|
Operating leases |
|
|
870,541 |
|
|
|
337,796 |
|
|
|
447,466 |
|
|
|
85,279 |
|
|
|
— |
|
Employment agreements |
|
|
2,634,000 |
|
|
|
1,144,000 |
|
|
|
1,490,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,186,480 |
|
|
$ |
2,072,656 |
|
|
$ |
8,188,105 |
|
|
$ |
153,163 |
|
|
$ |
549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Excludes floating rate interest on the long-term debt. Interest payments required during
2008, based on current interest rates are projected to be $32,000. |
| |
| (2) |
|
Includes $602,740 of interest on subordinated notes payable in shares of common stock |
| |
| (3) |
|
$5,000,000 in subordinated convertible notes will automatically convert to common stock if
the closing price on our common stock is $10.50 or greater for 20 days in a 30 day period at
any time after May 31, 2008. |
Recent Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a return. FIN 48 requires that companies recognize in their financial statements the impact of a
tax position if that position more likely than not will be sustained on an audit, based on the
technical merits of the position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and transition provisions. We
adopted FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, no adjustment to
retained earnings was made.
Our subsidiaries file income tax returns in various tax jurisdictions, including the United
States and certain U.S. states. We had substantially concluded all US Federal and State income tax
matters for years up to and including 2001.
We recorded a valuation allowance equaling the deferred tax asset due to the uncertainty of
our realization in the future. At December 31, 2007, we had US federal net operating loss
carryforwards available to offset future taxable income of approximately $75 million, which expire
in the years 2018 through 2026. Under section 382 of the Internal Revenue Code of 1986, as amended,
the utilization of US net operating loss carryforwards may be limited under the change in stock
ownership rules of the IRC. As a result of ownership changes as defined by Section 382, which have
occurred at various points in our history, we believe utilization of our net operating loss
carryforwards will likely be significantly limited under certain circumstances. We are currently
in the process of calculating the potential Section 382 limitations.
Our policy is to recognize interest and penalties related to income tax matters in interest
and income tax expense respectively. There were no interest and penalties related to income taxes
recorded at January 1, 2007, the date of adoption of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards, Fair Value
Measurements (“Statement No. 157”). Statement No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands disclosures about
fair value measurements. The statement does not require new fair value measurements, but is applied
to the extent that other accounting pronouncements require or permit fair value measurements. The
statement emphasizes that fair value is a market-based measurement that should be determined based
on the assumptions that market participants would use in pricing an asset or liability. Companies
will be required to disclose the extent to which fair value is used to measure assets and
liabilities, the inputs used to develop the measurements, and the effect of certain of the
measurements on earnings (or changes in net assets) for the period. Certain requirements of
Statement No. 157 are required for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date for other requirements of Statement No. 157
has been deferred for one year by the FASB. The Company does not expect adoption of the sections of
Statement No. 157 which are effective for fiscal years beginning after
31
November 15, 2007 to have a material effect on the Company’s consolidated financial statements. We
are currently evaluating the impact of the delayed Sections of Statement No. 157 on its
consolidated financial statements, but has not yet determined the impact of its adoption.
In February 2007, the FASB issued Statement of Financial Accounting Standards The Fair Value
Option for Financial Assets and Liabilities (“Statement No. 159”). Statement No. 159 will become
effective as of the beginning of the first fiscal year beginning after November 15, 2007. Statement
No. 159 provides companies with an option to report selected financial assets and liabilities at
fair value that are not currently required to be measured at fair value. Accordingly, companies
would then be required to report unrealized gains and losses on these items in earnings at each
subsequent reporting date. The objective is to improve financial reporting by providing companies
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently. Statement No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The adoption of Statement No. 159 in the
first quarter of 2008 is not expected to have a material impact on our consolidated financial
statements as we do not expect to elect the fair value option for any financial assets or
liabilities.
In December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations
(“Statement No. 141R”), effective prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Statement No. 141R establishes principles and requirements on how an acquirer
recognizes and measures in its financial statements identifiable assets acquired, liabilities
assumed, noncontrolling interests in the acquiree, goodwill or gain from a bargain purchase and
accounting for transaction costs. Additionally, Statement No. 141R determines what information must
be disclosed to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. We will adopt Statement No. 141R on January 1, 2009.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. (“Statement No. 160”) Statement No. 160 requires
entities to report noncontrolling (minority) interests as a component of shareholders’ equity on
the balance sheet; include all earnings of a consolidated subsidiary in consolidated results of
operations; and treat all transactions between a parent and its noncontrolling interest as equity
transactions provided the parent does not lose control. Statement No. 160 is effective for fiscal
years beginning on or after December 15, 2008, must be adopted concurrently with SFAS 141R, and
adoption is prospective only; however, presentation and disclosure requirements described above
must be applied retrospectively. We are currently evaluating the impact that Statement No. 160 will
have on our financial statements and disclosures.
|
|
|
| Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
The only significant exposure we have to market risk is the risk of changes in market interest
rates. The interest rate on our mortgage is variable and changes with changes in the prime rate.
The interest rate on the mortgage is equal to the prime rate plus 1/2%. As of December 31, 2007, the
prime rate was 7.25%. If the prime rate were to increase 1 percentage point, the aggregate annual
interest cost on the mortgage would increase by approximately $4,900.
32
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements:
| |
|
|
|
|
|
|
F-1 |
|
Report of Independent Registered Public Accounting Firm |
| |
|
|
F-2 - F-3 |
|
Consolidated Balance Sheets as of December 31, 2007 and December 31, 2006 |
| |
|
|
F-4 |
|
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 |
| |
|
|
F-5 |
|
Statements of Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005 |
| |
|
|
F-6 - F-7 |
|
Statements of Consolidated Cash Flows for the years ended December 31, 2007, 2006 and 2005 |
| |
|
|
F-8 - F-52 |
|
Notes to Consolidated Financial Statements |
| |
|
|
F-53 |
|
Schedule II, Valuation and Qualifying Accounts |
|
|
|
| Item 9. |
|
Change in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
33
Item 9A(T). Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management is required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the
supervision and with the participation of the Company’s management, including the Company’s Chief
Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures as of the end of the period covered
by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. Internal control over financial
reporting includes policies and procedures for maintaining records that in reasonable detail
accurately and fairly reflect our transactions; providing reasonable assurance that transactions
are recorded as necessary for the preparation of our financial statements; providing reasonable
assurance that receipts and expenditures of the Company are made in accordance with management
authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition
of Company assets that could have a material effect on our financial statements would be prevented
or detected on a timely basis. Because of inherent limitations, internal control over financial
reporting is not intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Company’s internal control over financial reporting was effective as of December
31, 2007.
This annual report does not include an attestation report of the company’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter
ended December 31, 2007 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
34
Item 9B. Other Information.
None.
PART III
Certain information required to be included in Part III is omitted from this report because we
intend to file a definitive Proxy Statement pursuant to Regulation 14A (the “Proxy Statement”) no
later than 120 days after the end of the fiscal year covered by this report, and certain
information to be included therein is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this item regarding our directors and executive officers and
compliance by our directors, executive officers and certain beneficial owners of our common stock
with Section 16(a) of the Exchange Act is incorporated by reference to all information under the
captions entitled “Election of Directors,” “Executive Officers,” and “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement. Information required by this item
regarding our codes of ethics is incorporated by reference to all information under the caption
“Codes of Conduct and Business Ethics” in the Proxy Statement. Information required by this item
regarding our separately designated standing Audit Committee and our Audit Committee Financial
Experts is incorporated by reference to all information under the caption “Committees of the Board
of Directors—Audit Committee” in the Proxy Statement. We had no material changes to procedures by
which security holders may recommend nominees to our Board of Directors.
Item 11. Executive Compensation.
Information required by this item regarding compensation of our named executive officers is
incorporated by reference to all information under the caption “Executive Compensation” in the
Proxy Statement. Information required by this item regarding compensation of our directors is
incorporated by reference to all information under the caption “Compensation of Directors” in the
Proxy Statement. Information required by this item regarding our Compensation Committee interlocks
and insider participation is incorporated by reference to all information under the caption
“Compensation Committee Interlocks and Insider Participation.” Information required by this item
regarding the report of our Compensation Committee is incorporated by reference to all information
under the caption “Compensation Committee Report.”
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item regarding security ownership of certain beneficial owners,
directors and executive officers is incorporated by reference to all information under the caption
“Security Ownership of Principal Stockholders and Management—Beneficial Owners of Greater than 5%
of Each Class of Our Common Stock” and “—Directors and Executive Officers” in the Proxy Statement.
Information required by this item regarding our equity compensation plans, including both
stockholder approved plans and plans not approved by stockholders, is incorporated by reference to
all information under the caption “Stock Options and Incentive Compensation” in the Proxy
Statement.
35
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this item regarding certain relationships and related transactions is
incorporated by reference to all information under the caption “Transactions with Related Persons”
in the Proxy Statement. Information required by this item regarding the review and approval of
related-party transactions is incorporated by reference to all information under the caption
“Review, Approval or Ratification of Transactions with Related Persons,” Information required by
this item regarding the director independence is incorporated by reference to all information under
the caption “Independent Directors,”
Item 14. Principal Accountant Fees and Services.
Information required by this item regarding principal auditor fees and services is
incorporated by reference to all information under the caption “Independent Auditors’ Fees” in the
Proxy Statement. Information required by this item regarding our Audit Committee’s pre-approval
policies and procedures and the status of our auditors’ employees is incorporated by reference to
all information under the captions “Procedures for Audit Committee Pre-Approval of Audit and
Permissible Non-Audit Services of Independent Auditor,”
PART IV
Item 15. Exhibits and Financial Statement Schedules.
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(a)(1)
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Financial Statements |
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The information required by this item is included in Item 8 of Part II of this report. |
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(a)(2)
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Financial Statement Schedule |
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The information required by this item is included in Item 8 of Part II of this report. |
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(a)(3)
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Exhibits |
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See Item 15(b) below. |
(b) Exhibits
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| Exhibit |
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| Number |
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Description of Exhibit |
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2.1 |
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Agreement and Plan of Merger, dated as of April 29,
2005, by and among the Company, MPG Acquisition
Corporation, and Maximum Performance Group, Inc.
(Incorporated herein by reference to Exhibit 10.2 of
the Company’s Current Report on Form 8-K dated April
28, 2005 and filed on May 4, 2005) |
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2.2.1 |
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Agreement and Plan of Merger, dated as of May 19, 2006,
by and among the Company, Parke Acquisition LLC, and
Parke P.A.N.D.A. Corporation (Incorporated herein by
reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K dated May 19, 2006 and filed on May
22, 2006) |
36
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| Exhibit |
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| Number |
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Description of Exhibit |
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2.2.2 |
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Joinder and Amendment to Agreement and Plan of Merger
by and among the Company, Parke Acquisition LLC, and
Parke P.A.N.D.A. Corporation (Incorporated herein by
reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K dated June 29, 2006 and filed on
July 6, 2006) |
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2.3 |
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Agreement and Plan of Merger dated September 26, 2006
by and among the Company, Kapadia Acquisition, Inc.,
Kapadia Consulting, Inc., and Pradeep Kapadia
(Incorporated herein by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K dated
September 26, 2006 and filed on September 29, 2006) |
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3.1.1 |
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Certificate of Incorporation (Incorporated herein by
reference to Exhibit 3.01 of the Company’s Amendment
No. 4 to Form S-1 filed on February 14, 2007 (File No.
333-136992)) |
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3.1.2 |
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Certificate of Amendment to Certificate of
Incorporation dated August 30, 2001 (Incorporated
herein by reference to Exhibit 3.02 of the Company’s
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992)) |
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3.1.3 |
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Certificate of Amendment to Certificate of
Incorporation dated July 31, 2002 (Incorporated herein
by reference to Exhibit 3.03 of the Company’s Amendment
No. 4 to Form S-1 filed on February 14, 2007 (File No.
333-136992)) |
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3.1.4 |
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Certificate of Amendment to Certificate of
Incorporation dated May 4, 2005 (Incorporated herein by
reference to Exhibit 3.04 of the Company’s Amendment
No. 4 to Form S-1 on February 14, 2007 (File No.
333-136992)) |
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3.1.5 |
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Certificate of Amendment to Certificate of
Incorporation dated January 23, 2007 (Incorporated
herein by reference to Exhibit 3.05 of the Company’s
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992)) |
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3.1.6 |
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Certificate of Ownership and Merger Merging Lime Energy
Subsidiary Company into Electric City Corp.
(Incorporated herein by reference to Exhibit 3.06 of
the Company’s Amendment No. 4 to Form S-1 filed on
February 14, 2007 (File No. 333-136992)) |
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3.1.7 |
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Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series A Convertible Preferred
Stock of the Company dated August 30, 2001
(Incorporated herein by reference to Exhibit 3.07 of
the Company’s Amendment No. 4 to Form S-1 filed on
February 14, 2007 (File No. 333-136992)) |
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3.1.8 |
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Certificate of Designations of the Relative Rights and
Preferences of the Series B Convertible Preferred Stock
of the Company dated October 13, 2000 (Incorporated
herein by reference to Exhibit 3.08 of the Company’s
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992)) |
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3.1.9 |
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Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series C Convertible Preferred
Stock of the Company dated June 3, 2002 (Incorporated
herein by reference to Exhibit 3.09 of the Company’s
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992)) |
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3.1.10 |
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Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series D Convertible Preferred
Stock of the Company dated June 26, 2003 (Incorporated
herein by reference to Exhibit 3.10 of the Company’s
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992)) |
37
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| Exhibit |
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| Number |
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Description of Exhibit |
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3.1.11 |
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Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series E Convertible Preferred
Stock of the Company dated March 18, 2004 (Incorporated
herein by reference to Exhibit 3.11 of the Company’s
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992)) |
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3.2 |
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Amended and Restated Bylaws, as amended (Incorporated
herein by reference to Exhibit 3.1 of the Company’s
Current Report on Form 8-K dated June 8, 2007 and filed
June 11, 2007) |
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4.1 |
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Specimen Stock Certificate |
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4.2.1 |
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2001 Stock Incentive Plan (Incorporated herein by
reference to Annex B of the Company’s Proxy Statement
on Form 14A filed on April 28, 2006) |
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4.2.2 |
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Amendment to Stock Incentive Plan (Incorporated herein
by reference to Annex A of the Company’s Proxy
Statement on Form 14A on April 28, 2006) |
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4.3 |
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Amended and Restated Directors’ Stock Option Plan
(Incorporated herein by reference to Exhibit 4.63 of
the Company’s Quarterly Report on Form 10-Q for the
period ended March 31, 2004 and filed on May 13, 2004) |
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4.4 |
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Form of Common Stock Warrant Used to Pay Certain
Vendors (Incorporated herein by reference to Exhibit
4.44 of the Company’s Annual Report on Form 10-K/A for
the year ended December 31, 2004 and filed on April 14,
2005) |
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4.5 |
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Form of Common Stock Warrant (with Cashless Exercise
Provision) Used to Pay Certain Vendors (Incorporated
herein by reference to Exhibit 4.45 of the Company’s
Annual Report on Form 10-K/A for the year ended
December 31, 2004 and filed on April 14, 2005) |
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4.6 |
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Form of Common Stock Warrant, With Vesting Period
issued April 28, 2005 Incorporated herein by reference
to Exhibit 4.1 of the Company’s Current Report on Form
8-K dated April 28, 2005 and filed on May 4, 2005) |
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4.7 |
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Form of Common Stock Warrant, Without Vesting Period
issued April 28, 2005 Incorporated herein by reference
to Exhibit 4.2 of the Company’s Current Report on Form
8-K dated April 28, 2005 and filed on May 4, 2005) |
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4.8 |
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Stock Trading Agreement dated as of April 29, 2005
Incorporated herein by reference to Exhibit 4.3 of the
Company’s Current Report on Form 8-K dated April 28,
2005 and filed on May 4, 2005) |
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4.9 |
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Warrant Certificate dated November 22, 2005 to Purchase
2,000,000 shares of common stock Par Value $0.0001 Per
Share, of the Company issued to Laurus Master Fund,
Ltd. (Incorporated herein by reference to Exhibit 4.1
of the Company’s Current Report on Form 8-K/A dated
November 22, 2005 and filed on February 9, 2006) |
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4.10 |
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Registration Rights Agreement dated November 22, 2005
by and between the Company and Laurus Master Fund, Ltd.
(Incorporated herein by reference to Exhibit 4.2 of the
Company’s Current Report on Form 8-K/A dated November
22, 2005 and filed on February 9, 2006) |
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4.11 |
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Employee Stock Option Agreement dated June 30, 2006
between the Company and Daniel Parke (Incorporated
herein by reference to Exhibit 10.5 of the Company’s
Current Report on Form 8-K dated June 29, 2006 and
filed on July 6, 2006) |
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4.12 |
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Employee Stock Option Agreement dated July 11, 2006
between the Company and David Asplund (Incorporated
herein by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K dated July 11, 2006 and
filed on July 17, 2006) |
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4.13 |
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Employee Stock Option Agreement dated July 11, 2006
between the Company and Daniel Parke (Incorporated
herein by reference to Exhibit 10.2 of the Company’s
Current Report on Form 8-K dated July 11, 2006 and
filed on July 17, 2006) |
38
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| Exhibit |
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| Number |
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Description of Exhibit |
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4.14 |
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Employee Stock Option Agreement dated July 11, 2006
between the Company and Jeffrey Mistarz (Incorporated
herein by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K dated July 11, 2006 and
filed on July 17, 2006) |
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4.15 |
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Employee Stock Option Agreement dated July 11, 2006
between the Company and Leonard Pisano (Incorporated
herein by reference to Exhibit 10.4 of the Company’s
Current Report on Form 8-K dated July 11, 2006 filed on
July 17, 2006) |
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4.16 |
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Employee Option Agreement dated August 15, 2006 between
the Company and Jeffrey Mistarz (Incorporated herein by
reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K dated August 15, 2006 filed on
August 18, 2006) |
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4.17 |
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Warrant Certificate dated May 29, 2007 to purchase
shares of common stock, par value $0.0001 per share, of
the Company issued Richard P. Kiphart (Incorporated
herein by reference to Exhibit 4.1 of the Company’s
Current Report on Form 8-K dated May 29, 2007 filed on
May 30, 2007) |
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10.1 |
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Common Stock Purchase Warrant dated September 11, 2003
issued by the Company in favor of Laurus Master Fund,
Ltd. (Incorporated herein by reference to Exhibit 10.5
of the Company’s Current Report on Form 8-K dated
September 11, 2003 and filed on September 16, 2003) |
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10.2 |
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Form of Secured Convertible Revolving Note dated
September 11, 2003, made by the Company in favor of
Laurus Master Fund, Ltd. (Incorporated herein by
reference to Exhibit 10.9 of the Company’s Current
Report on Form 8-K dated September 11, 2003 and filed
on September 16, 2003) |
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10.3 |
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Securities Purchase Agreement dated March 19, 2004,
among the Company and Security Equity Fund, Mid Cap
Value Series, SBL Fund, Series V, Security Mid Cap
Growth and SBL Fund Series J (Incorporated herein by
reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K dated March 19, 2004 and filed on
March 23, 2004) |
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10.4 |
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Redemption and Exchange Agreement dated March 19, 2004,
by and among the Company and Newcourt Capital USA Inc.,
Morgan Stanley Dean Witter Equity Funding, Inc.,
Originators Investment Plan, L.P., Cinergy Ventures II,
LLC, Leaf Mountain Company, LLC, SF Capital Partners,
Ltd., Richard Kiphart, David P. Asplund, John Thomas
Hurvis Revocable Trust, John Donohue, Augustine Fund,
LP, and Technology Transformation Venture Fund, LP
(Incorporated herein by reference to Exhibit 10.2 of
the Company’s Current Report on Form 8-K dated March
19, 2004 and filed on March 23, 2004) |
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10.5.1 |
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Third Amended and Restated Mortgage, Assignment of
Rents and Security Agreement dated December 13, 2005 by
the Company and American Chartered Bank (Incorporated
herein by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K dated December 13, 2005 and
filed on December 15, 2005) |
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10.5.2 |
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Fourth Modification to Mortgage, Assignment of Rents
and Security Agreement dated December 28, 2006 by the
Company and American Chartered Bank (Incorporated
herein by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K dated December 28, 2006 and
filed on December 29, 2006) |
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10.6 |
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Employment Agreement, dated as of May 3, 2005, between
the Company and Leonard Pisano (Incorporated herein by
reference to Exhibit 10.31 of the Company’s Annual
Report on Form 10-K for the year ended December 31,
2005 and filed March 21, 2006) |
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10.7 |
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Consulting Agreement with John Mitola dated January 21,
2006 (Incorporated herein by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K dated
January 22, 2006 and filed on January 26, 2006) |
39
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| Exhibit |
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| Number |
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Description of Exhibit |
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10.8 |
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Employment Agreement, dated as of January 23, 2006,
between the Company and David Asplund (Incorporated
herein by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K dated January 22, 2006 and
filed on February 22, 2006) |
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10.9 |
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Stock Purchase Agreement dated as of April 3, 2006
between the Company, Eugene Borucki and Denis Enberg
(Incorporated herein by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K dated April 3,
2006 and filed on April 7, 2006) |
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10.10 |
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Non-Competition, Non-Disclosure And Non-Solicitation
Agreement Dated as of March 31, 2006 between the
Company and Eugene Borucki (Incorporated herein by
reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K dated April 3, 2006 and filed on
April 7, 2006) |
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10.11 |
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Non-Competition, Non-Disclosure And Non-Solicitation
Agreement Dated as of March 31, 2006 between the
Company and Denis Enberg (Incorporated herein by
reference to Exhibit 10.3 of the Company’s Current
Report on Form 8-K dated April 3, 2006 and filed on
April 7, 2006) |
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10.12 |
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Securities Purchase Agreement dated June 29, 2006 by
and among the Company and the investors named therein
(Incorporated herein by reference to Exhibit 10.2 of
the Company’s Current Report on Form 8-K dated June 29,
2006 and filed on July 6, 2006) |
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10.13.1 |
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Employment Agreement dated as of June 30, 2006 between
Parke Acquisition, LLC and Daniel Parke (Incorporated
herein by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K dated June 29, 2006 and
filed on July 6, 2006) |
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10.13.2 |
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Amendment to Employment Agreement dated October 1, 2007
between Parke Acquisition, LLC and Daniel W. Parke.
