UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34811

Ameresco, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		04-3512838 (I.R.S. Employer Identification No.)
111 Speen Street, Suite 410 Framingham, Massachusetts (Address of Principal Executive Offices)		01701 (Zip Code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class		Shares outstanding as of November 12, 2010
Class A Common Stock, $0.0001 par value per share			23,086,165
Class B Common Stock, $0.0001 par value per share			18,000,000

 

 

AMERESCO, INC.

Table of Contents

		Page
Part 1 — Financial Information
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2009 and September 30, 2010 (Unaudited)			3
Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2009 and 2010 (Unaudited)			4
Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2010 (Unaudited)			6
Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2009 and 2010 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			46
Part II — Other Information
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			64
Item 6. Exhibits
Signatures			65
Exhibit Index			66
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part 1 — Financial Information

Item 1. Condensed Consolidated Financial Statements

AMERESCO, INC.

CONSOLIDATED BALANCE SHEETS

		December 31,				September 30,
		2009				2010
						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	47,927,540			$	29,266,001
Restricted cash			9,249,885				10,617,362
Accounts receivable, net			61,279,515				91,905,734
Accounts receivable retainage			9,242,288				17,337,445
Costs and estimated earnings in excess of billings			14,009,076				32,724,457
Inventory, net			4,237,909				5,309,177
Prepaid expenses and other current assets			8,077,761				13,649,918
Deferred income taxes			9,279,473				10,819,900
Project development costs			8,468,974				9,266,798
Total current assets			171,772,421				220,896,792
Federal ESPC receivable financing			51,397,347				161,920,078
Property and equipment, net			4,373,256				4,661,471
Project assets, net			117,637,990				134,995,537
Deferred financing fees, net			3,582,560				3,431,442
Goodwill			16,132,429				18,460,564
Other assets			10,648,605				4,144,324
			203,772,187				327,613,416
		$	375,544,608			$	548,510,208
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	8,093,016			$	4,932,771
Accounts payable			75,578,378				94,671,536
Accrued expenses			18,362,674				13,361,057
Billings in excess of cost and estimated earnings			28,166,364				30,870,614
Incomes taxes payable			2,129,529				2,808,209
Total current liabilities			132,329,961				146,644,187
Long-term debt, less current portion			102,807,203				180,663,431
Subordinated debt			2,998,750				—
Deferred income taxes			11,901,645				11,901,645
Deferred grant income			4,158,508				3,995,058
Other liabilities			18,578,754				23,042,218
			140,444,860				219,602,352
Stockholders’ equity:
Series A convertible preferred stock, $0.0001 par value, 3,500,000 shares authorized, 3,210,000 shares issued and outstanding at 12/31/2009, no shares issued and outstanding at 9/30/2010			321				—
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at 12/31/2009 and 9/30/2010			—				—
Common stock, $0.0001 par value, 60,000,000 shares authorized, 17,998,168 shares issued and 13,282,284 outstanding at 12/31/2009, no shares issued and outstanding at 9/30/2010			1,800				—
Class A common stock, $0.0001 par value, 500,000,000 shares authorized, no shares issued and outstanding at 12/31/2009, 27,919,449 shares issued and 23,086,165 shares outstanding at 9/30/2010			—				2,792
Class B common stock, $0.0001 par value, 144,000,000 shares authorized, no shares issued and outstanding at 12/31/2009, 18,000,000 shares issued and outstanding at 9/30/2010			—				1,800
Additional paid-in capital			10,466,312				71,308,330
Retained earnings			97,882,985				118,909,218
Accumulated other comprehensive income			2,831,970				1,224,100
Less — treasury stock, at cost, 4,715,884 shares and 4,833,284 shares, respectively			(8,413,601	)			(9,182,571	)
Total stockholders’ equity			102,769,787				182,263,669
		$	375,544,608			$	548,510,208

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERESCO, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