(Incorporated herein by reference to Exhibit 10.2 of
the Company’s Current Report on Form 8-K dated October
1, 2007 and filed on October 2, 2007) |
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10.14 |
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Non-Competition Agreement dated as of June 30, 2006 by
and among the Company, Parke Acquisition, LLC and
Daniel Parke (Incorporated herein by reference to
Exhibit 10.4 of the Company’s Current Report on Form
8-K dated June 29, 2006 and filed on July 6, 2006) |
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10.15 |
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First Amendment to Commercial Lease Agreement dated
June 30, 2006 by and between M&D Investments and Parke
Industries, LLC (Incorporated herein by reference to
Exhibit 10.6 of the Company’s Current Report on Form
8-K dated June 29, 2006 and filed on July 6, 2006) |
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10.16.1 |
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Employment Agreement, dated as of August 9, 2006,
between the Company and Jeffrey Mistarz (Incorporated
herein by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K dated August 15, 2006 and
filed on August 18, 2006) |
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10.16.2 |
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Amendment to Employment Agreement dated October 1, 2007
between Lime Energy Co. and Jeffrey R. Mistarz.
(Incorporated herein by reference to Exhibit 10.3 of
the Company’s Current Report on Form 8-K dated October
1, 2007 and filed on October 2, 2007) |
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10.17 |
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Agreement with The Parke Family Trust dated February 1,
2007 (Incorporated herein by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K dated
January 24, 2007 and filed on February 21, 2007) |
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10.18 |
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Agreement with the PIPE Transaction investors dated
February 1, 2007 (Incorporated herein by reference to
Exhibit 10.2 of the Company’s Current Report on Form
8-K dated January 24, 2007 and filed on February 21,
2007) |
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10.19.1 |
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Agreement with David Asplund dated November 3, 2006
(Incorporated herein by reference to Exhibit 10.3 of
the Company’s Current Report on Form 8-K dated January
24, 2007 and filed on February 21, 2007) |
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| Exhibit |
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| Number |
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Description of Exhibit |
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10.19.2 |
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Second Amendment to Employment Agreement dated October
1, 2007 between Lime Energy Co. and David R. Asplund.
(Incorporated herein by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K dated October
1, 2007 and filed on October 2, 2007) |
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10.20 |
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Agreement with Richard Kiphart dated November 2, 2006
(Incorporated herein by reference to Exhibit 10.4 of
the Company’s Current Report on Form 8-K dated January
24, 2007 and filed on February 21, 2007) |
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10.21 |
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Agreement with David Valentine dated November 2, 2006
(Incorporated herein by reference to Exhibit 10.5 of
the Company’s Current Report on Form 8-K dated January
24, 2007 and filed on February 21, 2007) |
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10.22 |
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Loan Agreement between the Company and various lenders,
including Richard P. Kiphart, dated May 29, 2007
(Incorporated herein by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K dated May 29,
2007 and filed on May 30, 2007) |
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10.23 |
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Investor Rights Agreement between the Company and
various investors, including Richard P. Kiphart, dated
May 29, 2007 (Incorporated herein by reference to
Exhibit 10.2 of the Company’s Current Report on Form
8-K dated May 29, 2007 and filed on May 30, 2007) |
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10.24 |
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Fifth Modification to Mortgage, Assignment of Rents and
Security Agreement dated December 17, 2007 by the
Company and American Chartered Bank (Incorporated
herein by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K dated December 17, 2007 and
filed on December 18, 2007) |
| |
|
|
|
|
| |
10.25 |
|
|
Third Amended and Restated Mortgage Note dated December
17, 2007, by and among American Chartered Bank and the
Company (Incorporated herein by reference to Exhibit
10.2 of the Company’s Current Report on Form 8-K dated
December 17, 2007 and filed on December 18, 2007) |
| |
|
|
|
|
| |
10.26 |
|
|
Revolving Line of Credit Note dated March 12, 2008 by
and among the Company and Advanced Biotherapy, Inc. and
Richard P. Kiphart (Incorporated herein by reference to
Exhibit 10.1 of the Company’s Current Report on Form
8-K/A dated March 12, 2008 and filed on March 14, 2008) |
| |
|
|
|
|
| |
10.27 |
|
|
Note Issuance Agreement dated March 12, 2008 by and
among the Company and Advanced Biotherapy, Inc. and
Richard P. Kiphart (Incorporated herein by reference to
Exhibit 10.2 of the Company’s Current Report on Form
8-K/A dated March 12, 2008 and filed on March 14, 2008) |
| |
|
|
|
|
| |
14.1 |
|
|
Code of Ethics For Chief Executive Officer and Chief
Financial Officer of the Company (Incorporated herein
by reference to Exhibit 14 of the Company’s Annual
Report on Form 10-KSB for the year ended December 31,
2003 and filed on March 29, 2004) |
| |
|
|
|
|
| |
14.2 |
|
|
Code of Business Conduct and Ethics (All Officers,
Directors and Employees) (Incorporated herein by
reference to Exhibit 14.2 of the Company’s Annual
Report on Form 10-K for the year ended December 31,
2005 and filed March 21, 2006) |
| |
|
|
|
|
| |
21 |
* |
|
List of subsidiaries |
| |
|
|
|
|
| |
23.1 |
* |
|
Consent of BDO Seidman LLP |
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
|
|
|
|
|
|
|
|
|
|
LIME ENERGY CO.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ David R. Asplund |
|
|
|
|
|
|
|
|
|
|
|
|
|
David R. Asplund |
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
March 31, 2008 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant in the capacities and on the
dates indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| /s/ David Asplund
David Asplund |
|
Chief Executive Officer & Director
|
|
March 31, 2008 |
| /s/ Daniel Parke
Daniel Parke |
|
President, Chief Operating Officer
& Director
|
|
March 31, 2008 |
| /s/ Jeffrey Mistarz
Jeffrey Mistarz |
|
Chief Financial Officer & Treasurer
|
|
March 31, 2008 |
| /s/ Richard Kiphart
Richard Kiphart |
|
Chairman of the Board
|
|
March 31, 2008 |
| /s/ Gregory Barnum
Gregory Barnum |
|
Director
|
|
March 31, 2008 |
| /s/ William Carey
William Carey |
|
Director
|
|
March 31, 2008 |
| /s/ Joseph Desmond
Joseph Desmond |
|
Director
|
|
March 31, 2008 |
| /s/ David Valentine
David Valentine |
|
Director
|
|
March 31, 2008 |
42
Report of Independent Registered Public Accounting Firm
Lime Energy Co.
Elk Grove Village, Illinois
We have audited the accompanying consolidated balance sheets of Lime Energy Co. as of December 31,
2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2007. We have also audited the
schedule in the accompanying index. These financial statements and schedule are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Lime Energy Co. at December 31, 2007 and 2006, and the
results of its operations and its cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted in the United States
of America.
Also, in our opinion, the schedule presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 3 to the consolidated financial statements, effective January 1, 2006, the
Company adopted Statement of Financial Accounting Standards No. 123R, “Share- Based Payments” using
the modified prospective transition method.
| |
|
|
|
|
| |
|
|
| Chicago, Illinois |
/s/ BDO SEIDMAN, LLP
|
|
| March 28, 2008 |
|
|
| |
|
|
F-1
Lime Energy Co.
Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
| December 31, |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,780,701 |
|
|
$ |
4,663,618 |
|
Accounts receivable, less allowance for doubtful accounts of
$151,000 and $366,000 at December 31, 2007 and 2006,
respectively |
|
|
6,382,060 |
|
|
|
2,825,947 |
|
Inventories (Note 6) |
|
|
693,227 |
|
|
|
614,491 |
|
Advances to suppliers |
|
|
374,713 |
|
|
|
132,083 |
|
Costs of Uncompleted Contracts in Excess of Related Billings |
|
|
952,997 |
|
|
|
— |
|
Prepaid expenses and other |
|
|
250,169 |
|
|
|
279,017 |
|
| |
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
13,433,867 |
|
|
|
8,515,156 |
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment (Note 7) |
|
|
1,542,327 |
|
|
|
1,201,008 |
|
|
|
|
|
|
|
|
|
|
Long Term Receivables |
|
|
224,568 |
|
|
|
102,904 |
|
|
|
|
|
|
|
|
|
|
Deferred Financing Costs, net of amortization of $1,687 at
December 31, 2007 (Note 12) |
|
|
6,885 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Intangibles, net of amortization of $3,693,648 and $1,681,771 at
December 31, 2007 and 2006, respectively (Notes 4 and 8) |
|
|
3,979,052 |
|
|
|
5,126,829 |
|
|
|
|
|
|
|
|
|
|
Cost in Excess of Assets Acquired |
|
|
6,757,133 |
|
|
|
10,450,968 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
25,943,832 |
|
|
$ |
25,396,865 |
|
| |
F-2
Lime Energy Co.
Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
| December 31, |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Notes payable (Note 14) |
|
|
150,000 |
|
|
|
150,000 |
|
Current maturities of long-term debt (Note 15) |
|
|
81,954 |
|
|
|
46,699 |
|
Accounts payable |
|
|
3,092,226 |
|
|
|
1,344,725 |
|
Accrued expenses (Note 9) |
|
|
1,571,683 |
|
|
|
1,251,777 |
|
Deferred revenue |
|
|
1,531,417 |
|
|
|
967,446 |
|
Customer deposits |
|
|
1,180,834 |
|
|
|
1,148,090 |
|
| |
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
7,608,114 |
|
|
|
4,908,737 |
|
| |
| |
Deferred Revenue |
|
|
244,792 |
|
|
|
748,980 |
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, less current maturities net of unamortized
discount of $2,412,305 and $0 as of December 31, 2007
and 2006, respectively (Notes 12 and 15) |
|
|
3,187,680 |
|
|
|
520,392 |
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liability |
|
|
1,034,000 |
|
|
|
1,034,000 |
|
| |
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
12,074,586 |
|
|
|
7,212,109 |
|
|
|
|
|
|
|
|
|
|
Commitments (Notes 17 and 19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Notes 20, 21, 22, 23 and 24) |
|
|
|
|
|
|
|
|
Common stock, $.0001 par value; 200,000,000 shares authorized,
7,720,269 and 7,112,374 issued as of December 31, 2007
and December 31, 2006, respectively |
|
|
773 |
|
|
|
711 |
|
Additional paid-in capital |
|
|
106,267,336 |
|
|
|
95,030,180 |
|
Accumulated deficit |
|
|
(92,398,863 |
) |
|
|
(76,846,135 |
) |
| |
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity |
|
|
13,869,246 |
|
|
|
18,184,756 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
25,943,832 |
|
|
$ |
25,396,865 |
|
| |
See accompanying notes to consolidated financial statements.
F-3
Lime Energy Co.
Consolidated Statements of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended |
|
|
Year ended |
|
|
Year ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
19,481,130 |
|
|
$ |
8,143,624 |
|
|
$ |
3,693,429 |
|
| |
Cost of sales (includes reserve for obsolete inventory of
$0, $568,558 and $19,232 in the years ended December 31,
2007, 2006 and 2005, respectively) |
|
|
15,082,400 |
|
|
|
6,931,294 |
|
|
|
3,691,854 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,398,730 |
|
|
|
1,212,330 |
|
|
|
1,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (includes share based
compensation expense of $3,582,066, $4,519,686 and $0 for
the years ended December 31, 2007, 2006 and 2005,
respectively) |
|
|
13,072,381 |
|
|
|
12,165,700 |
|
|
|
5,363,503 |
|
Amortization of intangibles (Note 8) |
|
|
2,011,878 |
|
|
|
1,210,006 |
|
|
|
471,765 |
|
Impairment loss (Note 3) |
|
|
4,181,969 |
|
|
|
1,183,525 |
|
|
|
242,830 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(14,867,498 |
) |
|
|
(13,346,901 |
) |
|
|
(6,076,523 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
266,863 |
|
|
|
194,182 |
|
|
|
58,737 |
|
Interest expense (Notes 11, 12, 13, 14 and 15) |
|
|
(952,093 |
) |
|
|
(3,273,370 |
) |
|
|
(602,990 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(685,230 |
) |
|
|
(3,079,188 |
) |
|
|
(544,253 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before discontinued operations |
|
|
(15,552,728 |
) |
|
|
(16,426,089 |
) |
|
|
(6,620,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operation of discontinued business |
|
|
— |
|
|
|
(21,425 |
) |
|
|
(251,962 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(15,552,728 |
) |
|
|
(16,447,514 |
) |
|
|
(6,872,738 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividends (Note 23) |
|
|
— |
|
|
|
(24,347,725 |
) |
|
|
(1,851,345 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Available to Common Shareholders |
|
$ |
(15,552,728 |
) |
|
$ |
(40,795,239 |
) |
|
$ |
(8,724,083 |
) |
| |
Basic and diluted loss per common share from
continuing operations |
|
$ |
(2.06 |
) |
|
$ |
(10.60 |
) |
|
$ |
(18.59 |
) |
Discontinued operations |
|
|
— |
|
|
|
(0.01 |
) |
|
|
(0.55 |
) |
| |
Basic and Diluted Loss Per Common Share |
|
$ |
(2.06 |
) |
|
$ |
(10.61 |
) |
|
$ |
(19.14 |
) |
| |
Weighted Average Common Shares Outstanding (Note 24) |
|
|
7,541,960 |
|
|
|
3,844,087 |
|
|
|
455,809 |
|
| |
See accompanying notes to consolidated financial statements.
F-4
Lime Energy Co.
Consolidated Statements of Stockholders’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Series E |
|
|
Series E |
|
|
Additional |
|
|
|
|
|
|
Total |
|
| |
|
|
|
|
|
Common |
|
|
Preferred |
|
|
Preferred |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stock-holders’ |
|
| |
|
Common Shares |
|
|
Stock |
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
| |
Balance, December 31, 2004 |
|
|
396,311 |
|
|
$ |
40 |
|
|
|
224,752 |
|
|
$ |
2,248 |
|
|
$ |
55,303,866 |
|
|
$ |
(53,525,883 |
) |
|
$ |
1,780,271 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock (net of offering costs of $211,787) |
|
|
59,524 |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
5,413,207 |
|
|
|
— |
|
|
|
5,413,213 |
|
Conversion of preferred stock |
|
|
2,064 |
|
|
|
— |
|
|
|
(2,167 |
) |
|
|
(22 |
) |
|
|
22 |
|
|
|
— |
|
|
|
— |
|
Acquisition of Maximum Performance Group, Inc. |
|
|
23,735 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
2,691,605 |
|
|
|
— |
|
|
|
2,691,607 |
|
Cumulative dividends on preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,366,900 |
) |
|
|
— |
|
|
|
(1,366,900 |
) |
Satisfaction of accrued dividends through the issuance of preferred stock |
|
|
— |
|
|
|
— |
|
|
|
13,669 |
|
|
|
137 |
|
|
|
1,366,763 |
|
|
|
— |
|
|
|
1,366,900 |
|
Warrants issued in connection with convertible debt issuance |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
920,000 |
|
|
|
— |
|
|
|
920,000 |
|
Common stock issued for services received |
|
|
2,147 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
125,484 |
|
|
|
— |
|
|
|
125,484 |
|
Warrants issued for services received |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
319,800 |
|
|
|
— |
|
|
|
319,800 |
|
Net loss for the year ended December 31, 2005 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,872,738 |
) |
|
|
(6,872,738 |
) |
| |
Balance, December 31, 2005 |
|
|
483,781 |
|
|
$ |
48 |
|
|
|
236,254 |
|
|
$ |
2,363 |
|
|
$ |
64,773,847 |
|
|
$ |
(60,398,621 |
) |
|
$ |
4,377,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock (net of offering costs of $115,107) |
|
|
2,553,571 |
|
|
|
255 |
|
|
|
— |
|
|
|
— |
|
|
|
17,759,639 |
|
|
|
— |
|
|
|
17,759,894 |
|
Cumulative dividends on preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(698,000 |
) |
|
|
— |
|
|
|
(698,000 |
) |
Satisfaction of accrued dividends through the issuance of preferred stock |
|
|
— |
|
|
|
— |
|
|
|
6,980 |
|
|
|
70 |
|
|
|
697,930 |
|
|
|
— |
|
|
|
698,000 |
|
Conversion of preferred stock |
|
|
3,099,411 |
|
|
|
310 |
|
|
|
(243,234 |
) |
|
|
(2,433 |
) |
|
|
2,123 |
|
|
|
— |
|
|
|
— |
|
Sale of Great Lakes Controlled Energy Corporation |
|
|
(2,027 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(193,743 |
) |
|
|
— |
|
|
|
(193,743 |
) |
Acquisition of Parke P.A.N.D.A. Corporation |
|
|
714,286 |
|
|
|
72 |
|
|
|
— |
|
|
|
— |
|
|
|
4,999,928 |
|
|
|
— |
|
|
|
5,000,000 |
|
Acquisition of Kapadia Consulting, Inc. |
|
|
71,429 |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
479,993 |
|
|
|
— |
|
|
|
480,000 |
|
Conversion of revolver |
|
|
135,838 |
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
|
|
951,963 |
|
|
|
— |
|
|
|
951,977 |
|
Beneficial value of adjustment in revolver conversion price |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
950,865 |
|
|
|
— |
|
|
|
950,865 |
|
Term loan liquidated damages satisfied through the issuance of common stock |
|
|
23,014 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
185,258 |
|
|
|
— |
|
|
|
185,260 |
|
Termination of post repayment interest obligation |
|
|
33,071 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
266,222 |
|
|
|
— |
|
|
|
266,225 |
|
Warrants issued for services received |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,200 |
|
|
|
— |
|
|
|
25,200 |
|
Share based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,828,955 |
|
|
|
— |
|
|
|
4,828,955 |
|
Net loss for the year ended December 31, 2006 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16,447,514 |
) |
|
|
(16,447,514 |
) |
| |
Balance, December 31, 2006 |
|
|
7,112,374 |
|
|
$ |
711 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
95,030,180 |
|
|
$ |
(76,846,135 |
) |
|
$ |
18,184,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock (less issuance costs of $202,932) |
|
|
428,519 |
|
|
|
43 |
|
|
|
— |
|
|
|
— |
|
|
|
2,796,657 |
|
|
|
— |
|
|
|
2,796,700 |
|
Offering costs for 2006 issuance of common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(45,361 |
) |
|
|
— |
|
|
|
(45,361 |
) |
Acquisition of Texas Energy Products, Inc. |
|
|
28,571 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
213,997 |
|
|
|
— |
|
|
|
214,000 |
|
Acquisition of Preferred Lighting, Inc. |
|
|
15,069 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
384,920 |
|
|
|
— |
|
|
|
384,922 |
|
Release of escrow shares to former owners of Maximum Performance Group, Inc. |
|
|
2,959 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,309 |
|
|
|
— |
|
|
|
26,309 |
|
Satisfaction of liquidated damages through the issuance of common stock |
|
|
87,673 |
|
|
|
9 |
|
|
|
— |
|
|
|
— |
|
|
|
613,699 |
|
|
|
— |
|
|
|
613,708 |
|
Share based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,726,731 |
|
|
|
— |
|
|
|
3,726,731 |
|
Warrants issued in connection with Subordinated Convertible Notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,136,537 |
|
|
|
— |
|
|
|
1,136,537 |
|
Value of beneficial conversion feature on Subordinated Convertible Notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,866,537 |
|
|
|
— |
|
|
|
1,866,537 |
|
Satisfaction of interest obligation through issuance of common stock |
|
|
7,088 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
83,826 |
|
|
|
— |
|
|
|
83,827 |
|
Warrants issued for services received |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
162,000 |
|
|
|
— |
|
|
|
162,000 |
|
Exercise of options |
|
|
33,005 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
222,006 |
|
|
|
— |
|
|
|
222,009 |
|
Exercise of warrants |
|
|
5,011 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
30,094 |
|
|
|
— |
|
|
|
30,095 |
|
Warrant repricing |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,204 |
|
|
|
— |
|
|
|
19,204 |
|
Net loss for the year ended December 31, 2007 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,552,728 |
) |
|
|
(15,552,728 |
) |
| |
Balance, December 31, 2007 |
|
|
7,720,269 |
|
|
$ |
773 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
106,267,336 |
|
|
$ |
(92,398,863 |
) |
|
$ |
13,869,246 |
|
| |
See accompanying notes to consolidated financial statements.
F-5
Lime Energy Co.
Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended |
|
|
Year ended |
|
|
Year ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,552,728 |
) |
|
$ |
(16,447,514 |
) |
|
$ |
(6,872,738 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities, net of assets acquired and disposed of: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for bad debts |
|
|
126,241 |
|
|
|
105,442 |
|
|
|
96,872 |
|
Share based compensation |
|
|
3,726,731 |
|
|
|
4,828,955 |
|
|
|
— |
|
Depreciation and amortization |
|
|
2,200,444 |
|
|
|
1,386,597 |
|
|
|
601,869 |
|
Amortization of deferred financing costs |
|
|
1,687 |
|
|
|
299,964 |
|
|
|
93,774 |
|
Amortization of issuance discount |
|
|
590,769 |
|
|
|
898,409 |
|
|
|
71,639 |
|
Liquidated damages satisfied through issuance of
common stock |
|
|
613,708 |
|
|
|
185,260 |
|
|
|
— |
|
Termination of post repayment interest and interest
converted to common stock |
|
|
— |
|
|
|
274,747 |
|
|
|
— |
|
Beneficial value of adjustment in revolver conversion price |
|
|
— |
|
|
|
950,865 |
|
|
|
— |
|
Issuance of shares and warrants in exchange for
services received |
|
|
162,000 |
|
|
|
25,200 |
|
|
|
319,800 |
|
Accrued interest converted to common stock |
|
|
83,827 |
|
|
|
— |
|
|
|
— |
|
Loss on disposal of fixed assets |
|
|
— |
|
|
|
115,914 |
|
|
|
11,743 |
|
Warrant repricing |
|
|
19,204 |
|
|
|
— |
|
|
|
— |
|
Asset impairment |
|
|
— |
|
|
|
1,183,525 |
|
|
|
— |
|
Provision for inventory obsolescence |
|
|
— |
|
|
|
568,558 |
|
|
|
19,232 |
|
Goodwill impairment |
|
|
4,181,969 |
|
|
|
— |
|
|
|
242,830 |
|
Changes in assets and liabilities, net of dispositions |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,701,117 |
) |
|
|
(279,822 |
) |
|
|
(484,685 |
) |
Inventories |
|
|
42,397 |
|
|
|
519,491 |
|
|
|
(121,254 |
) |
Advances to suppliers |
|
|
(242,630 |
) |
|
|
192,594 |
|
|
|
148,012 |
|
Other current assets |
|
|
(902,614 |
) |
|
|
72,537 |
|
|
|
(81,604 |
) |
Accounts payable |
|
|
1,646,123 |
|
|
|
(359,331 |
) |
|
|
(1,299,561 |
) |
Accrued liabilities |
|
|
280,501 |
|
|
|
(300,017 |
) |
|
|
2,136 |
|
Deferred revenue |
|
|
23,999 |
|
|
|
(196,310 |
) |
|
|
401,050 |
|
Customer deposits |
|
|
(75,316 |
) |
|
|
(273,149 |
) |
|
|
(105,757 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(6,774,805 |
) |
|
|
(6,248,085 |
) |
|
|
(6,956,642 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions (including acquisition costs), net of cash acquired |
|
|
(703,539 |
) |
|
|
(4,098,377 |
) |
|
|
(1,632,972 |
) |
Sale of discontinued operations |
|
|
— |
|
|
|
(83,586 |
) |
|
|
— |
|
Purchase of property and equipment |
|
|
(514,295 |
) |
|
|
(82,967 |
) |
|
|
(548,874 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,217,834 |
) |
|
|
(4,264,930 |
) |
|
|
(2,181,846 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (payments) on line of credit |
|
|
— |
|
|
|
(1,456,545 |
) |
|
|
2,000,000 |
|
Proceeds from long-term debt |
|
|
5,171,440 |
|
|
|
— |
|
|
|
5,000,000 |
|
Payments on long-term debt |
|
|
(56,592 |
) |
|
|
(5,355,865 |
) |
|
|
(541,547 |
) |
Proceeds from issuance of common stock |
|
|
2,999,632 |
|
|
|
17,875,000 |
|
|
|
5,625,000 |
|
Costs related to stock issuances |
|
|
(248,293 |
) |
|
|
(115,107 |
) |
|
|
(211,787 |
) |
Cash paid for deferred financing costs |
|
|
(8,572 |
) |
|
|
— |
|
|
|
(293,836 |
) |
Proceeds from exercise of options and warrants |
|
|
252,107 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
8,109,722 |
|
|
|
10,947,483 |
|
|
|
11,577,830 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents |
|
|
117,083 |
|
|
|
434,468 |
|
|
|
2,439,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, at beginning of period |
|
|
4,663,618 |
|
|
|
4,229,150 |
|
|
|
1,789,808 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, at end of period |
|
$ |
4,780,701 |
|
|
$ |
4,663,618 |
|
|
$ |
4,229,150 |
|
| |
F-6
Lime Energy Co.
Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended |
|
|
Year ended |
|
|
Year ended |
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest — continuing
operations (including prepayment penalties) |
|
$ |
134,000 |
|
|
$ |
911,000 |
|
|
$ |
214,200 |
|
Cash paid during the period for interest — discontinued
operations |
|
|
— |
|
|
|
— |
|
|
|
400 |
|
Interest obligation satisfied through the issuance of
common stock |
|
|
83,827 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock, warrants and options issued in
exchange for services received |
|
|
17,143 |
|
|
|
3,600 |
|
|
|
45,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual satisfied through the issuance of
common stock |
|
|
345,583 |
|
|
|
7,410 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfaction of accrued dividends on Series E Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
Stock through the issuance of 6,980 and 13,669
shares of Series E Preferred stock during the years
ended |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 and 2005, respectively |
|
|
— |
|
|
|
698,000 |
|
|
|
1,366,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible debt to common stock |
|
$ |
— |
|
|
$ |
943,455 |
|
|
$ |
— |
|
Holders of Series E preferred stock converted 243,234 shares of Series E preferred stock into 3,099,411
shares of the Company’s common stock during the year ended December 31, 2006.
The holder of the Company’s revolving convertible note converted the outstanding balance of $943,455 along
with $7,410 of accrued interest thereon into 135,838 shares of the Company’s common stock on June 29, 2006.
The Company satisfied $161,096 of liquidated damages for failing to register common stock with the SEC in
connection with the $5 million term loan which the Company issued in November 2005, through the issuance on
June 29, 2006 of 23,014 shares of its common stock to the holder of the note.
On June 29, 2006, in exchange for receiving 33,071 shares of the Company’s common stock, the holder of the $5
million term loan issued in November 2005 waived the requirement that the company pay a portion of the cash
flow generated by certain projects for a period of 5 years following the repayment of the note.
See accompanying notes to consolidated financial statements.
F-7
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 1 — Description of Business
Lime Energy Co. (the “Company”), a Delaware corporation, is a developer and integrator of
energy savings technologies and services. The Company is made up of seven separate companies,
comprising three distinct business segments: Maximum Performance Group, Inc. (“MPG”) and the
discontinued EnergySaver business comprise the Energy Technology segment, Parke Industries, LLC
(“Parke”), Kapadia Energy Services, Inc. (“Kapadia”), Lime Midwest, Inc. (“Lime Midwest”), Texas
Energy Products, Inc. (“Texas Energy”) and Preferred Lighting, Inc. (“Preferred Lighting”) comprise
the Energy Services segment and Lime Finance, Inc. comprises the finance services segment. Lime
Energy, Lime Midwest and Lime Finance are headquartered in Elk Grove Village, Illinois, a suburb of
Chicago. MPG is headquartered in San Diego with a sales office in New York City and Ellington,
Connecticut. Parke is headquartered in Glendora, California with several sales offices in northern
California and an office in Salt Lake City, Utah. Kapadia is headquartered in Ventura, California
with offices in New York City and Peekskill, New York. Texas Energy is headquartered in Austin,
Texas with an office in Dallas, Texas and Preferred Lighting is headquartered in Seattle,
Washington. In March 2006, the Company sold Great Lakes Controlled Energy Corporation (“Great
Lakes”), which comprised the building control and automation control segment.
Note 2 — Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“GAAP”).
Note 3 — Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Lime Energy Co. and its wholly
owned subsidiaries, Maximum Performance Group, Inc., Parke Industries LLC, Kapadia Energy Services,
Inc., Lime Midwest, Inc., Texas Energy Products, Inc., Preferred Lighting, Inc. and Lime Finance,
Inc. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Concentration of Risk
The Company’s customers are primarily owners of, or tenants of, commercial and industrial
buildings. One customer accounted for approximately 10% of the Company’s consolidated billings
during the year ended December 31, 2007. Three customers each accounted for approximately 13% of
the Company’s consolidated billings during the year ended December 31, 2006, while two customers
F-8
Lime Energy Co.
Notes to Consolidated Financial Statements
accounted for approximately 37% and 11% of the Company’s consolidated billings during the year
ended December 31, 2005.
The Company purchases its materials from a variety of suppliers and continues to seek out
alternate suppliers for critical components so that it can be assured that its sales will not be
interrupted by the inability of a single supplier to deliver product. During the year ended
December 31, 2007, two suppliers accounted for approximately 17% and 10% of the company’s
purchases, respectively. During the year ended December 31, 2006, one supplier accounted for
approximately 12% of the Company’s total purchases while no single supplier accounted for more
than 10% of the Company’s total purchases during the year ended December 31, 2005.
The Company maintains cash and cash equivalents in accounts with a financial institution in
excess of the amount insured by the Federal Deposit Insurance Corporation. The Company monitors the
financial stability of this institution regularly and management does not believe there is
significant credit risk associated with deposits in excess of federally insured amounts.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on specifically identified
amounts that it believes to be uncollectible. If actual collections experience changes, revisions
to the allowance may be required. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on the information available to it, the
Company believes its allowance for doubtful accounts is adequate. However, actual write-offs might
exceed the recorded allowance.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined utilizing the
first-in, first-out (FIFO) method.
Properties & Equipment
Property and equipment are stated at cost. For financial reporting purposes depreciation is
computed over the estimated useful lives of the assets by the straight-line method over the
following lives:
| |
|
|
Buildings
|
|
39 years |
Office equipment
|
|
3 — 5 years |
Furniture
|
|
5 — 10 years |
Equipment
|
|
3 — 5 years |
Transportation equipment
|
|
3 — 5 years |
Cost in Excess of Assets Acquired
Goodwill represents the purchase price in excess of the fair value of assets acquired in
business combinations. Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and
Other Intangible Assets”, requires the Company to assess goodwill for impairment at least annually
in the absence of an indicator of possible impairment and immediately upon an indicator of possible
impairment. During the fourth quarter of 2004, the Company completed its annual assessment of
impairment regarding the goodwill recorded for its Building Control and Automation segment. That
assessment, supported by independent appraisals of the fair value of the segment, did not identify
any impairment. However, the 2005 appraisal, made using customary valuation methodologies,
including discounted cash flows and fundamental analysis, did reveal an impairment. Further
supporting this
F-9
Lime Energy Co.
Notes to Consolidated Financial Statements
assessment, in February 2006, the Company signed a letter of intent to sell the
segment for an amount below the carrying value of the reporting unit. The decline in fair value of
the Building Control and Automation segment was primarily the result of the segment failing to meet
earnings expectations, due in part to strong competition in its markets. As a result of this
decline in fair value, the Company recorded an impairment loss of $242,830 during the year ended
December 31, 2005.
During the fourth quarter of 2007, the Company updated its projections for portions of the
Energy Services and Energy Technology businesses and estimated the fair value based on the
discounted current value of the estimated future cash flows. It then compared the implied fair
values of the reporting units to their carrying values. The analysis did not identify any
impairment for the Energy Services business, but did determine that the value of the Energy
Technology’s goodwill was impaired. The decline in the fair value of the Energy Technology segment
was primarily the result of lower than expected sales of the eMAC line of HVAC controllers, in
large part due to delays in product enhancements designed to replace discontinued components and
add cellular communication capabilities. As a result of the decline in the fair value, the Company
recorded an impairment loss of $4,181,969 during the fourth quarter of 2007.
It is possible that upon completion of future impairment tests, as the result of changes in
facts or circumstances, the Company may have to take additional charges to recognize a further
write-down of the value of its acquisitions to their estimated fair values.
Deferred Financing Costs
The Company incurred $8,572 in costs in connection with the issuance of the convertible
subordinated notes during 2007. This expense has been capitalized to deferred financing costs and
is being amortized over the three year term of the debt using the effective interest method.
The Company capitalized costs incurred in arranging its convertible revolving credit facility
and convertible term loans as deferred financing. These deferred financing costs were being
amortized over the life of the related convertible term loan using the effective interest method.
On June 29, 2006 the Company prepaid the outstanding balance on its two convertible term loans and
the holder of the convertible notes, elected to convert the outstanding balance of the convertible
revolving credit facility into common stock. Upon the repayment and conversion of these notes in
June 2006 the Company was required to recognize as interest expense the remaining unamortized
balances of the capitalized issuance costs and the debt discount of $231,281. Amortization of the
deferred financing costs included in interest expense totaled $1,687, $299,964 and $93,774 in 2007,
2006 and 2005, respectively.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of those items. The Company’s
cash flow estimates are based on historical results adjusted to reflect its best estimate of future
market and operating conditions. The net carrying value of assets not recoverable is reduced to
fair value. These estimates of fair value represent management’s best estimate based on industry
trends and reference to market rates and transactions.
F-10
Lime Energy Co.
Notes to Consolidated Financial Statements
During 2006, the Company terminated its Virtual Negawatt Power Program (“VNPP”) in northern
Illinois, due to the high capital requirements of the program, changes in lighting technology and
changes in the Company’s business plan. As a result of this decision, it reduced the carrying
value of its VNPP assets to $0 and recorded an impairment charge of $1,183,525.
Revenue Recognition
The Company recognizes revenue when all four of the following criteria are met: (i) persuasive
evidence has been received that an arrangement exists; (ii) delivery of the products and/or
services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is
reasonably assured. In addition, the Company follows the provisions of the Securities and Exchange
Commission’s Staff Accounting Bulletin No. 104, Revenue Recognition, which sets forth guidelines in
the timing of revenue recognition based upon factors such as passage of title, installation,
payments and customer acceptance. Any amounts received prior to satisfying the Company’s revenue
recognition criteria is recorded as deferred revenue in the accompanying balance sheet.
The Company accounts for revenue on most of its long-term contracts on the completed contract
method, whereby revenue is recognized once the project is substantially complete. However, revenue
on some long-term contracts is recorded under the percentage of completion method in conjunction
with the cost-to-cost method of measuring the extent of progress toward completion consistent with
the AICPA’s Statement of Position 81-1 (SOP 81-1). Any anticipated losses on contracts are charged
to operations as soon as they are determinable.
Billings on contracts that do not meet the Company’s revenue recognition policy requirements
for which it has been paid or has a valid account receivable are recorded as deferred revenue.
Deferred revenue for billings that did not meet the Company’s revenue recognition policies totaled
$636,867 and $294,430 as of December 31, 2007 and 2006, respectively.
The Company’s MPG subsidiary often bundles contracts to provide monitoring services and
Internet access with the sale of its eMAC hardware. As a result, these sales are considered to be
contracts with multiple deliverables which at the time the hardware is delivered and installed
includes undelivered services essential to the functionality of the product. Accordingly, the
Company defers the revenue for the product and services and the cost of the equipment and
installation and recognizes them over the term of the monitoring contract. The monitoring
contracts vary in length from 1 month to 5 years. Deferred revenue included $1,139,342 and
$1,421,996 as of December 31, 2007 and 2006, respectively, related to these contracts.
Costs of Uncompleted Contracts in Excess of Related Billings
As of December 31, 2007, the Company had several customer projects underway for which it will
recognize revenue upon completion of the project. Expenses related to these uncompleted projects
have been recorded as a current asset titled “Costs of Uncompleted Contracts in Excess of Related
Billings.” These expenses will be recognized as the related projects are completed and revenue is
recognized. The Company had costs in excess of related billings of $952,997 and $0 at December 31,
2007 and 2006, respectively. It is expected that the majority of the projects underway as of the
end of 2007 will be completed during the first quarter of 2008.
F-11
Lime Energy Co.
Notes to Consolidated Financial Statements
Shipping and Handling Costs
The Company classifies freight costs billed to customers as revenue. Costs related to freight
are classified as cost of sales.
Research and Development Costs
Research and development costs are charged to operations when incurred and are included in
selling, general and administrative expenses. Total research and development costs charged to
operations were approximately $700,000, $535,000 and $395,000 for the periods ended December 31,
2007, 2006 and 2005, respectively.
Advertising, Marketing and Promotional Costs
Expenditures on advertising, marketing and promotions are charged to operations in the period
incurred and totaled $168,000, $117,000 and $7,000 for the periods ended December 31, 2007, 2006
and 2005, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes
are recognized for the tax consequences in future years of the differences between the tax basis of
assets and liabilities and their financial reporting amounts at each period end based on enacted
tax laws and statutory tax rates applicable to the periods in which the differences are expected to
affect taxable earnings. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount more likely than not to be realized.
Net Loss Per Share
The Company computes loss per share under Statement of Financial Accounting Standards No. 128,
“Earnings Per Share.” The statement requires presentation of two amounts; basic and diluted loss
per share. Basic loss per share is computed by dividing the loss available to common stockholders
by the weighted average common shares outstanding. Diluted earnings per share would include all
common stock equivalents unless anti-dilutive. The Company has not included the outstanding
options, warrants, convertible preferred stock or convertible debt as common stock equivalents
because the effect would be antidilutive.
The following table sets forth the weighted average shares issuable upon exercise of
outstanding options and warrants and conversion of preferred stock and convertible debt that is not
included in the basic and diluted net loss per share available to common stockholders:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
Weighted average shares issuable
upon exercise of outstanding options |
|
|
1,744,873 |
|
|
|
778,310 |
|
|
|
111,623 |
|
Weighted average shares issuable
upon exercise of outstanding
warrants |
|
|
332,560 |
|
|
|
156,783 |
|
|
|
130,097 |
|
Weighted average shares issuable
upon conversion of preferred stock |
|
|
— |
|
|
|
108,663 |
|
|
|
217,030 |
|
Weighted average shares issuable
upon conversion of convertible debt |
|
|
419,276 |
|
|
|
25,272 |
|
|
|
22,460 |
|
| |
Total |
|
|
2,496,709 |
|
|
|
1,069,028 |
|
|
|
481,210 |
|
| |
F-12
Lime Energy Co.