		Three Months Ended September 30,
		2009				2010
		(Unaudited)
Revenue:
Energy efficiency revenue		$	106,803,997			$	147,863,350
Renewable energy revenue			25,490,418				44,038,079
			132,294,415				191,901,429
Direct expenses:
Energy efficiency expenses			88,714,827				121,906,348
Renewable energy expenses			19,662,420				35,114,345
			108,377,247				157,020,693
Gross profit			23,917,168				34,880,736
Operating expenses:
Salaries and benefits			7,364,786				8,409,014
Project development costs			1,267,986				2,716,616
General, administrative and other			3,708,122				4,841,508
			12,340,894				15,967,138
Operating income			11,576,274				18,913,598
Other income (expense), net			924,031				(2,010,030	)
Income before provision for income taxes			12,500,305				16,903,568
Income tax provision			4,305,830				4,862,651
Net income			8,194,475				12,040,917
Other comprehensive income (loss):
Unrealized loss from interest rate hedge, net of tax			—				(746,087	)
Foreign currency translation adjustment			3,530,723				879,842
Comprehensive income:		$	11,725,198			$	12,174,672
Net income per share attributable to common shareholders:
Basic		$	0.86			$	0.35
Diluted		$	0.23			$	0.28
Weighted average common shares outstanding:
Basic			9,559,545				34,434,352
Diluted			35,625,835				43,445,391

The accompanying notes are an integral part of these condensed consolidated financial statements.

		Nine Months Ended September 30,
		2009				2010
		(Unaudited)
Revenue:
Energy efficiency revenue		$	241,290,308			$	323,578,578
Renewable energy revenue			53,848,666				115,305,944
			295,138,974				438,884,522
Direct expenses:
Energy efficiency expenses			199,585,426				267,495,450
Renewable energy expenses			42,597,466				91,955,471
			242,182,892				359,450,921
Gross profit			52,956,082				79,433,601
Operating expenses:
Salaries and benefits			18,817,921				21,893,756
Project development costs			6,862,982				7,893,558
General, administrative and other			13,261,611				16,156,553
			38,942,514				45,943,867
Operating income			14,013,568				33,489,734
Other income (expense), net			1,512,388				(4,082,417	)
Income before provision for income taxes			15,525,956				29,407,317
Income tax provision			5,193,123				8,381,084
Net income			10,332,833				21,026,233
Other comprehensive loss:
Unrealized loss from interest rate hedge, net of tax			—				(2,297,667	)
Foreign currency translation adjustment			3,269,613				689,797
Comprehensive income:		$	13,602,446			$	19,418,363
Net income per share attributable to common shareholders:
Basic		$	1.08			$	1.02
Diluted		$	0.30			$	0.53
Weighted average common shares outstanding:
Basic			9,576,548				20,563,849
Diluted			34,812,967				39,513,507

The accompanying notes are an integral part of these condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

																																																										Accumulated
																																										Additional																Other				Total
		Series A Preferred Stock								Preferred Stock								Common Stock								Class B Common Stock								Class A Common Stock								Paid-In				Retained				Treasury Stock								Comprehensive				Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Capital				Earnings				Shares				Amount				Income (Loss)				Equity
Balance, December 31, 2009			3,210,000			$	321				—			$	—				17,998,168			$	1,800				—			$	—				—			$	—			$	10,466,312			$	97,882,985				4,715,884			$	(8,413,601	)		$	2,831,970			$	102,769,787
Conversion of preferred and common stock:			(3,210,000	)			(321	)			—				—				(17,998,168	)			(1,800	)			18,000,000				1,800				19,258,168				1,926				(1,605	)			—				—				—				—				—
Initial public offering proceeds, net:			—				—				—				—				—				—				—				—				6,000,000				600				53,238,878				—				—				—				—				53,239,478
Initial public offering overallotment, net:			—				—				—				—				—				—				—				—				342,889				34				3,188,834				—				—				—				—				3,188,868
Exercise of stock options:			—				—				—				—				—				—				—				—				1,913,106				191				2,655,423				—				—				—				—				2,655,614
Repurchase of stock options:			—				—				—				—				—				—				—				—				—				—				—				—				117,400				(768,970	)			—				(768,970	)
Exercise of warrants:			—				—				—				—				—				—				—				—				405,286				41				1,985				—				—				—				—				2,026
Stock-based compensation expense:			—				—				—				—				—				—				—				—				—				—				1,758,503				—				—				—				—				1,758,503
Foreign currency translation adjustment:			—				—				—				—				—				—				—				—				—				—				—				—				—				—				689,797				689,797
Unrealized loss from interest rate hedge, net of tax:			—				—				—				—				—				—				—				—				—				—				—				—				—				—				(2,297,667	)			(2,297,667	)
Net income:			—				—				—				—				—				—				—				—				—				—				—				21,026,233				—				—				—				21,026,233
Balance, September 30, 2010			—			$	—				—			$	—				—			$	—				18,000,000			$	1,800				27,919,449			$	2,792			$	71,308,330			$	118,909,218				4,833,284			$	(9,182,571	)		$	1,224,100			$	182,263,669