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash, accounts
receivable, accounts payable and accrued expenses approximate fair value because of the short-term
nature of these amounts. The Company’s long-term debt approximates fair value based on instruments
with similar terms.
Stock-based Compensation
The Company has a stock incentive plan that provides for stock-based employee compensation,
including the granting of stock options and shares of restricted stock, to certain key employees.
The plan is more fully described in Note 25. Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123(R), “Share-based Payment” (“SFAS 123(R)”),
which requires, among other things, that compensation expense be recognized for employee
stock options. Prior to the adoption of SFAS 123(R), the Company accounted for stock
compensation using the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Under that
method, compensation expense was recorded only if the current market price of the underlying stock
on the date of grant exceeded the option exercise price. Since stock options are granted at
exercise prices that are greater than or equal the market value of the underlying common stock on
the date of grant under the Company’s stock incentive plan, no compensation expense related to
stock options was recorded in the Consolidated Statements of Operations prior to January 1, 2006.
On January 1, 2006, the Company adopted SFAS No. 123(R), which requires companies to record
stock compensation expense for equity-based awards granted, including stock options and restricted
stock unit grants, over the service period of the equity-based award based on the fair value of the
award at the date of grant. The Company recognized $3,726,731 and $4,828,955 of stock compensation
expense during the years ended December 31, 2007 and 2006, respectively.
The following table illustrates the effect on the net loss and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation during the year ended December 31, 2005:
| |
|
|
|
|
| Year ended December 31, |
|
2005 |
|
| |
|
|
|
|
|
Net Loss, as reported |
|
$ |
(6,873,000 |
) |
|
|
|
|
|
Deduct: Stock-based employee
compensation expense included
in reported net loss |
|
|
— |
|
Add: Total stock-based employee
compensation expense determined under fair value
based method for awards |
|
|
(774,000 |
) |
| |
|
|
|
|
|
Pro forma net loss |
|
$ |
(7,647,000 |
) |
|
|
|
|
|
Net loss per share: |
|
|
|
|
Basic and diluted — as reported |
|
$ |
(19.14 |
) |
Basic and diluted — pro forma |
|
$ |
(20.84 |
) |
| |
F-13
Lime Energy Co.
Notes to Consolidated Financial Statements
For purposes of this pro forma disclosure the fair value of each option granted has been
estimated on the date of grant using a modified Black-Scholes option-pricing model with the
following weighted-average assumptions used for the grants:
| |
|
|
|
|
| December 31, |
|
2005 |
|
| |
Risk-free interest rate |
|
|
2.27 |
% |
Expected volatility |
|
|
65 |
% |
Expected life (years) |
|
|
9.1 |
|
Expected dividend yield |
|
|
0 |
% |
| |
The weighted-average fair value of options granted was $4.76 in 2005. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized over the options’ vesting
period.
Warranty Obligations
The Company warrants to the purchasers of its products that the product will be free of
defects in material and workmanship for one year from the date of installation. In addition, some
customers have purchased extended warranties for the Company’s products that extend the base
warranty period. The Company records the estimated cost that may be incurred under its warranties
at the time the product revenue is recognized based upon the relationship between historical and
anticipated warranty costs and sales volumes. The Company periodically assesses the adequacy of
its recorded warranty liability and adjusts the amounts as necessary. While the Company believes
that its estimated liability for
product warranties is adequate and that the judgment applied is appropriate, the estimated
liability for product warranties could differ materially from actual future warranty costs. See
Note 10 for additional information about the Company’s warranty liability.
Insurance Reserves
In October 2005, the Company implemented a partially self-funded health insurance program for
its employees. Under the program the Company is responsible for the first $35,000 of each
individual claim, but its exposure is limited on a monthly and cumulative basis through insurance
provided by a third party insurance company. The Company accrues on a monthly basis an amount
sufficient to cover its maximum exposure under the program. At the end of each plan year it
assesses the adequacy of the reserve based on its claims history and adjusts the reserve as
necessary. It had accrued liabilities of $102,665, $45,423 and $57,231 as of December 31, 2007,
2006 and 2005, respectively, to cover future claims under the program.
Recent Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a return. FIN 48 requires that companies recognize in their financial statements the impact of a
tax position if that position more likely than not will be sustained on an audit, based on the
technical merits of the position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and transition provisions. The
Company adopted FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, no
adjustment to retained earnings was made.
F-14
Lime Energy Co.
Notes to Consolidated Financial Statements
The Company’s subsidiaries file income tax returns in various tax jurisdictions, including the
United States and certain U.S. states. The Company has substantially concluded all US Federal and
State income tax matters for years up to and including 2001.
The Company has recorded a valuation allowance equaling the deferred tax asset due to the
uncertainty of its realization in the future. At December 31,
2007, the Company had US federal net
operating loss carryforwards available to offset future taxable income of approximately $75
million, which expire in the years 2018 through 2026. Under section 382 of the Internal Revenue
Code of 1986, as amended, the utilization of US net operating loss carryforwards may be limited
under the change in stock ownership rules of the IRC. As a result of ownership changes as defined
by Section 382, which have occurred at various points in the
Company’s history, it believes utilization of its
net operating loss carryforwards will likely be significantly limited under certain circumstances.
The Company is currently in the process of calculating the potential Section 382 limitations.
The Company’s policy is to recognize interest and penalties related to income tax matters in
interest and income tax expense respectively. There were no interest and penalties related to
income taxes recorded at January 1, 2007, the date of adoption of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards, Fair Value
Measurements (“Statement No. 157”). Statement No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands disclosures about
fair value measurements. The statement does not require new fair value measurements, but is applied
to the extent that other accounting pronouncements require or permit fair value measurements. The
statement emphasizes that fair value is a market-based measurement that should be determined based
on the assumptions that market participants would use in pricing an asset or liability. Companies
will be required to disclose the extent to which fair value is used to measure assets and
liabilities, the inputs used to develop the measurements, and the effect of certain of the
measurements on earnings (or changes in net assets) for the period. Certain requirements of
Statement No. 157 are required for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date for other requirements of Statement No. 157
has been deferred for one year by the FASB. The Company does not expect adoption of the sections of
Statement No. 157 which are effective for fiscal years beginning after November 15, 2007 to have a
material effect on the Company’s consolidated financial statements. The Company is currently
evaluating the impact of the delayed Sections of Statement No. 157 on its consolidated financial
statements, but is not yet in a position to determine the impact of its adoption.
In February 2007, the FASB issued Statement of Financial Accounting Standards The Fair Value
Option for Financial Assets and Liabilities (“Statement No. 159”). Statement No. 159 will become
effective as of the beginning of the first fiscal year beginning after November 15, 2007. Statement
No. 159 provides companies with an option to report selected financial assets and liabilities at
fair value that are not currently required to be measured at fair value. Accordingly, companies
would then be required to report unrealized gains and losses on these items in earnings at each
subsequent reporting date. The objective is to improve financial reporting by providing companies
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently. Statement No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The adoption of Statement No. 159 in the
first quarter of 2008 is not expected to have a material impact on the
F-15
Lime Energy Co.
Notes to Consolidated Financial Statements
Company’s consolidated
financial statements as it does not expect to elect the fair value option for any financial assets
or liabilities.
In December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations
(“Statement No. 141R”), effective prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Statement No. 141R establishes principles and requirements on how an acquirer
recognizes and measures in its financial statements identifiable assets acquired, liabilities
assumed, noncontrolling interests in the acquiree, goodwill or gain from a bargain purchase and
accounting for transaction costs. Additionally, Statement No. 141R determines what information must
be disclosed to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. The
Company will adopt Statement No. 141R on January 1, 2009.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. (“Statement No. 160”) Statement No. 160 requires
entities to report noncontrolling (minority) interests as a component of shareholders’ equity on
the balance sheet; include all earnings of a consolidated subsidiary in consolidated results of
operations; and treat all transactions between a parent and its noncontrolling interest as equity
transactions provided the parent does not lose control. Statement No. 160 is effective for fiscal
years beginning on or after December 15, 2008, must be adopted concurrently with SFAS 141R, and
adoption is prospective only; however, presentation and disclosure requirements described above
must be applied retrospectively. The Company is currently evaluating the impact that Statement No.
160 will have on its financial statements and disclosures.
Note 4 — Acquisitions
Maximum Performance Group, Inc.
On May 3, 2005, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as
of April 28, 2005, by and among Lime Energy Co., MPG Acquisition Corporation, a wholly-owned
subsidiary of Lime Energy (“Merger Subsidiary”), and Maximum Performance Group, Inc. (“MPG”), Lime
Energy acquired MPG through the merger of MPG with and into Merger Subsidiary, with Merger
Subsidiary continuing as the surviving corporation under the name Maximum Performance Group, Inc.
The merger consideration, after post closing adjustments, consisted of $1,632,972 in cash (net
of transaction costs of $137,386 and cash acquired of $136,492), 26,553 shares of Lime Energy
common stock, of which 2,818 shares were issued in 2007 based upon an earn-out formula tied to
MPG’s revenue during the two year period following the merger. Total consideration was $4,613,728,
which consisted of $1,632,079 in cash; stock valued at $2,716,633 (based on the average closing
price the Company’s stock for the five days before and after the announcement of the transaction of
$113.40 per share and $8.89 per share for the earn-out shares — the stock price on the date the
shares were released from escrow); $137,386 in transaction costs; plus commissions paid to Delano
Securities in the form of 1,336 shares of common stock valued at $1,252 (based on the closing price
of the Company’s stock on the dates of payment).
As a result of the merger, Merger Subsidiary (which changed its name to Maximum Performance
Group, Inc. pursuant to the merger) became responsible for the liabilities of MPG, including
F-16
Lime Energy Co.
Notes to Consolidated Financial Statements
approximately $232,000 in payments owed to shareholders and affiliates and approximately $40,000 of
bank debt and capitalized lease obligations.
The assets acquired and liabilities assumed in the acquisition are as follows:
| |
|
|
|
|
Accounts receivable |
|
$ |
292,102 |
|
Inventory |
|
|
326,122 |
|
Advances to suppliers |
|
|
472,689 |
|
Other current assets |
|
|
63,611 |
|
Net Property and equipment |
|
|
121,608 |
|
Identifiable intangible assets |
|
|
2,432,600 |
|
Goodwill (non-deductible) |
|
|
4,181,969 |
|
| |
Total assets acquired |
|
|
7,890,701 |
|
|
|
|
|
|
Accounts payable |
|
|
(928,509 |
) |
Accrued expenses |
|
|
(658,940 |
) |
Deferred revenue |
|
|
(1,011,616 |
) |
Other current liabilities |
|
|
(525,676 |
) |
Notes payable |
|
|
(289,587 |
) |
| |
Total liabilities acquired |
|
|
(3,414,328 |
) |
|
|
|
|
|
| |
Net assets acquired |
|
|
4,476,373 |
|
|
|
|
|
|
Less valuation of shares issued for
acquisition |
|
|
(2,716,664 |
) |
Acquisition costs paid through the
issuance of common stock |
|
|
(126,737 |
) |
| |
Total cash paid, including acquisition
costs, net of cash acquired |
|
$ |
1,632,972 |
|
| |
The Company has assessed the fair values of assets and liabilities of MPG and allocated the
purchase price accordingly. For purposes of the allocation, it has allocated $2,432,600 of the MPG
purchase price to identifiable intangible assets with definitive lives such as customer
relationships, customer contracts and the eMac technology and software. This amount has been
capitalized and is being amortized over the estimated useful life of the related identifiable
intangible assets. The amounts capitalized and the estimated useful life of the identifiable
intangible assets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Estimated |
|
|
Estimated |
|
| Asset Class |
|
Value |
|
|
Useful Life |
|
| |
eMac technology and software |
|
$ |
1,979,900 |
|
|
4.0 years |
Customer relationships |
|
|
267,800 |
|
|
9.7 years |
Customer contracts |
|
|
184,900 |
|
|
12 months |
| |
F-17
Parke P.A.N.D.A. Corporation
Lime Energy Co.
Notes to Consolidated Financial Statements
On May 19, 2006, Lime Energy entered into an agreement by and among the Company, Parke
Acquisition, LLC, a wholly-owned subsidiary of Lime Energy (“Merger Subsidiary”), Parke P.A.N.D.A.
Corporation (“Parke”), Daniel W. Parke (a director of Lime Energy) and Daniel W. Parke and Michelle
A. Parke as Trustees under The Parke Family Trust, under which on June 30, 2006, the Company
acquired Parke pursuant to the merger of Parke with and into Merger Subsidiary, with Merger
Subsidiary continuing as the surviving corporation under the name Parke Industries, LLC.
The merger consideration consisted of $2,720,000 in cash and shares of common stock having the
value of $5 million (valuing each share at the $7.00 price used in the private placement of common
stock described under Note 22(i)) or 714,286 shares of Lime Energy common stock, all of which was
paid to The Parke Family Trust, the sole stockholder of Parke, which is beneficially owned by
Daniel Parke and his spouse, Michelle A. Parke, who are also the trustees of such Trust. As a
result of the merger, Merger Subsidiary became responsible for the liabilities of Parke, including
$400,000 due on its line of credit and approximately $46,000 in various vehicle loans. The
acquisition has been recorded using the purchase method of accounting.
Parke is an energy services provider specializing in the design, engineering and installation
of energy efficient lighting upgrades for commercial and industrial users. Parke is headquartered
in Glendora, California with sales offices in northern California, and at the time of the
acquisition it had 30 employees.
Dan Parke, the president and founder of Parke continues to serve as the President of Parke and
as of June 30, 2006 also assumed the position of President and Chief Operating Officer of Lime
Energy. Mr. Parke also continues to serve as a director of Lime Energy.
The assets acquired and liabilities assumed in the acquisition, are as follows:
| |
|
|
|
|
Cash |
|
$ |
1,710 |
|
Accounts receivable |
|
|
710,465 |
|
Inventory |
|
|
142,789 |
|
Other current assets |
|
|
7,088 |
|
Net property and equipment |
|
|
79,917 |
|
Identifiable intangible assets |
|
|
3,247,000 |
|
Goodwill (non-deductible) |
|
|
5,584,874 |
|
|
|
|
|
Total assets acquired |
|
|
9,773,843 |
|
|
|
|
|
|
Line of credit |
|
|
(400,000 |
) |
Accounts payable |
|
|
(338,536 |
) |
Accrued expenses |
|
|
(89,571 |
) |
Notes payable |
|
|
(45,763 |
) |
Other current liabilities |
|
|
(368 |
) |
Deferred tax liability |
|
|
(1,034,000 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(1,908,238 |
) |
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
7,865,605 |
|
|
|
|
|
|
Less valuation of shares issued
for acquisition |
|
|
(5,000,000 |
) |
Acqusition costs |
|
|
(145,605 |
) |
|
|
|
|
Total cash paid |
|
$ |
2,720,000 |
|
F-18
Lime Energy Co.
Notes to Consolidated Financial Statements
The Company has assessed the fair values of assets and liabilities of Parke and allocated the
purchase price accordingly. For purposes of the allocation, it has allocated $595,000 of the Parke
purchase price to identifiable intangible assets with definitive lives such as customer contracts,
sales pipeline and the non-compete agreement with Dan Parke. This amount has been capitalized and
will be amortized over the estimated useful life of the related identifiable intangible assets. It
also allocated $2,652,000 to the Parke trade name, which was determined to have an indefinite
useful life and therefore will not be amortized. Amortization of intangibles such as these are
generally not deductible for tax purposes. The amounts capitalized and the estimated useful life
of the identifiable intangible assets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Estimated |
|
|
Estimated |
|
| Asset Class |
|
Value |
|
|
Useful Life |
|
| |
Non-compete agreement |
|
$ |
336,000 |
|
|
2 Years |
Customer contracts |
|
|
206,000 |
|
|
1 month |
Sales pipeline |
|
|
53,000 |
|
|
5 months |
Trade name |
|
|
2,652,000 |
|
|
Indefinite |
| |
Kapadia Consulting, Inc.
On September 26, 2006, the Company entered into an Agreement and Plan of Merger with Kapadia
Acquisition, Inc. (“Acquisition”), a wholly-owned subsidiary of the Company, Kapadia Consulting,
Inc. (“Kapadia”) and Pradeep Kapadia. The parties filed the Certificate of Merger on September 27,
2006, at which time the merger became effective, merging Kapadia with and into Acquisition, with
Acquisition continuing as the surviving corporation under the name Kapadia Energy Services, Inc.
The merger consideration consisted of $1,250,000 in cash and 71,429 shares of Lime Energy
common stock. For accounting purposes the common stock was valued at $6.72 per share, the average
closing price of the stock for the 20 trading days immediately prior to the closing. The
acquisition was recorded using the purchase method of accounting.
Kapadia is an engineering firm that specializes in energy management consulting and energy
efficient lighting upgrades for commercial and industrial users. At the time of the acquisition
Kapadia had seven employees, was headquartered in Peekskill, New York and had an office in Ventura,
California.
F-19
Lime Energy Co.
Notes to Consolidated Financial Statements
The assets acquired and liabilities assumed in the acquisition are based on a preliminary
allocation as follows:
| |
|
|
|
|
Cash |
|
$ |
47,329 |
|
Accounts receivable |
|
|
574,160 |
|
Inventory |
|
|
111,962 |
|
Other current assets |
|
|
122,451 |
|
Long term receivables |
|
|
17,713 |
|
Property and equipment |
|
|
16,430 |
|
Identifiable intangible assets |
|
|
1,129,000 |
|
Goodwill (non-deductible) |
|
|
710,433 |
|
|
|
|
|
Total assets acquired |
|
|
2,729,478 |
|
|
|
|
|
|
Accounts payable |
|
|
(657,079 |
) |
Accrued expenses |
|
|
(299,316 |
) |
Other current liabilities |
|
|
(11,272 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(967,667 |
) |
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
1,761,811 |
|
|
|
|
|
|
Less valuation of shares issued
for acquisition |
|
|
(480,000 |
) |
Acqusition costs |
|
|
(31,811 |
) |
|
|
|
|
|
|
|
|
|
Total cash paid |
|
$ |
1,250,000 |
|
The Company has assessed the fair values of assets and liabilities of Kapadia and allocated
the purchase price accordingly. For purposes of the allocation, it has allocated $1,129,000 of the
Kapadia purchase price to identifiable intangible assets with definitive lives such as sales
backlog, sales pipeline, the non-compete agreement with Pradeep Kapadia and Kapadia’s customer
list. This amount has been capitalized and will be amortized over the estimated useful life of the
related identifiable intangible assets. Amortization of intangibles such as these are generally
not deductible for tax purposes. The amounts capitalized and the estimated useful life of the
identifiable intangible assets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Estimated |
|
|
Estimated |
|
| Asset Class |
|
Value |
|
|
Useful Life |
|
| |
Sales backlog |
|
$ |
187,000 |
|
|
6 Months |
Sales pipeline |
|
|
708,000 |
|
|
12 Months |
Non-compete agreement |
|
|
87,000 |
|
|
2 Years |
Customer list |
|
|
147,000 |
|
|
10 Years |
| |
Texas Energy Products and Preferred Lighting, Inc.
On June 6, 2007, effective retroactive to May 31, 2007, the Company entered into an Asset
Purchase Agreement with George Bradley Boyett dba Texas Energy Products. Pursuant to the
agreement, Texas Energy Products, Inc., a newly formed wholly owned subsidiary of the Lime Energy,
acquired all of the business assets and assumed certain liabilities held by Mr. Boyett for $319,324
in cash and 28,571 shares of Lime Energy common stock. For accounting purposes the common stock
was valued at $7.49 per
F-20
Lime Energy Co.
Notes to Consolidated Financial Statements
share, the average closing price of the stock for the 20 trading days immediately prior to the
closing. The acquisition was recorded using the purchase method of accounting.
On August 6, 2007, effective retroactive to July 31, 2007, the Company entered into an Asset
Purchase Agreement with Preferred Lighting, Inc. pursuant to which a newly formed wholly owned
subsidiary of Lime Energy, acquired all of the business assets and assumed certain liabilities held
by Preferred Lighting, Inc. for $409,953 in cash (including $109,953 paid in 2008 pursuant to an
earn-out based on 2007 earnings), 15,069 shares of Lime Energy common stock and warrants to
purchase 21,429 shares of Lime Energy common stock at $13.23 per share. For accounting purposes
the common stock was valued at $13.30 per share, the average closing price of the stock for the 20
trading days immediately prior to the closing and the warrants were valued at $184,500 using a
modified Black-Scholes option pricing model utilizing the following assumptions: risk free rate of
4.909%, expected volatility of 75.0%, expected dividend of $0, and expected life of four years.
The acquisition was also recorded using the purchase method of accounting.
The assets acquired and liabilities assumed in the acquisitions, based on a preliminary
allocation are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Texas |
|
|
Preferred |
|
| |
|
Energy |
|
|
Lighting |
|
| |
Cash |
|
$ |
17,899 |
|
|
$ |
31,127 |
|
Accounts receivable |
|
|
78,410 |
|
|
|
24,491 |
|
Inventory |
|
|
67,634 |
|
|
|
53,499 |
|
Other current assets |
|
|
4,800 |
|
|
|
16,735 |
|
Property and equipment |
|
|
7,000 |
|
|
|
8,593 |
|
Identifiable intangible assets |
|
|
496,000 |
|
|
|
368,100 |
|
Goodwill (deductible) |
|
|
28,780 |
|
|
|
433,045 |
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
700,523 |
|
|
|
935,590 |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(101,356 |
) |
|
|
(22 |
) |
Accrued expenses |
|
|
(19,241 |
) |
|
|
(20,164 |
) |
Other current liabilities |
|
|
(35,784 |
) |
|
|
(108,059 |
) |
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
(156,381 |
) |
|
|
(128,245 |
) |
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
544,142 |
|
|
|
807,345 |
|
|
|
|
|
|
|
|
|
|
Less valuation of shares and
warrants issued for acquisition |
|
|
(214,000 |
) |
|
|
(384,922 |
) |
Acqusition costs |
|
|
(10,818 |
) |
|
|
(12,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash paid |
|
|
319,324 |
|
|
|
409,953 |
|
The Company has assessed the fair values of acquired assets and assumed liabilities and
allocated the purchase price accordingly. For purposes of the allocation, it has allocated $496,000
and $368,100 of the Texas Energy Products and Preferred Lighting purchase prices, respectively, to
identifiable intangible assets with definitive lives such as sales backlog and the sales pipeline.
These amounts have been capitalized and will be amortized over the estimated useful life of the
related identifiable intangible assets.
F-21
Lime Energy Co.
Notes to Consolidated Financial Statements
This amortization and goodwill will be deductible for tax
purposes. The amounts capitalized and the estimated useful life of the identifiable intangible
assets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Estimated |
|
Estimated |
| Asset Class |
|
Value |
|
Useful Life |
| |
|
|
|
|
|
|
|
|
|
Texas Energy Products |
|
|
|
|
|
|
|
|
Sales backlog |
|
$ |
223,000 |
|
|
3 Months |
Sales pipeline |
|
|
273,000 |
|
|
6 Months |
|
|
|
|
|
|
|
|
|
Preferred Lighting |
|
|
|
|
|
|
|
|
Sales backlog |
|
$ |
15,400 |
|
|
4 months |
Sales pipeline |
|
|
335,000 |
|
|
16 months |
Customer list |
|
|
17,700 |
|
|
3 years |
Both companies are energy services companies that specialize in energy efficient lighting
upgrades. In addition Texas Energy products markets energy efficient window film and roofing.
Texas Energy Products is headquartered in Austin, Texas, has a sales office in Dallas, Texas and
had four employees on the date of acquisition. Preferred Lighting is headquartered in Seattle,
Washington and also had four employees at the time of acquisition.
The acquisitions of MPG, Parke, Kapadia, Texas Energy and Preferred Lighting were recorded
using the purchase method of accounting. Accordingly, the results of operations for each company
have been included in the consolidated statement of operations since their respective dates of
acquisition.
Unaudited pro forma results of operations for the years ended December 31, 2006 and 2005 for
the Company assuming the acquisitions of MPG and Parke had taken place on January 1, 2005 are as
follows:
| |
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
As Reported |
|
$ |
8,143,624 |
|
|
$ |
3,693,429 |
|
Pro-forma |
|
|
10,027,454 |
|
|
|
7,298,786 |
|
|
|
|
|
|
|
|
|
|
Net Loss from Continuing Operations: |
|
|
|
|
|
|
|
|
As Reported |
|
$ |
(16,426,089 |
) |
|
$ |
(6,620,776 |
) |
Pro-forma |
|
|
(16,056,887 |
) |
|
|
(8,360,207 |
) |
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss per Share
from Continuing Operations: |
|
|
|
|
|
|
|
|
As Reported |
|
$ |
(10.61 |
) |
|
$ |
(19.14 |
) |
Pro-forma |
|
|
(8.84 |
) |
|
|
(19.01 |
) |
The pro forma operating results as if the Company had completed the acquisitions of Kapadia,
Texas Energy and Preferred Lighting are not significant to the Company’s financial statements and
are not presented.
F-22
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 5 — Discontinued Operations
The Company adopted Statement of Financial Accounting Standards No. 144 (SFAS 144) at the
beginning of 2002. Among other things, SFAS 144 requires that the results of operations and
related disposal costs as well as the gain or loss on the disposal of a business unit be presented
on the statement of operations as a separate component of income before extraordinary items for all
periods presented.
On April 3, 2006, the Company completed a Stock Purchase Agreement with Eugene Borucki and
Denis Enberg (the “Purchasers”) in which it sold, effective as of March 31, 2006, all of the
outstanding capital stock of Great Lakes Controlled Energy Corporation to the Purchasers for 2,027
shares of Lime Energy common stock. The shares of Lime Energy common stock received from the
Purchasers were retired and became authorized but un-issued shares. For accounting purposes, the
Company valued these shares at $95.55 each, which is the average closing market price of the common
stock prior to entering into the letter of intent to sell Great Lakes. The Company did not incur a
gain or loss on the sale of Great Lakes, however it did incur an impairment charge of $242,830
during the year ended December 31, 2005 when it reduced the carrying value of the goodwill
associated with Great Lakes in anticipation of the sale.
The revenue and loss related to discontinued operations were as follows:
| |
|
|
|
|
|
|
|
|
| Year ended December 31 |
|
2006 |
|
|
2005 |
|
| |
Revenue |
|
$ |
485,787 |
|
|
$ |
1,161,343 |
|
Net Loss |
|
|
(21,425 |
) |
|
|
(251,962 |
) |
Note 6 — Inventories
Inventories consisted of the following:
| |
|
|
|
|
|
|
|
|
| December 31, |
|
2007 |
|
|
2006 |
|
| |
Raw materials |
|
$ |
681,602 |
|
|
$ |
1,010,995 |
|
Work in process |
|
|
— |
|
|
|
3,700 |
|
Finished goods |
|
|
13,463 |
|
|
|
196,586 |
|
Reserve for obsolescence (1) |
|
|
(1,838 |
) |
|
|
(596,790 |
) |
| |
|
|
$ |
693,227 |
|
|
$ |
614,491 |
|
| |
|
|
|
| (1) |
|
Includes $553,909 reserve for obsolete EnergySaver inventory as of December 31,
2006. |
F-23
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 7 — Property and Equipment
Property and equipment consist of the following:
| |
|
|
|
|
|
|
|
|
| December 31, |
|
2007 |
|
|
2006 |
|
| |
Land |
|
$ |
205,000 |
|
|
$ |
205,000 |
|
Building |
|
|
1,011,723 |
|
|
|
997,381 |
|
Furniture |
|
|
120,609 |
|
|
|
82,946 |
|
Equipment |
|
|
121,622 |
|
|
|
43,192 |
|
Office equipment |
|
|
561,785 |
|
|
|
342,906 |
|
Transportation equipment |
|
|
303,212 |
|
|
|
123,055 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
2,323,951 |
|
|
|
1,794,480 |
|
Less accumulated depreciation |
|
|
(781,624 |
) |
|
|
(593,472 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,542,327 |
|
|
$ |
1,201,008 |
|
| |
F-24
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 8 — Goodwill and Other Intangible Assets
Goodwill represents the purchase price in excess of the fair value of assets acquired in
business combinations. Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and
Other Intangible Assets”, requires the Company to assess goodwill for impairment at least annually
in the absence of an indicator of possible impairment and immediately upon an indicator of possible
impairment. The following is a summary of the Company’s goodwill as of December 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Building |
|
|
|
|
|
|
|
|
|
|
| |
|
Control and |
|
|
Energy |
|
|
Energy |
|
|
|
|
| |
|
Automation |
|
|
Technology |
|
|
Services |
|
|
Total |
|
| |
Balance at January 1, 2005 |
|
$ |
416,573 |
|
|
|
— |
|
|
|
— |
|
|
|
416,573 |
|
Acquisition of Maximum
Performance Group, Inc. |
|
|
— |
|
|
|
4,155,660 |
|
|
|
— |
|
|
|
4,155,660 |
|
Impairment charge |
|
|
(242,831 |
) |
|
|
— |
|
|
|
— |
|
|
|
(242,831 |
) |
| |
Balance at December 31, 2005 |
|
$ |
173,742 |
|
|
$ |
4,155,660 |
|
|
$ |
— |
|
|
$ |
4,329,402 |
|
Sale of Great Lakes Controlled
Energy Corporation |
|
|
(173,742 |
) |
|
|
— |
|
|
|
— |
|
|
|
(173,742 |
) |
Acquisition of Parke P.A.N.D.A.
Corporation |
|
|
— |
|
|
|
— |
|
|
|
5,584,874 |
|
|
|
5,584,874 |
|
Acquisition of Kapadia Consulting,
Inc. |
|
|
— |
|
|
|
— |
|
|
|
710,433 |
|
|
|
710,433 |
|
| |
Balance at December 31, 2006 |
|
$ |
— |
|
|
$ |
4,155,660 |
|
|
$ |
6,295,307 |
|
|
$ |
10,450,967 |
|
| |
Release of escrow shares to
Former owners of Maximum
Performance Group, Inc. |
|
|
— |
|
|
|
26,309 |
|
|
|
— |
|
|
|
26,309 |
|
Acquisition of Texas Energy
Products, Inc. |
|
|
— |
|
|
|
— |
|
|
|
28,780 |
|
|
|
28,780 |
|
Acquisition of Preferred
Lighting, Inc. |
|
|
— |
|
|
|
— |
|
|
|
433,045 |
|
|
|
433,045 |
|
Impairment charge |
|
|
— |
|
|
|
(4,181,969 |
) |
|
|
— |
|
|
|
(4,181,969 |
) |
| |
Balance at December 31, 2007 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,757,132 |
|
|
$ |
6,757,132 |
|
| |
See Note 5 for additional information regarding the sale of Great Lakes Controlled Energy and
Note 4 for additional information regarding the acquisitions of Maximum Performance Group, Inc,
Parke P.A.N.D.A. Corporation, Kapadia Consulting, Inc., Texas Energy Products and Preferred
Lighting, Inc. The goodwill related to the acquisitions of Maximum Performance Group, Parke
P.A.N.D.A. and Kapadia, is non-deductible for income tax purposes.
F-25
Lime Energy Co.
Notes to Consolidated Financial Statements
The components of intangible assets as of December 31, 2007 and 2006 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
| |
|
Average |
|
|
|
|
|
|
|
|
|
|
| |
|
Remaining |
|
|
|
|
|
|
|
|
|
|
| |
|
Life |
|
|
Gross Book |
|
|
Accumulated |
|
|
Net Book |
|
| |
|
(months) |
|
|
Value |
|
|
Amortization |
|
|
Value |
|
| |
As of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived assets |
|
|
|
|
|
$ |
2,652,000 |
|
|
$ |
— |
|
|
$ |
2,652,000 |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and software |
|
|
8.5 |
|
|
|
1,979,900 |
|
|
|
1,319,933 |
|
|
|
659,967 |
|
Customer relationships |
|
|
57.1 |
|
|
|
432,500 |
|
|
|
86,390 |
|
|
|
346,110 |
|
Customer contracts |
|
|
0.0 |
|
|
|
816,300 |
|
|
|
816,300 |
|
|
|
— |
|
Non-compete agreements |
|
|
3.9 |
|
|
|
423,000 |
|
|
|
306,375 |
|
|
|
116,625 |
|
Sales pipe-line |
|
|
6.6 |
|
|
|
1,369,000 |
|
|
|
1,164,650 |
|
|
|
204,350 |
|
| |
Total |
|
|
|
|
|
$ |
7,672,700 |
|
|
$ |
3,693,648 |
|
|
$ |
3,979,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived assets |
|
|
|
|
|
$ |
2,652,000 |
|
|
|
— |
|
|
$ |
2,652,000 |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and software |
|
|
14.5 |
|
|
|
1,979,900 |
|
|
|
824,958 |
|
|
|
1,154,942 |
|
Customer relationships |
|
|
64.6 |
|
|
|
414,800 |
|
|
|
47,538 |
|
|
|
367,262 |
|
Customer contracts |
|
|
2.0 |
|
|
|
577,900 |
|
|
|
484,400 |
|
|
|
93,500 |
|
Non-compete agreements |
|
|
9.8 |
|
|
|
423,000 |
|
|
|
94,875 |
|
|
|
328,125 |
|
Sales pipe-line |
|
|
5.0 |
|
|
|
761,000 |
|
|
|
230,000 |
|
|
|
531,000 |
|
| |
Total |
|
|
|
|
|
$ |
6,808,600 |
|
|
$ |
1,681,771 |
|
|
$ |
5,126,829 |
|
| |
The aggregate amortization expense was $2,011,878 and $1,210,006 for the years ended December
31, 2007 and 2006, respectively. The estimated amortization expense for intangible assets for each
of the next five years as of December 31, 2007, is as follows:
| |
|
|
|
|
| |
|
Amortization |
|
| |
|
Expense |
|
| |
2008 |
|
$ |
857,513 |
|
2009 |
|
|
215,927 |
|
2010 |
|
|
44,736 |
|
2011 |
|
|
39,813 |
|
2012 |
|
|
36,440 |
|
| |
|
|
$ |
1,194,429 |
|
| |
F-26
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 9 — Accrued Expenses
Accrued expenses are comprised of the following:
| |
|
|
|
|
|
|
|
|
| December 31, |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
30,222 |
|
|
$ |
56,590 |
|
Compensation |
|
|
302,922 |
|
|
|
149,320 |
|
Insurance |
|
|
137,531 |
|
|
|
47,866 |
|
Interest |
|
|
172,975 |
|
|
|
31,059 |
|
Job costs |
|
|
230,665 |
|
|
|
122,924 |
|
Lease expense |
|
|
36,840 |
|
|
|
13,502 |
|
Professional fees |
|
|
10,386 |
|
|
|
82,238 |
|
Real estate taxes |
|
|
42,012 |
|
|
|
41,689 |
|
Registration penalties |
|
|
— |
|
|
|
345,583 |
|
Sales tax payable |
|
|
211,549 |
|
|
|
35,050 |
|
Warranty reserve |
|
|
377,902 |
|
|
|
196,783 |
|
Other |
|
|
18,679 |
|
|
|
129,173 |
|
| |
|
|
$ |
1,571,683 |
|
|
$ |
1,251,777 |
|
| |
Note 10 — Warranty Liability
Changes in the Company’s warranty liability are as follows:
| |
|
|
|
|
|
|
|
|
| December 31, |
|
2007 |
|
|
2006 |
|
| |
Balance, beginning of year |
|
$ |
196,783 |
|
|
$ |
228,331 |
|
Warranties issued |
|
|
231,737 |
|
|
|
54,790 |
|
Settlements |
|
|
(50,618 |
) |
|
|
(66,307 |
) |
Adjustments (1) |
|
|
— |
|
|
|
(20,031 |
) |
| |
Balance, end of year |
|
$ |
377,902 |
|
|
$ |
196,783 |
|
| |
|
|
|
| (1) |
|
Reflects the sale of Great Lakes Controlled Energy |
Note 11 — Line of Credit
On September 11, 2003 the Company closed on a credit facility with Laurus Master Fund, Ltd.
(“Laurus”). The facility, which was subsequently amended on August 31, 2004, February 28, 2005 and
November 28, 2005, included a $1,000,000 convertible term loan and a $2,000,000 convertible
revolving line of credit.
On June 29, 2006, Laurus exercised its right to convert all of the outstanding balance on the
Company’s revolving line of credit of $943,455 plus $7,410 in accrued interest into 135,838 shares
of the Company’s common stock, and the line was terminated. The revolving note contained
anti-dilution provisions which automatically adjusted the conversion price of the note to $7.00 per
share, the price at which the Company issued shares of common stock in the June 2006 PIPE
Transaction (as described in
F-27
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 20). Laurus (if it still chose to convert the note) would have received 8,557 shares of
common stock upon conversion of the revolving note utilizing the conversion price prior to this
adjustment, but as a result of the adjustment it received 134,779 shares. The market value of the
126,222 additional shares it received as a result of the adjustment (capped at the amount converted
including the accrued interest), was recorded as interest expense in the amount of $950,865. On
June 29, 2006, the market price of the Company’s common stock was $8.05 per share, as a result the
Company recognized an additional $1,112 of non-cash interest expense calculated as the difference
between the market price ($8.05) and the conversion price ($7.00) of the 1,059 shares of common
stock issued in satisfaction of the accrued interest expense.
Note 12 — Subordinated Convertible Term Notes
During the second quarter of 2007, eight investors, including Richard Kiphart, the Company’s
chairman and largest individual stockholder (collectively the “Investors”), and the Company entered
into a loan agreement under which the Investors lent the Company $5 million in the form of
subordinated convertible term notes (the “Term Notes”). The Term Notes mature on May 31, 2010,
although they may be prepaid at anytime after May 31, 2008 at the Company’s option without penalty,
and accrue interest at the rate of 10% per year. Interest is payable quarterly, 50% in cash and
50% in shares of the Company’s common stock valued at the market price of the Company’s common
stock on the interest due date. The Term Notes are convertible at any time at the Investors’
election at $7.00 per share and will automatically convert to shares of common stock at $7.00 per
share, if, at any time after May 31, 2008 the closing price of the Company’s common stock exceeds
$10.50 per share for 20 days in any consecutive 30-day period. The loan agreement provides for
acceleration upon the occurrence of typical events of default, including nonpayment,
nonperformance, bankruptcy and collateral impairment.
As part of the transaction, the Company issued the Investors four-year warrants to purchase
206,044 shares of its common stock at $7.28 per share. These warrants were valued at $1,136,537
utilizing a modified-Black Scholes option pricing model utilizing the following assumptions: risk
free rate of 4.846%; expected volatility of 93.3%; expected dividend of $0; and expected life of
four years.
The shares issued as part of the quarterly interest payments and issuable upon conversion of
the term loan or exercise of the warrants will not be registered for resale, though the Company has
given the Investors the right to demand the Company use its best efforts to file as soon as
practicable a registration statement to register a minimum of 142,857 issued shares.
In recording the transaction, the Company allocated the value of the proceeds to the Term
Notes and warrants based on their relative fair values. In doing so, it determined that the Term
Notes contained a beneficial conversion feature since the fair market value of the common stock
issuable upon conversion of the Term Notes (determined on the Term Note issuance date) exceeded the
value allocated to the Term Notes of $3,863,463. The Term Notes are convertible 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 of the shares issuable
upon conversion and the value allocated to the Term Notes of $1,866,537 is considered to be the
value of the beneficial conversion feature. This calculation is summarized as follows:
F-28
Lime Energy Co.
Notes to Consolidated Financial Statements
| |
|
|
|
|
Value Allocated to Term Notes: |
|
|
|
|
Proceeds from issuance |
|
$ |
5,000,000 |
|
Less value allocated to warrants |
|
|
(1,136,537 |
) |
|
|
|
|
|
|
|
|
|
Value allocated to Term Notes |
|
$ |
3,863,463 |
|
|
|
|
|
|
|
|
|
|
Market Value of Shares Issuable Upon Conversion: |
|
|
|
|
Shares issuable upon conversion of the Term Notes |
|
|
714,286 |
|
Closing market value of stock on Term Note issuance date |
|
$ |
8.022 |
|
|
|
|
|
|
|
|
|
|
Market value of shares issuable upon conversion |
|
|
5,730,000 |
|
|
|
|
|
|
|
|
|
|
Beneficial Conversion Value: |
|
|
|
|
Market value of shares issuable upon conversion |
|
$ |
5,730,000 |
|
Less value allocated to Term Notes |
|
|
(3,863,463 |
) |
|
|
|
|
|
|
|
|
|
Value of beneficial conversion feature |
|
$ |
1,866,537 |
|
|
|
|
|
The value of the beneficial conversion feature and the value of the warrants have been
recorded as a discount to the Term Notes and are being amortized over the term of the Term Notes
using the effective interest method. Amortization of the discount of $590,769 was included in
interest expense during the year ended December 31, 2007.