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERESCO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended September 30,
		2009				2010
		(Unaudited)
Cash flows from operating activities:
Net income		$	8,194,475			$	12,040,917
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation of project assets			1,876,182				4,206,992
Depreciation of property and equipment			500,262				589,029
Amortization of deferred financing fees			59,016				306,398
Unrealized loss on interest rate swaps			354,326				—
Stock-based compensation expense			611,414				651,352
Deferred income taxes			(314,885	)			792,193
Changes in operating assets and liabilities:
(Increase) decrease in:
Restricted cash draws			13,677,494				53,185,373
Accounts receivable			(12,650,473	)			(21,103,490	)
Accounts receivable retainage			(2,875,973	)			(5,204,217	)
Federal ESPC receivable financing			(18,759,514	)			(51,833,048	)
Inventory			1,371,016				23,790
Costs and estimated earnings in excess of billings			2,411,481				(8,859,603	)
Prepaid expenses and other current assets			(845,316	)			(1,817,278	)
Project development costs			(1,256,091	)			(872,942	)
Other assets			88,416				4,560,707
Increase (decrease) in:
Accounts payable and accrued expenses			14,543,993				25,940,748
Billings in excess of cost and estimated earnings			10,110,040				(1,341,379	)
Other liabilities			3,336,316				337,826
Income taxes payable			2,668,299				(2,541,814	)
Net cash provided by operating activities			23,100,478				9,061,554
Cash flows from investing activities:
Purchases of property and equipment			(508,466	)			(877,781	)
Purchases of project assets, net of grants received			2,341,325				(12,415,691	)
Acquisitions, net of cash received			(674,110	)			(6,138,941	)
Net cash provided by (used in) investing activities			1,158,749				(19,432,413	)
Cash flows from financing activities:
Payments of financing fees			(9,842	)			(402,625	)
Proceeds from options, warrants and issuance of stock			—				59,649,893
Payments on senior secured credit facility			(15,062,033	)			(31,351,119	)
Proceeds from long-term debt financing			1,352,559				—
Restricted cash			(3,771,371	)			(1,137,175	)
Repayment of subordinated debt			—				(2,998,750	)
Payments on long-term debt			(1,178,396	)			(5,755,902	)
Net cash (used in) provided by financing activities			(18,669,083	)			18,004,322
Effect of exchange rate changes on cash			1,021,999				498,142
Net increase in cash and cash equivalents			6,612,143				8,131,605
Cash and cash equivalents, beginning of period			8,855,402				21,134,396
Cash and cash equivalents, end of period		$	15,467,545			$	29,266,001
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	768,981			$	710,265
Income taxes		$	570,378			$	3,652,142
Acquisitions, net of cash received:
Accounts receivable		$	—			$	8,354,669
Accounts receivable retainage			—				423,927
Costs and estimated earnings in excess of billings			—				1,947,639
Prepaid expenses and other current assets			18,177				33,922
Property and equipment			113,842				127,512
Goodwill			2,280,739				2,539,561
Other assets			—				18,551
Accounts payable and accrued expenses			(1,356,095	)			(7,032,052	)
Billings in excess of cost and estimated earnings			—				(274,788	)
Long-term debt, net			(382,553	)			—
		$	674,110			$	6,138,941

The accompanying notes are an integral part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended September 30,
		2009				2010
		(Unaudited)
Cash flows from operating activities:
Net income		$	10,332,833			$	21,026,233
Adjustments to reconcile net income to cash used in operating activities:
Depreciation of project assets			3,928,979				7,623,850
Depreciation of property and equipment			1,033,373				1,234,415
Amortization of deferred financing fees			161,662				474,403
Provision for bad debts			327,558				—
Write-down of long-term receivable			—				2,111,000
Unrealized (gain) loss on interest rate swaps			(1,634,619	)			133,591
Stock-based compensation expense			1,844,400				1,758,503
Deferred income taxes			418,256				—
Changes in operating assets and liabilities:
(Increase) decrease in:
Restricted cash draws			21,612,096				108,936,357
Accounts receivable			(21,059,142	)			(24,037,153	)
Accounts receivable retainage			(1,353,728	)			(7,491,725	)
Federal ESPC receivable financing			(27,056,209	)			(110,522,731	)
Inventory			1,679,369				(1,071,268	)
Costs and estimated earnings in excess of billings			(9,709,704	)			(16,660,465	)
Prepaid expenses and other current assets			(2,463,756	)			(5,518,403	)
Project development costs			(2,899,742	)			(790,904	)
Other assets			6,207,159				6,582,019
Increase (decrease) in:
Accounts payable and accrued expenses			4,423,091				6,749,903
Billings in excess of cost and estimated earnings			12,101,951				2,311,175
Other liabilities			(2,046,462	)			1,702,081
Income taxes payable			1,060,602				(946,361	)
Net cash used in operating activities			(3,092,033	)			(6,395,480	)
Cash flows from investing activities:
Purchases of property and equipment			(1,430,604	)			(1,361,876	)
Purchases of project assets, net of grants received			(14,587,244	)			(24,783,062	)
Acquisitions, net of cash received			(674,110	)			(6,138,941	)
Net cash used in investing activities			(16,691,958	)			(32,283,879	)
Cash flows from financing activities:
Payments of financing fees			(79,905	)			(1,300,058	)
Proceeds from options, warrants and issuance of stock			—				60,062,759
Repurchase of stock			(874,948	)			(768,970	)
Payments on senior secured credit facility			(4,449,242	)			(19,915,218	)
Proceeds from long-term debt financing			28,074,858				812,398
Restricted cash			(5,054,245	)			(5,956,433	)
Repayment of subordinated debt			—				(2,998,750	)
Payments on long-term debt			(2,626,925	)			(10,548,598	)
Net cash provided by financing activities			14,989,593				19,387,130
Effect of exchange rate changes on cash			2,112,798				630,690
Net decrease in cash and cash equivalents			(2,681,600	)			(18,661,539	)
Cash and cash equivalents, beginning of year			18,149,145				47,927,540
Cash and cash equivalents, end of period		$	15,467,545			$	29,266,001
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	2,558,505			$	3,228,744
Income taxes		$	2,114,344			$	5,052,664
Acquisitions, net of cash received:
Accounts receivable		$	—			$	8,354,669
Accounts receivable retainage			—				423,927
Costs and estimated earnings in excess of billings			—				1,947,639
Prepaid expenses and other current assets			18,177				33,922
Property and equipment			113,842				127,512
Goodwill			2,280,739				2,539,561
Other assets			—				18,551
Accounts payable and accrued expenses			(1,356,095	)			(7,032,052	)
Billings in excess of cost and estimated earnings			—				(274,788	)
Long-term debt, net			(382,553	)			—
		$	674,110			$	6,138,941

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERESCO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

Ameresco, Inc. and Subsidiaries (the “Company”) was organized as a Delaware corporation on April 25, 2000. The Company is a provider of energy efficiency solutions for facilities throughout North America. The Company provides solutions, both products and services, that enable customers to reduce their energy consumption, lower their operating and maintenance costs and realize environmental benefits. The Company’s comprehensive set of services includes upgrades to a facility’s energy infrastructure and the construction and operation of small-scale renewable energy plants. It also sells certain photovoltaic equipment worldwide. The Company operates in the United States, Canada, and Europe.