In addition, the Company incurred costs of $8,572 relative to the Term Note offering. These
costs have been capitalized and are also being amortized over the term of the Term Notes using the
effective interest method. Amortization of the deferred issuance costs of $1,687 was included in
interest expense during the year ended December 31, 2007.
Note 13 — Convertible Term Loans
On September 11, 2003, the Company entered into a $1,000,000 convertible Term Loan with Laurus
Master Fund, Ltd., which was subsequently amended on August 31, 2004. The term loan was secured by
all of the Company’s assets except its real estate; was convertible into the Company’s common stock
under certain circumstances at Laurus’ or the Company’s option; required monthly payments of
principal and interest; and was schedule to mature on September 1, 2006.
On November 22, 2005, the Company and Laurus entered into a securities purchase agreement
providing for a new four year, $5 million convertible term loan (the “November 2005 Term Loan”).
The Company received unrestricted access to the proceeds from the November 2005 Term Loan on
November 25, 2005. This term loan was also secured by all of the Company’s assets except its real
estate; was convertible into the Company’s common stock under certain circumstances at Laurus’ or
the Company’s option; required monthly payments of principal and interest; and was scheduled to
mature on November 1, 2009. None of the November 2005 Term Loan was ever converted to common
stock.
As part of the November 2005 Term Loan the Company agreed to split any cash flow generated by
the Company’s VNPP and Shared Savings projects, after the payment of related debt, to the extent
any portion of the November 2005 Term Loan was used to fund such Projects. In addition, the
Company
F-29
Lime Energy Co.
Notes to Consolidated Financial Statements
agreed to continue to pay a portion of the Project Cash Flow to Laurus on a declining basis
for five years after repayment of the November 2005 Term Loan.
In connection with the November 2005 Term Loan, Laurus received warrants to purchase shares of
the Company’s common stock valued at $920,000. The value of these warrants were recorded as a
discount to the loan and were being amortized over the life of the loan utilizing the effective
interest method. In addition, fees and expenses related to the transaction totaling $271,431were
recorded as capitalized financing costs and were being amortized over the life of the loan
utilizing the effective interest method.
On June 29, 2006, the Company repaid the outstanding balances on the two term loans held by
Laurus, along with accrued interest thereon and related prepayment penalties and fees. The total
cash payment to Laurus made on June 29, 2006 was as follows:
| |
|
|
|
|
| |
|
Payment |
|
| |
Principal |
|
$ |
5,038,030 |
|
Interest through the date of repayment |
|
|
40,568 |
|
Prepayment penalties |
|
|
516,071 |
|
Related fees |
|
|
6,749 |
|
| |
Total payment |
|
$ |
5,601,418 |
|
| |
In conjunction with the repayment Laurus agreed to 1) waive the payment of liquidated damages
due as a result of the Company’s failure to register shares of its stock issuable upon conversion
of the November 2005 Term Loan as required in the related Securities Purchase Agreement, and 2)
terminate the requirement that the Company pay it a portion of the cash flows generated by VNPP and
Shared Savings projects following the repayment of the November 2005 Term Loan, in exchange for
receipt of 23,014 and 33,071 shares of the Company’s common stock, respectively. The Company
valued these shares at $8.05 per share (the market price on the date of issue) and charged $266,225
to interest expense and $185,260 to selling general & administrative expense during 2006.
Upon the repayment of the term loans the Company was required to recognize as interest expense
the unamortized balance of the discount and capitalized financing costs related to these loans of
$777,996 and $231,281, respectively.
F-30
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 14 — Notes Payable
As part of the acquisition of Maximum Performance Group, Inc., the Company assumed a $150,000
demand note payable to Duke Investments, LLC (formerly known as Cinergy Investments, LLC). The
note accrues interest at the rate of prime (7.25% as of December 31, 2007) plus 3%. As of December
31, 2007 and 2006 the Company had accrued interest payable of $43,643 and $27,096, respectively
related to the note.
Note 15 — Long Term Debt
The Company’s long term debt consists of the following:
| |
|
|
|
|
|
|
|
|
| December 31, |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
|
|
|
|
Mortgage note to American Chartered Bank, prime (7.25% as of
December 31, 2007) plus 1/2%, payable in monthly
installments of $3,000, plus interest until January
2010. A final payment of $415,000 is due in February
2010. This note is collateralized by the building and
land in Elk Grove Village, Illinois. |
|
$ |
490,000 |
|
|
$ |
526,000 |
|
|
|
|
|
|
|
|
|
|
Subordinated convertible term note (less debt discount
of $2,412,305, as of December 31, 2007). |
|
|
2,587,695 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Various other notes |
|
|
191,939 |
|
|
|
41,091 |
|
| |
|
|
|
|
|
|
|
|
|
Total debt |
|
|
3,269,634 |
|
|
|
567,091 |
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
81,954 |
|
|
|
46,699 |
|
| |
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
3,187,680 |
|
|
$ |
520,392 |
|
| |
The aggregate amounts of long-term debt maturing in future years as of December 31, 2007, are
as follows:
| |
|
|
|
|
| |
|
Aggregate |
|
| |
|
Maturities |
|
| |
2008 |
|
|
81,954 |
|
2009 |
|
|
81,387 |
|
2010 |
|
|
5,453,149 |
|
2011 |
|
|
36,952 |
|
2112 |
|
|
27,950 |
|
2113 |
|
|
547 |
|
| |
|
|
$ |
5,681,939 |
|
| |
F-31
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 16 — Interest Expense
Interest expense is comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31 |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
Line of credit (Note 11) |
|
$ |
— |
|
|
$ |
50,344 |
|
|
$ |
138,097 |
|
Note payable (Note 14) |
|
|
16,547 |
|
|
|
16,563 |
|
|
|
9,563 |
|
Mortgage (Note 15) |
|
|
43,931 |
|
|
|
46,495 |
|
|
|
39,181 |
|
Subordinated convertible notes
(Note 12) |
|
|
293,683 |
|
|
|
— |
|
|
|
— |
|
Convertible term loans (Note 13) |
|
|
— |
|
|
|
249,065 |
|
|
|
87,709 |
|
Other |
|
|
5,476 |
|
|
|
1,772 |
|
|
|
3,027 |
|
Amortization of deferred issuance
costs and debt discount
(Notes 12 and 13) |
|
|
592,456 |
|
|
|
1,175,970 |
|
|
|
165,413 |
|
Value of warrant issued to
Laurus (Note 22(b)) |
|
|
— |
|
|
|
— |
|
|
|
160,000 |
|
Prepayment penalty (Note 13) |
|
|
— |
|
|
|
516,071 |
|
|
|
— |
|
Value of adjustment in conversion
price (Note 13) |
|
|
— |
|
|
|
950,865 |
|
|
|
— |
|
Termination of post re-payment
interest obligation (Note 13) |
|
|
— |
|
|
|
266,225 |
|
|
|
— |
|
| |
Total Interest Expense |
|
$ |
952,093 |
|
|
$ |
3,273,370 |
|
|
$ |
602,990 |
|
| |
Note 17 — Lease Commitments
The Company leases a facility in Glendora, California from a company controlled by Dan Parke,
the Company’s President and a director. Total rent expense for this facility amounted to $78,371
and $21,000 for 2007 and 2006, respectively. The Company believes that the rates charged by Mr.
Parke are reasonable in that they are equivalent to rates charged to other unaffiliated third
parties in the building. The Company also leases offices in New York, California, Texas,
Connecticut, and Washington from unrelated third parties on which it paid a total of $235,594
during 2007.
Future minimum rentals to be paid by the Company as of December 31, 2007 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Related |
|
|
Unrelated |
|
|
|
|
| Year ending December 31, |
|
Party |
|
|
Party |
|
|
Total |
|
| |
2008 |
|
$ |
126,126 |
|
|
$ |
211,671 |
|
|
$ |
337,797 |
|
2009 |
|
|
130,403 |
|
|
|
181,750 |
|
|
|
312,153 |
|
2010 |
|
|
— |
|
|
|
135,313 |
|
|
|
135,313 |
|
2011 |
|
|
— |
|
|
|
85,279 |
|
|
|
85,279 |
|
| |
Total |
|
$ |
256,529 |
|
|
$ |
614,013 |
|
|
$ |
870,542 |
|
| |
F-32
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 18 — Income Taxes
The composition of income tax expense (benefit) is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31 |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(5,353,000 |
) |
|
$ |
(5,453,000 |
) |
|
$ |
(2,272,000 |
) |
State |
|
|
(945,000 |
) |
|
|
(962,000 |
) |
|
|
(401,000 |
) |
Change in valuation allowance |
|
|
6,298,000 |
|
|
|
6,415,000 |
|
|
|
2,673,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Significant components of the Company’s deferred tax asset are as follows:
| |
|
|
|
|
|
|
|
|
| December 31 |
|
2007 |
|
|
2006 |
|
| |
Deferred tax asset consisting principally of net operating losses |
|
$ |
33,897,000 |
|
|
$ |
28,368,000 |
|
Deferred tax liabilities, principally related to non-deductible
identifiable intangible assets |
|
|
(1,231,000 |
) |
|
|
(2,000,000 |
) |
Less valuation allowance |
|
|
(33,700,000 |
) |
|
|
(27,402,000 |
) |
| |
|
|
|
|
|
|
|
|
|
Total net deferred tax liability |
|
$ |
(1,034,000 |
) |
|
$ |
(1,034,000 |
) |
| |
The Company has recorded a valuation allowance equaling the deferred tax asset due to the
uncertainty of its realization in the future. At December 31, 2007, the Company had U.S. federal
net operating loss carryforwards available to offset future taxable income of approximately $75
million, which expire in the years 2018 through 2027. Under Section 382 of the Internal Revenue
Code (IRC) of 1986, as amended, the utilization of U.S. net operating loss carryforwards may be
limited under the change in stock ownership rules of the IRC. As a result of ownership changes as
defined by Section 382, which have occurred at various points in our history, we believe
utilization of our net operating loss carryfowards will likely be significantly limited under
certain circumstances. The Company is currently in the process of calculating the potential
Section 382 limitations on the future us of its net operating loss carryforwards.
F-33
Lime Energy Co.
Notes to Consolidated Financial Statements
The reconciliation of income tax expense (benefit) to the amount computed by applying the
federal statutory rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) at federal statutory rate |
|
$ |
(5,288,000 |
) |
|
$ |
(5,592,000 |
) |
|
$ |
(2,337,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes (net of federal tax benefit) |
|
|
(1,010,000 |
) |
|
|
(823,000 |
) |
|
|
(336,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in valuation allowance |
|
|
6,298,000 |
|
|
|
6,415,000 |
|
|
|
2,673,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
The Company has recorded a valuation allowance of $33.7 million due to the uncertainty of
future utilization of the deferred tax assets. In assessing the adequacy of the valuation
allowance, the Company determined that there existed a deferred tax liability related to an
indefinite-lived intangible, for which the expected reversal was indeterminate. Due to uncertainty
of whether this deferred tax liability would reverse prior to expiration of the net operating
losses and other deferred tax assets, this liability has not been netted against the Company’s
deferred tax assets, resulting in a net deferred tax liability of approximately $1 million as of
both December 31, 2007 and 2006.
Note 19 — Commitments and Contingencies
| a) |
|
The Company entered into employment agreements with certain officers and employees expiring
in 2010. Total future commitments under these agreements are as follows: |
| |
|
|
|
|
| Year ending December 31, |
|
|
|
|
| |
2008 |
|
$ |
1,144,000 |
|
2009 |
|
|
745,000 |
|
2010 |
|
|
745,000 |
|
| |
|
|
|
|
|
Total |
|
$ |
2,634,000 |
|
| |
| b) |
|
The Company is involved in certain litigation in the normal course of its business.
Management intends to vigorously defend these cases. In the opinion of management, the
litigation now pending will not have a material adverse affect on the consolidated financial
statements of the Company. |
Note 20 — The June 2006 PIPE Transaction
On June 29, 2006, the Company entered into a securities purchase agreement with a group of 17
investors (the “PIPE Investors”) pursuant to which it issued to such purchasers an aggregate of
2,553,571 shares of its common stock at a price of $7.00 per share for total gross proceeds of
$17,875,000 (the “PIPE Transaction”). Ten of the PIPE Investors, who purchased an aggregate of
1,985,714 shares of common stock in the PIPE Transaction, were holders of Series E Convertible
Preferred stock, including three members of the Company’s board of directors (who, together with
members of their families, purchased 1,100,000 shares of common stock in the PIPE Transaction).
Proceeds from the transaction were used to repay the Company’s outstanding convertible debt and to
fund the cash portion of the
F-34
Lime Energy Co.
Notes to Consolidated Financial Statements
consideration of the
Parke P.A.N.D.A. Corporation and the Kapadia
Consulting, Inc. acquisitions, with the balance used for general corporate purposes.
A provision of the June 2006 PIPE Transaction required the Company to file and have declared
effective by November 3, 2006, a registration statement registering the shares issued as part of
the PIPE Transaction. To the extent that it failed to have the registration statement declared
effective by this date, the Company was required to pay penalties to the PIPE investors at the rate
of 1% per month of the purchase price paid by the investors. Largely as a result of the questions
regarding the need to amend its Certificate of Incorporation to effect the 2006 reverse split of
its stock, the Company was not able to have the registration statement declared effective until
February 14, 2007. All of the investors in the PIPE Transaction agreed to accept shares of the
Company’s common stock as payment of this registration penalty. As of December 31, 2006 the
Company had accrued $345,583 in penalties related to its failure to register these shares. The
accrued penalties, along with $268,125 of penalties for the period from January 1, 2007 through
February 14, 2007 (when the registration was declared effective), were satisfied through the
issuance of 87,673 shares of common stock in January and February 2007.
Note 21 — The Series E Conversion
In connection with the June 2006 PIPE Transaction, the holders of the Series E Preferred
agreed to convert all of their shares of Series E Preferred into common stock, and agreed that,
upon the conversion, all agreements related to the Preferred Stock would be terminated. As a
result of the conversion, all special approval rights related to the Preferred Stock, including the
right to a liquidation preference, were terminated. All of the shares of Series E Convertible
Preferred which were converted to common stock have been cancelled.
Prior to the June 2006 PIPE Transaction, the Series E Preferred stock was convertible into the
Company’s common stock at $105.00 per share. However, the Series E Preferred contained
anti-dilution provisions which required automatic reduction of the conversion price of the Series E
Preferred to the price of a new issuance if the Company issued stock or securities convertible into
common stock at a price below the Series E Preferred conversion price then in effect. Because the
Company issued common stock in the June 2006 PIPE Transaction at $7.00 per share, the Series E
Preferred conversion price was automatically reduced to $7.00 per share. Prior to this adjustment
the holders of the Series E Convertible Preferred stock would have been entitled to 224,861 shares
of common stock on conversion, whereas as a result of this adjustment on conversion they actually
received 3,092,621 shares of common stock. The market value of the additional 2,867,760 shares
issuable upon conversion of the Series E was recorded as a non-cash deemed dividend in the amount
of $23,085,467 on June 29, 2006.
F-35
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 22 — Equity Transactions
2005 Transactions
| a) |
|
During 2005, two holders of the Company’s Series E Convertible
Preferred Stock converted 2,167 shares of Series E Convertible
Preferred Stock into 2,064 shares of common stock. |
| |
| b) |
|
During 2005, the Company issued the following warrants: |
| |
• |
|
On April 28, 2005, Laurus Master Fund, Ltd. received a warrant to purchase 3,810
shares of common stock in exchange for its consent to the Company entering into the
PIPE Transaction described under c) below and acquiring MPG, as well as waiving its
right to adjust the conversion price on the Company’s convertible term note and
convertible revolving note. The warrant has an exercise price of $105.00 per share and
a term of five years. The warrant was valued at $160,000 using a modified
Black-Scholes option pricing model utilizing the following assumptions: risk free rate
of 2.941%; expected volatility of 43.7%; expected dividend of $0; and expected life of
5 years. The value of the warrant was charged to interest expense during 2005. |
| |
| |
• |
|
Various parties received warrants to purchase 4,191 shares of the Company’s common
stock with exercise prices between $105.00 and $108.15 per share and terms of three to
ten years. The warrants were valued collectively at $159,800 using a modified
Black-Scholes option pricing model utilizing the following assumptions (depending on
the warrant being valued): risk free rate of 2.366% to 3.029%; expected volatility of
40.7% to 46.5%; an expected dividend of $0; and an expected life of 3 to 10 years. The
values of the warrants were charged to operations during the 2005. |
| c) |
|
On April 28, 2005 the Company issued to five (5) institutional investors, for an aggregate
gross purchase price of $5,625,000, 59,524 shares of its common stock and 42 month warrants to
purchase 29,762 additional shares of common stock at $110.25 per share. Net proceeds from the
transaction were approximately $5,413,000, of which approximately $1,644,000 was used to fund
the acquisition of Maximum Performance Group, Inc. The balance of the proceeds were used to
pay transaction costs and for general corporate purposes. |
| |
| |
|
Delano Group Securities LLC and Mr. David Valentine acted as advisors on the transaction. The
Company paid Delano Group Securities LLC $16,250 and 476 shares of common stock and Mr.
Valentine 476 shares of common stock for their services. Mr. Asplund and Mr. Valentine both
were serving as directors of Lime Energy at that time. Subsequently, on January 23, 2006, Mr.
Asplund became the Company’s CEO. |
| |
| d) |
|
On May 3, 2005 the Company issued 23,735 shares of common stock in connection with the
acquisition of Maximum Performance Group, Inc. Please refer to Note 4 for additional
information regarding this transaction. |
F-36
Lime Energy Co.
Notes to Consolidated Financial Statements
| |
|
Delano Group Securities LLC acted as an advisor on the acquisition of MPG and was paid $82,176
and 1,195 shares of common stock for its services. These shares were valued at $105.00 per
share, which was the closing market price of the Company’s common stock on April 28, 2005.
Delano
Group Securities LLC is owned by Mr. David Asplund, one of Lime Energy’s directors and effective
January 23, 2006, its CEO. |
| |
| e) |
|
On November 22, 2005 the Company entered into a securities purchase agreement with Laurus
Master Fund, Ltd. whereby the Company issued to Laurus a $5 million secured convertible term
note and warrants to purchase 19,048 shares of its common stock at $121.80 per share anytime
prior to November 22, 2012. The warrants were valued at $920,000 using a modified
Black-Scholes option pricing model utilizing the following assumptions: risk free rate of
4.034%; expected volatility of 67.4%; expected dividend of $0; and expected life of 7 years.
The value of the warrants was recorded as a discount to the term loan and was to be amortized
over the term of the underlying debt utilizing the effective interest method. |
| |
| |
|
This term loan was retired through a cash payment on June 29, 2006. No portion of the term loan
was converted to common stock. |
| |
| f) |
|
During the year ended December 31, 2005, the Company’s Board of
Directors declared dividends payable on its Series E Convertible
Preferred Stock of $1,366,900. The dividends were paid with
13,699 additional shares of Series E Convertible Preferred
Stock. |
2006 Transactions
| g) |
|
In January 2006 the Company issued stock options at the then
current market price of $65.10 per share, which was less than
the $96.60 exercise price on a warrant held by one of its former
Series E Preferred stock holders. Adjusting the exercise price
of this warrant resulted in a non-cash deemed dividend of
$266,390. |
| |
| h) |
|
During the first three months of 2006, two holders of the
Company’s Series E Convertible Preferred Stock converted a total
of 7,130 shares of Series E Convertible Preferred Stock into
6,790 shares of common stock. |
| |
| i) |
|
Effective March 31, 2006, the Company received 2,027 shares of
its common stock as part of the sale of its Great Lakes
Controlled Energy Corporation subsidiary to Messrs. Eugene
Borucki and Denis Enberg. These shares have been returned to
the status of authorized, unissued shares of common stock. |
| |
| j) |
|
A number of the Company’s common stock warrants contain
anti-dilution provisions that automatically adjust the exercise
price on the warrants to the issuance price of any security
convertible into the Company’s common stock if the price of the
newly issued security is less than the exercise price on the
holder’s warrant. Prior to the PIPE Transaction described in i)
above, the exercise price on these warrants ranged from $94.50
per share to $105.00 per share. The issuance of common stock in
the PIPE Transaction caused the exercise price on these warrants
to automatically be reduced to $7.00 per share. Utilizing a
modified Black-Scholes option pricing model, the Company
determined that the increase in value of these warrants that
resulted from this adjustment was $297,868, which the Company
recorded as a non-cash deemed dividend on June 29, 2006. The |
F-37
Lime Energy Co.