The Company is compensated through a variety of methods, including: 1) direct payments based on fee-for-services contracts (utilizing lump-sum or cost-plus pricing methodologies); 2) the sale of energy from the Company’s generating assets; and 3) direct payment for photovoltaic equipment and systems.

The condensed consolidated financial statements as of December 31, 2009, and September 30, 2010, and for the three and nine months ended September 30, 2009 and 2010, include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. The condensed consolidated financial statements as of September 30, 2010, and for the three and nine months ended September 30, 2009 and 2010, are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. The interim condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation in conformity with GAAP. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009, and notes thereto, included in the Company’s prospectus filed pursuant to Rule 424(b)(4) and contained in the related Registration Statement on Form S-1 declared effective by the SEC on July 21, 2010 (File No. 333-165821). The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Ameresco, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Gains and losses from the translation of all foreign currency financial statements are recorded in the accumulated other comprehensive income (loss) account within stockholders’ equity.

Stock Split

Prior to the consummation of the initial public offering of the Company’s Class A common stock, the number of authorized shares of common stock was increased to 60,000,000. In addition, all common share and per share amounts in the consolidated financial statements and notes thereto have been restated to reflect a two-for-one stock split effected on July 20, 2010.

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 revenue and expenses during the reporting period.

The most significant estimates with regard to these consolidated financial statements relate to the estimation of final construction contract profit in accordance with accounting for long-term contracts, allowance for doubtful accounts, inventory reserves, project development costs, fair value of derivative financial instruments and stock-based awards, impairment of long lived assets, income taxes and estimating potential liability in conjunction with certain commitments and contingencies. Actual results could differ from those estimates.

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

Cash and Cash Equivalents

Cash includes cash on deposit, overnight repurchase agreements, and amounts invested in highly liquid money market funds. Cash equivalents consist of short term investments with original maturities of three months or less. The Company maintains accounts with financial institutions and the balances in such accounts, at times, exceed federally insured limits. This credit risk is divided among a number of financial institutions that management believes to be of high quality. The carrying amount of cash and cash equivalents approximates their fair value.

Restricted Cash

Restricted cash consists of cash held in an escrow account in association with construction draws for energy savings performance contracts (“ESPCs”), as well as cash required under term loans to be maintained in debt service reserve accounts until all obligations have been indefeasibly paid in full.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the period. Bad debts are written off against the allowance when identified. Changes in the allowance for doubtful accounts for the nine months ended September 30, 2009 and 2010, are as follows:

		2009				2010
Balance at beginning of period		$	1,049,711			$	1,602,079
Charges to costs and expenses			356,728				—
Account write-offs and other deductions			(155,972	)			(17,006	)
Balance at end of period		$	1,250,467			$	1,585,073

At December 31 2009, the Company had one customer that accounted for approximately 14% of the Company’s total accounts receivable. At September 30, 2010, no customer accounted for more than 10% of the Company’s total accounts receivable.

During the three months ended September 30, 2009, one customer accounted for approximately 10.8% of the Company’s total revenue. During the three months ended September 30, 2010, no customer accounted for more than 10% of the Company’s total revenue.

During the nine months ended September 30, 2009, no customer accounted for more than 10% of the Company’s total revenue. During the nine months ended September 30, 2010, the Company had one customer that accounted for approximately 11.3% of the Company’s total revenue.