Notes to Consolidated Financial Statements
| |
|
Company used the following assumptions when determining the
change in value of these warrants: risk free rate of 5.036%;
expected volatility of between 97.8% and 154.7; expected
dividend of $0; and expected lives of between 0.4 years and 2.7
years. |
| |
| k) |
|
Immediately following completion of the PIPE Transaction
described in Note 20 above, and prepayment of the Laurus term
loans, Laurus elected to convert the entire outstanding balance
on its revolving line of credit, along with accrued interest
thereon, into 135,838 shares of the Company’s common stock. In
addition, in consideration of the issuance of 56,085 shares of
common stock, Laurus agreed to (i) waive the payment of
liquidated damages due as a result of the Company’s failure to
register shares of common stock into which the November 2005 $5
million term loan was convertible, and (ii) terminate the
requirement that the Company pay it a portion of the cash flows
generated by VNPP projects for a period of 5 years following the
repayment of the November 2005 $5 million convertible term loan. |
| |
| l) |
|
On June 30, 2006, the Company issued 714,286 shares to the Parke
Family Trust as part of the consideration in the acquisition of
Parke P.A.N.D.A. Corporation. Please refer to Note 4 for
additional information regarding this transaction. |
| |
| m) |
|
During the first six months of 2006, the Company’s Board of
Directors declared dividends payable on the Company’s Series E
Convertible Preferred Stock of $698,000. The dividends were paid
with 6,980 additional shares of Series E Convertible Preferred
Stock. |
| |
| n) |
|
On July 25, 2006, the Company issued a three year warrant to
purchase 8,571 shares of its common stock at $7.00 per share to
Bristol Capital, Ltd. This warrant was valued at $25,200 using
a modified Black-Scholes option pricing model utilizing the
following assumptions: risk free rate of 5.108%; expected
volatility of 91.4%; expected dividend of $0; and expected life
of 3 years. The value of this warrant was charged to operations
during the period. |
| |
| o) |
|
On September 26, 2006, the Company issued 71,429 shares of its
common stock to Pradeep and Susan Kapadia as part of the
consideration in the acquisition of Kapadia Consulting, Inc.
Please refer to Note 4 for additional information regarding this
transaction. |
2007 Transactions
| p) |
|
In January 2007, pursuant to the Directors’ Option Plan the
Company granted options to certain outside directors with an
exercise price of $6.30 per share, which was the market price on
the date of issuance. Warrants held by 12 investors, including
Messrs. Asplund and Kiphart, contained anti-dilution provisions
that automatically adjust the exercise price on the warrants to
the issuance price of any security convertible into the
Company’s common stock if the price of the newly issued security
is less than the exercise price on the holder’s warrant. Prior
to granting of the director options, the exercise price on these
warrants was $7.00 per share. The grant of the director options
caused the exercise price on these warrants to automatically be
reduced to $6.30 per share. Utilizing a modified Black-Scholes
option pricing model, the Company determined that the increase
in value of these warrants that resulted from this adjustment
was $19,204, which the Company recorded as an expense in January
2007. The Company used the following assumptions when
determining the change in value of these warrants: risk free
rate of 5.026%; expected volatility of between 73.5% and 127.7;
expected dividend of $0; and expected lives of between 0.5 years
and 1.7 years. |
F-38
Lime Energy Co.
Notes to Consolidated Financial Statements
| q) |
|
During January 2007, the Company issued consultants warrants
with terms of two to three years to purchase 38,571 shares of
its common stock at prices of $7.00 to $7.56 per share as
partial consideration for services provided the Company. These
warrants were valued at $162,000 using a modified Black-Scholes
option pricing model utilizing the following assumptions: risk
free rate of
5.129%; expected volatility of 88.9%; expected dividend of $0; and expected life of two to three
years. The value of the warrants was charged to operations during 2007. |
| |
| r) |
|
A provision of the June 2006 PIPE transaction required the Company to
file and have declared effective by no later than November 3, 2006, a
registration statement registering the shares issued as part of the
transaction. To the extent that it failed to have the registration
statement declared effective by this date, it was required to pay
penalties to the PIPE investors at the rate of 1% per month of the
purchase price paid by the investors. Largely as a result of the
questions regarding the need to amend its Certificate of Incorporation
to effect the 2006 reverse split of its stock, the Company was not
able to have the registration statement declared effective until
February 14, 2007. All of the investors in the PIPE transaction
agreed to accept shares of the Company’s common stock as payment of
this registration penalty. As of December 31, 2006, the Company had
accrued $345,583 in penalties related to its failure to register these
shares. The accrued penalties, along with $268,125 of penalties for
the period from January 1, 2007 through February 14, 2007, were
satisfied through the issuance of 87,673 shares of common stock in
January and February 2007. |
| |
| s) |
|
On February 23, 2007, the Company commenced a rights offering to
stockholders in which it distributed to each holder of record as of
February 23, 2007 (other than the former Series E Preferred
stockholders and Daniel Parke, who waived their rights to
participate), non-transferable subscription rights to purchase shares
of the Company’s common stock at $7.00 per share. Stockholders that
participated in the rights offering were also able to subscribe for
any shares that were not purchased by other stockholders pursuant to
their subscription rights. The rights offering closed on March 30,
2007 and raised $2,796,700 (net of issuance costs of $202,932) through
the issuance of 428,519 shares of common stock to 260 of the Company’s
existing stockholders. The Company received the proceeds from the
offering and issued the common stock to the participants during the
first week of April 2007. |
| |
| t) |
|
In connection with the placement of the subordinated convertible term
notes during the second quarter of 2007 the Company issued four-year
warrants to eight investors, including Richard Kiphart, the Company’s
chairman and largest individual stockholder, to purchase 206,043
shares of its common stock at $7.28 per share. These warrants were
valued at $1,136,537 using a modified-Black Scholes option pricing
model utilizing the following assumptions: risk free rate of 4.846%;
expected volatility of 93.3%; expected dividend of $0; and expected
life of four years. The value of the warrants was recorded as a
discount to the subordinated convertible term notes and will be
amortized over the life of the notes using the effective interest
method. |
F-39
Lime Energy Co.
Notes to Consolidated Financial Statements
| u) |
|
As part of the MPG acquisition, 23,735 shares of common stock were
deposited in escrow for the benefit of the selling stockholders of MPG
to be released over the two-year period following the April 30, 2005
purchase of MPG if it achieved certain revenue targets during the
period. During May 2007 the Company issued 2,818 shares to the
former MPG stockholders which it determined it owed them pursuant to
the MPG merger agreement. These shares were valued at $8.89 per
share, the market value on the date of their release, and recorded as
an increase in the goodwill associated with the MPG acquisition. The
remaining 20,917 shares that were in escrow were returned to the
Company and retired and became authorized but un-issued shares. |
| |
| v) |
|
Delano Group Securities LLC acted as an advisor on the acquisition of
MPG in 2005. Part of Delano’s compensation for its services was tied
to the purchase price paid for MPG. Mr. David Asplund owned and
operated Delano prior to joining Lime Energy as its CEO in January
2006. Since the release of the escrow shares was considered a payment
of additional consideration to the former stockholders of MPG, the
Company issued Mr. Asplund 141 shares of its common stock in May 2007
in satisfaction of the commission owed Delano. These shares were
valued at $1,252, based on the market value on the date of their
issuance, and recorded as an increase in the goodwill associated with
the MPG acquisition. |
| |
| w) |
|
On June 6, 2007, retroactive to May 31, 2007, the Company acquired the
assets and assumed certain liabilities of George Bradley Boyett dba
Texas Energy Products. The purchase consideration consisted of 28,571
shares of Lime Energy common stock and cash of $312,787. For
accounting purposes the stock was valued at $7.49 per share, the
average closing price of the stock for the 20 trading days immediately
prior to the closing. Please refer to Note 4 for additional
information regarding this transaction. |
| |
| x) |
|
On August 6, 2007, retroactive to July 31, 2007, the Company acquired
the assets and assumed certain liabilities of Preferred Lighting, Inc.
for 15,069 shares of Lime Energy common stock and cash of $409,953
(including $109,953 paid in 2008 pursuant to an earn-out based on 2007
earnings). The company also issued five year warrants to the former
owners of Preferred Lighting to purchase 21,429 shares of the
Company’s common stock at $13.23 per share. These warrants were
valued at $184,500 using a modified-Black Scholes option pricing model
utilizing the following assumptions: risk free rate of 4.909%;
expected volatility of 75.0%; expected dividend of $0; and expected
life of four years. The value of the warrants were considered part of
the purchase consideration. Please refer to Note 4 for additional
information regarding this transaction. |
| |
| y) |
|
During 2007, the Company issued 7,088 shares of its common stock to
the holders of its subordinated convertible term notes in satisfaction
of 50% of the interest owed on the note. |
| |
| z) |
|
During 2007 certain employees and a former director exercised options
to purchase 33,005 shares of the Company’s common stock as exercise
prices ranging from $6.30 to $7.14 per share. |
| |
| aa) |
|
During 2007 six investors exercised their warrants to purchase 5,011
shares of the Company’s common stock at $6.30 per share. One of these
investors elected to exercise its warrant on a cashless basis,
surrendering 569 shares it would have otherwise be entitled to receive
on exercise to cover the exercise price. |
F-40
Lime Energy Co.
Notes to Consolidated Financial Statements
| bb) |
|
The Company had outstanding warrants to purchase 417,907 and 157,443
shares of its common stock as of December 31, 2007 and 2006,
respectively, at an exercise price of between $6.30 per share and
$688.80 per share. These warrants can be exercised at any time prior
to their expiration dates which range between January 2008 and May
2015. The following table summarizes information about warrants
outstanding as of December 31, 2007: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Warrants Outstanding |
|
| |
|
Number |
|
|
Weighted
Average |
|
|
Weighted |
|
| |
|
Outstanding at |
|
|
Remaining |
|
|
Average |
|
| |
|
December 31, |
|
|
Contractual |
|
|
Exercise |
|
| Exercise Price |
|
2007 |
|
|
Life |
|
|
Price |
|
| |
|
|
|
|
|
$6.30 — $7.00 |
|
|
106,579 |
|
|
1.0 years |
|
|
$ |
6.58 |
|
$7.01 — $10.00 |
|
|
227,473 |
|
|
4.3 years |
|
|
|
7.31 |
|
$10.01 — $15.00 |
|
|
21,429 |
|
|
4.6 years |
|
|
|
13.23 |
|
$15.01 — $104.99 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
$105.00 — $688.80 |
|
|
62,426 |
|
|
2.1 years |
|
|
|
127.24 |
|
| |
|
|
|
|
|
|
|
|
417,907 |
|
|
2.6 years |
|
|
$ |
25.34 |
|
| |
Note 23 — Dividends
The dividend expense recognized during the years ended December 31, 2007, 2006 and 2005 is
comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of Series E Preferred
dividend |
|
|
— |
|
|
|
698,000 |
|
|
|
1,366,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend associated with
change in conversion price of the
Series E Convertible Preferred Stock |
|
|
— |
|
|
|
23,085,467 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend associated with
change in the exercise price of
warrants to purchase shares of
common stock |
|
|
— |
|
|
|
564,258 |
|
|
|
484,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
— |
|
|
$ |
24,347,725 |
|
|
$ |
1,851,345 |
|
| |
F-41
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 24 — Reverse Splits
On June 15, 2006, the Company effected a 1 for 15 reverse split of its common stock. A second
reverse split of the Company’s common stock was effected on January 25, 2007, this one on a 1 for 7
basis. All share amounts stated herein have been retroactively restated to reflect these reverse
splits.
Note 25 — Stock Options
On August 30, 2001, the Company’s shareholders approved the adoption of the 2001 Stock
Incentive Plan (the “Plan”), providing that up to 7,619 shares of the Company’s common stock could
be delivered under the Plan to certain employees of the Company or any of its subsidiaries and to
consultants and directors who are not employees. In addition, the Plan originally provided for an
additional number of shares of the Company’s common stock to be reserved for issuance under the
plan on January 1st of each succeeding year, beginning January 1, 2002, in an amount equal to the
lesser of (i) 5% of the number of outstanding shares of Common Stock, or (ii) 4,762 shares. At the
annual meeting held on June 7, 2006, the Company’s stockholders approved an amendment to the Plan
which increased the number of shares reserved for issuance under the plan by 57,143 shares and
increased the additional shares which would become automatically available under the plan each
January 1st to the lesser of (i) 5% of the number of outstanding shares of Common Stock,
or (ii) 19,048 shares. The awards granted under the Plan may be incentive stock options or
non-qualified stock options. The exercise price for any incentive stock option (“ISO”) may not be
less than 100% of the fair market value of the stock on the date the option is granted, except that
with respect to a participant who owns more than 10% of the common stock the exercise price must be
not less than 110% of fair market value. The exercise price of any non-qualified option shall be in
the sole discretion of the Compensation Committee or the Board. To qualify as an ISO the aggregate
fair market value of the shares (determined on the grant date) under options granted to any
participant may not exceed $100,000 in the first year that they can be exercised. There is no
comparable limitation with respect to non-qualified stock options. The term of all options granted
under the Plan will be determined by the Compensation Committee or the Board in their sole
discretion, provided, however, that the term of each ISO shall not exceed 10 years from the date of
grant thereof.
In addition to the ISOs and non-qualified options, the Plan permits the Compensation
Committee, consistent with the purposes of the Plan, to grant stock appreciation rights and/or
shares of Common Stock to non-employee directors and such employees (including officers and
directors who are employees) of, or consultants to, the Company or any of its Subsidiaries, as the
Committee may determine, in its sole discretion. Under applicable tax laws, however, ISO’s may only
be granted to employees.
The Plan is administered by the Board, which is authorized to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan and to determine the
individuals to whom, and the time, terms and conditions under which, options and awards are
granted. The Board may also amend, suspend or terminate the Plan in any respect at any time.
However, no amendment may (i) adversely affect the rights of a participant under an award
theretofore granted without the consent of such participant, (ii) increase the number of shares
reserved under the Plan, (iii) modify the requirements for participation in the Plan, or (iv)
modify the Plan in any way that would require stockholder approval under the rules and regulations
under the Exchange Act or the rules of any stock exchange or market on which the Common Stock is
listed (unless such stockholder approval is obtained).
F-42
Lime Energy Co.
Notes to Consolidated Financial Statements
As of December 31, 2007, there were approximately 107 employees of the Company eligible to
participate in the Plan, and 107,620 shares of common stock reserved under the Plan.
Effective April 1, 2000, the Company adopted a stock option plan for all independent
directors, which is separate and distinct from the 2001 Stock Incentive Plan described above.
The plan was amended on July 11, 2006 to provide that eligible directors receive an initial option
grant upon being appointed to the Company’s Board of Directors to purchase 14,286 shares of its
common stock, and a grant of options to purchase an additional 7,143 shares on the first day of
January beginning on the second January following the date the Director became an eligible
director. These options have an exercise price equal to the closing price of the Company’s common
stock on the grant date and a term of ten years. The initial options vest on the first day of
January following the initial grant date or six months following the initial grant date, whichever
is later, if the individual is still a director on the vesting date. All future grants vest in two
equal amounts, one amount on the grant date and the balance on the anniversary of the grant date,
if the individual is still a member of the Board of Directors on such anniversary date.
During 2005, certain directors, officers and key employees of the Company were granted options
to acquire 9,976 shares of common stock at exercise prices ranging from $105.00 to $130.20 per
share. These options vest over periods through October 2007.
During 2006, certain directors, officers and key employees of the Company were granted options
to acquire 1,446,903 shares of common stock at exercise prices ranging from $6.72 to $105.00 per
share. These options vest over periods through December 2008.
During 2007, certain directors, officers and key employees of the Company were granted options
to acquire 701,723 shares of common stock at exercise prices ranging from $6.30 to $13.30 per
share. These options vest over periods through December 2010.
F-43
Lime Energy Co.
Notes to Consolidated Financial Statements
The following table summarizes the options granted, exercised and outstanding as of December
31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Exercise |
|
|
Average |
|
| |
|
|
|
|
|
Price Per |
|
|
Exercise |
|
| |
|
Shares |
|
|
Share |
|
|
Price |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
105,876 |
|
|
$ |
88.20-$1,363.95 |
|
|
$ |
343.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
9,976 |
|
|
$ |
105.00-$130.20 |
|
|
$ |
109.20 |
|
Forfeited |
|
|
(1,566 |
) |
|
$ |
105.00-$840.00 |
|
|
$ |
163.80 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
114,286 |
|
|
$ |
88.20-$1,363.95 |
|
|
$ |
325.50 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,446,903 |
|
|
$ |
6.72-$105.00 |
|
|
$ |
7.84 |
|
Forfeited |
|
|
(31,626 |
) |
|
$ |
7.14-$735.00 |
|
|
$ |
137.76 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
1,529,563 |
|
|
$ |
6.72-$1,363.95 |
|
|
$ |
33.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
701,723 |
|
|
$ |
6.30-$13.30 |
|
|
$ |
10.58 |
|
Exercised |
|
|
(35,086 |
) |
|
$ |
6.30-$7.14 |
|
|
$ |
7.05 |
|
Forfeited |
|
|
(25,852 |
) |
|
$ |
6.30-$247.80 |
|
|
$ |
31.55 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
2,170,348 |
|
|
$ |
6.30-$1,363.95 |
|
|
$ |
23.31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2007 |
|
|
1,095,512 |
|
|
$ |
6.30-$1,363.95 |
|
|
$ |
36.86 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2006 |
|
|
663,636 |
|
|
$ |
6.72-$1,363.95 |
|
|
$ |
7.95 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2005 |
|
|
103,360 |
|
|
$ |
88.20-$1,363.95 |
|
|
$ |
338.10 |
|
| |
The intrinsic value of options exercised during 2007 was $193,000.
F-44
Lime Energy Co.
Notes to Consolidated Financial Statements
The weighted-average, grant-date fair value of stock options granted to employees during the
year, and the weighted-average significant assumptions used to determine those fair values, using a
modified Black-Scholes option pricing model for stock options under Statement of Financial
Accounting Standards No. 123, are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per options granted |
|
$ |
8.12 |
|
|
$ |
7.35 |
|
|
$ |
4.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant assumptions (weighted average): |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate at grant date |
|
|
4.06 |
% |
|
|
5.02 |
% |
|
|
2.27 |
% |
Expected stock price volatility |
|
|
88 |
% |
|
|
90 |
% |
|
|
65 |
% |
Expected dividend payout |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected option life (years) |
|
|
6.1 |
|
|
|
5.6 |
|
|
|
9.1 |
|
| |
The risk-free interest rate is based on the U.S. Treasury Bill rates at the time of grant. The
dividend reflects the fact that the Company has never paid a dividend on its common stock and does
not expect to in the foreseeable future. The Company estimated the volatility of its common stock
at the date of grant based on the historical volatility of its stock. The expected term of the
options is based on the simplified method as described in the Staff Accounting Bulletin. The
Company assumes a forfeiture rate of approximate 1% based on historical experience in the
calculation of share based compensation.
The Company recognized $3,726,731, $4,828,955 and $0 of share based compensation expense
related to stock options during 2007, 2006 and 2005, respectively. The following table summarizes
the expense for 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
| |
|
Cost of |
|
|
|
|
|
|
|
|
|
|
| |
|
Sales |
|
SG&A |
|
Total |
|
Cost of Sales |
|
SG&A |
|
Total |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy services |
|
$ |
129,716 |
|
|
$ |
591,560 |
|
|
$ |
721,276 |
|
|
$ |
217,271 |
|
|
$ |
623,277 |
|
|
$ |
840,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy technology |
|
|
14,949 |
|
|
|
529,112 |
|
|
|
544,061 |
|
|
|
79,663 |
|
|
|
817,287 |
|
|
|
896,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate overhead |
|
|
— |
|
|
|
2,461,394 |
|
|
|
2,461,394 |
|
|
|
— |
|
|
|
3,079,122 |
|
|
|
3,079,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,335 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,665 |
|
|
$ |
3,582,066 |
|
|
$ |
3,726,731 |
|
|
$ |
296,934 |
|
|
$ |
4,519,686 |
|
|
$ |
4,828,955 |
|
The Company recognizes compensation expense for stock options on a straight-line basis over
the requisite service period, which is generally equal to the vesting period of the option. The
subject stock options expire ten years after the date of grant.
F-45
Lime Energy Co.
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at December 31,
2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
|
Options Exercisable |
|
| |
|
Number |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding at |
|
|
Remaining |
|
|
Weighted Average |
|
|
Number Exercisable |
|
|
Weighted Average |
|
| |
|
December 31, |
|
|
Contractual |
|
|
Exercise |
|
|
at December 31, |
|
|
Exercise |
|
| Exercise Price |
|
2007 |
|
|
Life |
|
|
Price |
|
|
2007 |
|
|
Price |
|
| |
$6.30 — $7.00 |
|
|
548,571 |
|
|
8.6 years |
|
$ |
6.74 |
|
|
|
256,285 |
|
|
$ |
6.74 |
|
$7.01 — $8.50 |
|
|
907,053 |
|
|
7.6 years |
|
|
7.19 |
|
|
|
728,243 |
|
|
|
7.16 |
|
$8.51 — $11.00 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
$11.00 — $12.00 |
|
|
599,536 |
|
|
9.8 years |
|
|
11.15 |
|
|
|
1,429 |
|
|
|
11.20 |
|
$12.01 — $13.50 |
|
|
3,570 |
|
|
9.5 years |
|
|
12.88 |
|
|
|
— |
|
|
|
— |
|
$13.51 — 100.00 |
|
|
14,286 |
|
|
8.1 years |
|
|
65.10 |
|
|
|
14,286 |
|
|
|
65.10 |
|
$100.01—$1,363.95 |
|
|
97,332 |
|
|
2.1 years |
|
|
336.00 |
|
|
|
95,269 |
|
|
|
341.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,170,348 |
|
|
8.2 years |
|
$ |
23.31 |
|
|
|
1,095,512 |
|
|
$ |
36.86 |
|
| |
The aggregate intrinsic value of the outstanding options (the difference between the closing
stock price on the last trading day of 2007 of $9.45 per share and the exercise price, multiplied
by the number of in-the-money options) that would have been received by the option holders had all
option holders exercised their options on December 31, 2007 was $3,536,508. The aggregate intrinsic
value of the exercisable options as of December 31, 2007 was $2,360,851. These amount will change
based on changes in the fair market value of the Company’s common stock.
As of December 31, 2007, $5,400,499 of total unrecognized compensation cost related to
outstanding stock options is expected to be recognized over a weighted-average period of 1.84
years, as follows:
| |
|
|
|
|
| Year ending December 31, |
|
|
|
|
| |
2008 |
|
$ |
3,600,956 |
|
2009 |
|
|
1,280,652 |
|
2010 |
|
|
518,891 |
|
| |
|
|
|
|
|
Total |
|
$ |
5,400,499 |
|
| |
F-46
Lime Energy Co.
Notes to Consolidated Financial Statements
A summary of the nonvested options for the year ended December 31, 2007 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average Grant |
|
| |
|
|
|
|
|
Date Fair |
|
| |
|
Number of Options |
|
|
Value |
|
| |
Nonvested at December 31, 2006 |
|
|
865,950 |
|
|
$ |
8.86 |
|
Granted |
|
|
701,673 |
|
|
|
8.12 |
|
Vested |
|
|
(473,981 |
) |
|
|
9.03 |
|
Forfeited |
|
|
(18,806 |
) |
|
|
7.61 |
|
| |
Nonvested at December 31, 2007 |
|
|
1,074,836 |
|
|
$ |
8.30 |
|
| |
Note 26 — Related Parties
As is more fully described in Note 12, during the second quarter of 2007, eight investors,
including Richard Kiphart, the Company’s chairman and largest individual stockholder (collectively
the “Investors”), and the Company entered into a loan agreement under which the Investors lent the
Company $5 million in the form of subordinated convertible term notes.
On three occasions during 2006 and 2007, the Company retained Corporate Resource Development,
a company owned by William Carey, one of the Company’s directors, to provide sales and marketing
consulting services and training. It paid CRD a total of $52,500 for its services in each of 2007
and 2006.
In January 2007, the Company also entered into an agreement with Mr. Carey to provide it with
sales and marketing leads and introductions. In exchange for these services the Company agreed to
pay Mr. Carey a commission of 1.5% on any sale that closed as a result of his work and granted him
a warrant to purchase 21,429 shares of its stock at $7.56 per share and a term of three years. As
of December 31, 2007, no commission had been paid pursuant to this agreement.
On June 29, 2006, the Company entered into the PIPE Transaction and Series E Conversion (as
described in Notes 20 and 21) with 18 persons and entities, including Messrs. Asplund, Kiphart and
Valentine, who are all directors of the Company, for an aggregate purchase price of $17,875,000 for
2,553,571 shares of the Company’s common stock.
F-47
Lime Energy Co.
Notes to Consolidated Financial Statements
A breakdown of the shares issued in these transactions to Messrs. Asplund, Kiphart and
Valentine is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares Issued Upon |
|
Common Shares |
|
Aggregate Price |
| |
|
Conversion of |
|
Issued Pursuant to |
|
Paid for PIPE |
| |
|
Series E |
|
PIPE |
|
Shares |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
David R. Asplund |
|
|
50,600 |
|
|
|
214,286 |
|
|
$ |
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard P. Kiphart |
|
|
1,271,915 |
|
|
|
814,286 |
|
|
|
5,700,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Valentine |
|
|
20,814 |
|
|
|
28,571 |
|
|
|
200,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,343,329 |
|
|
|
1,057,143 |
|
|
$ |
7,400,000 |
|
| |
During January 2006, the Company entered into a consulting agreement with Parke P.A.N.D.A.
Corporation to provide sales and marketing consulting services. Parke P.A.N.D.A. was a company
which at the time was beneficially owned by Daniel Parke, one of the Company’s directors. Pursuant
to the consulting agreement the Company agreed to pay Parke P.A.N.D.A. $10,000 per month and to
reimburse it for any expenses incurred as a result of its work. The Company paid Parke P.A.N.D.A.
a total of $61,155 during the six months ended June 30, 2006. This agreement was terminated in May
2006.
On June 29, 2006, the Company acquired Parke P.A.N.D.A. Corporation, a company owned by The
Parke Family Trust, which is controlled and beneficially owned by Daniel Parke, one of the
Company’s directors, and his spouse. Please see Note 4 for additional information regarding this
transaction.
As part of the acquisition of Parke P.A.N.D.A. Corporation, the Company assumed Parke
P.A.N.D.A.’s existing office lease for space in a building in Glendora California owned by a
company controlled by Daniel Parke. The Company believes that the terms of the lease are fair as
they are comparable to the terms of leases with other third party tenants located in the building.
See Note 17 for additional information regarding this lease.
Certain other related party transactions are disclosed in Notes 12, 17 and 29.
The Company does not have a written policy concerning transactions between the Company or a
subsidiary of the Company and any director or executive officer, nominee for director, 5%
stockholder or member of the immediate family of any such person. However, the Company’s practice
is that such transactions shall be reviewed by the Company’s Board of Directors and found to be
fair to the Company prior to the Company (or a subsidiary) entering into any such transaction,
except for (i) executive officers’ participation in employee benefits which are available to all
employees generally; (ii) transactions involving routine goods or services which are purchased or
sold by the Company (or a subsidiary) on the same terms as are generally available in arm’s length
transactions with unrelated parties (however, such transactions are still subject to approval by an
authorized representative of the Company (or a subsidiary) in accordance with internal policies and
procedures applicable to such transactions with unrelated third parties); and (iii) compensation
decisions with respect to executive officers other than the CEO, which are made by the Compensation Committee pursuant to
recommendations of the CEO.
F-48
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 27 — Business Segment Information
The Company is organized and manages its business in three distinct segments: the Energy
Technology segment, the Energy Services segment and the Financial Services segment. In classifying
its operational entities into a particular segment, the Company segregated its businesses with
similar economic characteristics, products and services, production processes, customers, and
methods of distribution into distinct operating groups.
The Energy Technology segment designs, manufactures and markets energy saving technologies,
primarily to commercial and industrial customers. The principal products produced and marketed by
this segment are the eMAC line of HVAC and lighting controllers and the EnergySaver line of
lighting controllers, which the Company discontinued the active marketing of at the end of 2006.
Operations of Maximum Performance Group, Inc. and Lime Energy Co. (which previously operated the
EnergySaver business) are included in this segment. Lime Energy is headquartered, and most of its
operations are located, in Elk Grove Village, Illinois. Maximum Performance Group is headquartered
in San Diego, California and has a sales office in New York City and Ellington, Connecticut.
The Energy Services segment includes the operations of Parke Industries, LLC, Kapadia Energy
Services, Inc., Lime Midwest, Inc., Texas Energy Products, Inc. and Preferred Lighting, Inc.
Parke, which the Company acquired effective June 30, 2006, Texas Energy Products, Inc., which was
acquired effective May 31, 2007, and Preferred Lighting, which was acquired effective July 31,
2007, and Lime Midwest, a subsidiary created in January 2007, design, engineer and install energy
efficient lighting upgrades for commercial and industrial users. Kapadia, which the Company
acquired effective September 27, 2006, provides energy engineering services to assist customers in
improving their energy efficiency and to better manage their energy costs. Kapadia also designs,
engineers and manages the installation of energy efficient lighting upgrades for commercial and
industrial users, but unlike Parke, contracts the installation to third party electrical
contractors. Parke is headquartered in Glendora, California and has offices in Danville and
Carmel, California and Salt Lake City, Utah. Kapadia is headquartered in Ventura, California and
has an office in Peekskill, New York. Texas Energy is headquartered in Austin, Texas and has an
office in Dallas, Texas. Preferred Lighting is located in Seattle, Washington. Lime Midwest in
located in Elk Grove Village, Illinois.
In June 2007, the Company created a new subsidiary, Lime Finance Inc., to provide liquidity
for extended receivables created by Lime’s other subsidiaries. Lime Finance has no employees and
is headquartered in Elk Grove Village, Illinois.
Prior to March 31, 2006 the Company also operated a Building Control and Automation segment,
which was comprised of its Great Lakes Controlled Energy subsidiary. This segment provided
integration of building and environmental control systems for commercial and industrial customers.
The Company sold Great Lakes effective March 31, 2006; accordingly, the operating results have been
separately reported as discontinued operations.
F-49
Lime Energy Co.
Notes to Consolidated Financial Statements
An analysis and reconciliation of the Company’s business segment information to the respective
information in the consolidated financial statements is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services |
|
$ |
16,182,172 |
|
|
$ |
3,302,014 |
|
|
$ |
— |
|
Energy Technology |
|
|
3,609, 816 |
|
|
|
4,841,610 |
|
|
|
3,693,429 |
|
Financial Services |
|
|
8,292 |
|
|
|
— |
|
|
|
— |
|
Intercompany sales |
|
|
(319,150 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
19,481,130 |
|
|
|
8,143,624 |
|
|
|
3,693,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services |
|
|
(1,239,361 |
) |
|
|
(1,175,253 |
) |
|
|
— |
|
Energy Technology |
|
|
(8,234,325 |
) |
|
|
(6,692,648 |
) |
|
|
(4,578,753 |
) |
Financial Services |
|
|
8,292 |
|
|
|
— |
|
|
|
— |
|
Corporate |
|
|
(5,402,104 |
) |
|
|
(5,479,000 |
) |
|
|
(1,497,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(14,867,498 |
) |
|
|
(13,346,901 |
) |
|
|
(6,076,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net |
|
|
(685,230 |
) |
|
|
(3,079,188 |
) |
|
|
(544,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(15,552,728 |
) |
|
|
(16,426,089 |
) |
|
|
(6,620,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services |
|
|
1,559,850 |
|
|
|
641,870 |
|
|
|
9,598 |
|
Energy Technology |
|
|
578,853 |
|
|
|
742,706 |
|
|
|
592,271 |
|
Financial Services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Building Control and Automation |
|
|
— |
|
|
|
2,021 |
|
|
|
— |
|
Corporate |
|
|
61,741 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,200,444 |
|
|
|
1,386,597 |
|
|
|
601,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Additions: |
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services |
|
|
261,943 |
|
|
|
12,096 |
|
|
|
— |
|
Energy Technology |
|
|
122,884 |
|
|
|
68,406 |
|
|
|
530,925 |
|
Financial Services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Building Control and Automation |
|
|
— |
|
|
|
2,465 |
|
|
|
17,949 |
|
Corporate |
|
|
129,468 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
514,295 |
|
|
|
82,967 |
|
|
|
548,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services |
|
|
16,493,666 |
|
|
|
12,490,117 |
|
|
|
— |
|
Energy Technology |
|
|
3,166,073 |
|
|
|
7,486,535 |
|
|
|
10,760,824 |
|
Financial Services |
|
|
351,297 |
|
|
|
— |
|
|
|
— |
|
Building Control and Automation |
|
|
— |
|
|
|
— |
|
|
|
674,514 |
|
Corporate |
|
|
5,932,796 |
|
|
|
5,420,213 |
|
|
|
5,663,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,943,832 |
|
|
$ |
25,396,865 |
|
|
$ |
17,098,974 |
|
F-50
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 28 — Selected Quarterly Financial Data (unaudited)
The following represents the Company’s unaudited quarterly results for fiscal 2007 and fiscal
2006. These quarterly results were prepared in accordance with U.S. generally accepted accounting
principles and reflect all adjustments (consisting solely of normal recurring adjustments) which,
in the opinion of management, are necessary for a fair statement of the results.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal 2007 Quarters Ended |
| |
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
2,528,547 |
|
|
|
4,102,693 |
|
|
|
5,461,090 |
|
|
|
7,388,800 |
|
|
$ |
19,481,130 |
|
Gross profit |
|
|
372,067 |
|
|
|
1,157,969 |
|
|
|
1,434,435 |
|
|
|
1,434,259 |
|
|
|
4,398,730 |
|
Net loss |
|
|
(3,310,939 |
) |
|
|
(2,043,553 |
) |
|
|
(2,565,425 |
) |
|
|
(7,632,811 |
) |
|
|
(15,552,728 |
) |
Preferred dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net loss available to common shareholders |
|
|
(3,310,939 |
) |
|
|
(2,043,553 |
) |
|
|
(2,565,425 |
) |
|
|
(7,632,811 |
) |
|
|
(15,552,728 |
) |
Basic and Diluted Loss Per Common Share |
|
|
(0.47 |
) |
|
|
(0.27 |
) |
|
|
(0.33 |
) |
|
|
(0.99 |
) |
|
|
(2.06 |
) |
Weighted averages shares |
|
|
7,172,382 |
|
|
|
7,632,656 |
|
|
|
7,664,534 |
|
|
|
7,691,220 |
|
|
|
7,541,960 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal 2006 Quarters Ended |
| |
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,146,345 |
|
|
$ |
1,334,818 |
|
|
$ |
2,130,158 |
|
|
$ |
3,532,303 |
|
|
$ |
8,143,624 |
|
Gross profit |
|
|
237,943 |
|
|
|
361,337 |
|
|
|
537,545 |
|
|
|
75,505 |
|
|
|
1,212,330 |
|
Loss from continuing operations |
|
|
(1,935,180 |
) |
|
|
(4,659,818 |
) |
|
|
(4,117,510 |
) |
|
|
(5,713,581 |
) |
|
|
(16,426,089 |
) |
Loss from discontinued operations |
|
|
(21,425 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,425 |
) |
Net loss |
|
|
(1,956,605 |
) |
|
|
(4,659,818 |
) |
|
|
(4,117,510 |
) |
|
|
(5,713,581 |
) |
|
|
(16,447,514 |
) |
Preferred dividends |
|
|
(615,290 |
) |
|
|
(23,732,435 |
) |
|
|
— |
|
|
|
— |
|
|
|
(24,347,725 |
) |
Net loss available to common shareholders |
|
|
(2,571,895 |
) |
|
|
(28,392,253 |
) |
|
|
(4,117,510 |
) |
|
|
(5,713,581 |
) |
|
|
(40,795,239 |
) |
Basic and diluted loss per common share from
continuing operations |
|
|
(5.24 |
) |
|
|
(45.45 |
) |
|
|
(0.58 |
) |
|
|
(0.80 |
) |
|
|
(10.60 |
) |
Discontinued operations |
|
|
(0.04 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
Basic and Diluted Loss Per Common Share |
|
|
(5.28 |
) |
|
|
(45.45 |
) |
|
|
(0.58 |
) |
|
|
(0.80 |
) |
|
|
(10.61 |
) |
Weighted averages shares |
|
|
487,208 |
|
|
|
624,748 |
|
|
|
7,044,050 |
|
|
|
7,112,373 |
|
|
|
3,844,087 |
|
F-51
Lime Energy Co.
Notes to Consolidated Financial Statements
Note 29 — Subsequent Events
On March 12, 2008, the Company entered into a $3 million revolving line of credit note with
Advanced Biotherapy, Inc. and Richard Kiphart, the Company’s chairman and largest individual
investor. The note matures on March 31, 2009 and bears interest at 17% per annum, with 12% payable
in cash and the remaining 5% to be capitalized and added to the principal balance on the note. The
note also requires the payment of an unused funds fee of 4% per annum on the unused portion of the
note. The Company may borrow any amount, at any time during the term of the note as long as it is
not in default at the time of the advance, provided that the total advances under the note, net of
repayments, may not exceed $3 million. If the Company terminates the note before its scheduled
maturity it will be required to pay a termination fee based on a formula that is approximately
equal to $411 for each day remaining before the scheduled maturity.
Events of default include:
| |
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; or |
| |
| |
v) |
|
the Company sell substantially all of its assets. |
Mr. Kiphart is the Chairman of the Board of Advanced Biotherapy, Inc., and owns the majority
of the common stock of the Advanced Biotherapy. Mr. David Valentine, one of Lime Energy’s
directors, is also a director and stockholder of Advanced Biotherapy.
F-52
LIME ENERGY CO.
Schedule II — Valuation and Qualifying Accounts
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions/ |
|
|
|
|
|
|
| |
|
|
|
|
|
(recoveries) |
|
Deductions |
|
|
|
|
| |
|
Balance at |
|
charged to costs |
|
Amounts |
|
Other |
|
Balance at end |
| |
|
beginning of period |
|
and expenses |
|
written-off |
|
adjustments |
|
of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
$ |
199,000 |
|
|
|
97,000 |
|
|
|
(13,000 |
) |
|
|
42,000 |
|
|
|
325,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
$ |
325,000 |
|
|
$ |
105,000 |
|
|
$ |
(62,000 |
) |
|
$ |
(3,000 |
) |
|
$ |
366,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
$ |
366,000 |
|
|
$ |
126,000 |
|
|
$ |
(341,000 |
) |
|
$ |
— |
|
|
$ |
151,000 |
|
Other adjustment of $42,000 in 2005 resulted from the acquisition of Maximum Performance Group,
Inc.
Other adjustment of ($3,000) in 2006 resulted from the sale of Great Lakes Controlled Energy and
the acquisition of Parke P.A.N.D.A. Corporation and Kapadia Consulting Inc.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions/ |
|
|
|
|
|
|
| |
|
|
|
|
|
(recoveries) |
|
Deductions |
|
|
|
|
| |
|
Balance at |
|
charged to costs |
|
Amounts |
|
Other |
|
Balance at end |
| |
|
beginning of period |
|
and expenses |
|
written-off |
|
adjustments |
|
of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for obsolete inventory: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
$ |
— |
|
|
$ |
35,000 |
|
|
$ |
(16,000 |
) |
|
$ |
9,000 |
|
|
$ |
28,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
$ |
28,200 |
|
|
$ |
578,400 |
|
|
$ |
(9,800 |
) |
|
$ |
— |
|
|
$ |
596,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
$ |
596,800 |
|
|
$ |
— |
|
|
$ |
(596,800 |
) |
|
$ |
1,800 |
|
|
$ |
1,800 |
|
Other adjustment of $9,000 in 2005 resulted from the acquisition of Maximum Performance Group, Inc.
Other adjustment of $1,800 in 2007 resulted from the acquisition of Texas Energy Products, Inc.
F-53