Accounts Receivable Retainage

Accounts receivable retainage represents amounts due from customers, but where payments are withheld contractually until certain construction milestones are met. Amounts retained typically range from 5% to 10% of the total invoice.

Inventory

Inventories, which consist of photovoltaic solar panels, batteries, and related accessories, are stated at the lower of cost (“first-in, first-out” method) or market (determined on the basis of estimated realizable values). Provisions have been made to reduce the carrying value to the net realizable value.

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

Prepaid Expenses

Prepaid expenses consist primarily of short-term prepaid expenditures that will amortize within one year.

Federal ESPC Receivable Financing

Federal ESPC receivable financing represents the amount to be paid by various federal government agencies for work performed and earned by the Company under specific ESPCs. The Company assigns certain of its rights to receive those payments to third-party lenders that provide construction and permanent financing for such contracts. The receivable is recognized as revenue as each project is constructed. Upon completion and acceptance of the project by the government, the assigned ESPC receivable and the corresponding related project debt are eliminated from the Company’s financial statements.

Project Development Costs

The Company capitalizes as project development costs only those costs incurred in connection with the development of energy projects, primarily direct labor, interest costs, outside contractor services, consulting fees, legal fees and travel, if incurred after a point in time where the realization of related revenue becomes probable. Project development costs incurred prior to the probable realization of revenue are expensed as incurred. The Company classifies project development costs as a current asset as the development efforts are expected to proceed to construction activity in the twelve months that follow.

Property and Equipment

Property and equipment consists primarily of office and computer equipment. These assets are recorded at cost. Major additions and improvements are capitalized as additions to the property and equipment accounts, while replacements, maintenance and repairs that do not improve or extend the life of the respective assets, are expensed as incurred. Depreciation and amortization of property and equipment are computed on a straight-line basis over the following estimated useful lives:

Asset Classification		Estimated Useful Life
Furniture and office equipment		Five years
Computer equipment and software costs		Five years
Leasehold improvements		Lesser of term of lease or five years
Automobiles		Five years

Project Assets

Project assets consist of costs of materials, direct labor, interest costs, outside contract services and project development costs incurred in connection with the construction of small-scale renewable energy plants that the Company owns and the implementation of energy savings contracts. These amounts are capitalized and amortized over the lives of the related assets or the terms of the related contracts.

The Company capitalizes interest costs relating to construction financing during the period of construction. The interest capitalized is included in the total cost of the project at completion. The amount of interest capitalized for the nine months ended September 30, 2009 and 2010, was $1,146,790 and $252,113, respectively.

Routine maintenance costs are expensed in the current year’s consolidated statement of income and comprehensive income to the extent that they do not extend the life of the asset. Major maintenance, upgrades and overhauls are required for certain components of the Company’s assets, including its landfill gas (“LFG”) facilities. In these instances, the costs associated with these upgrades are capitalized and are depreciated over the shorter of the life of the asset or until the next required major maintenance or overhaul period. Gains or losses on disposal of property and equipment are reflected in general, administrative and other expenses in the consolidated statements of income and comprehensive income.

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

The Company evaluates its long-lived assets for impairment as events or changes in circumstances indicate the carrying value of these assets may not be fully recoverable. The Company evaluates recoverability of long-lived assets to be held and used by estimating the undiscounted future cash flows before interest associated with the expected uses and eventual disposition of those assets. When these comparisons indicate that the carrying value of those assets is greater than the undiscounted cash flows, the Company recognizes an impairment loss for the amount that the carrying value exceeds the fair value.

In September 2009, the Company received $12,864,644 in grant awards from the U.S. Treasury Department (the “Treasury”) under Section 1603 of the 2009 American Recovery and Reinvestment Act (the “Stimulus Act”). The Stimulus Act authorized the Treasury to make payments to eligible persons who place in service qualifying renewable energy projects. The grants are paid in lieu of investment tax credits. All of the proceeds from the grants were used and recorded as a reduction in the cost basis of the applicable project assets. If the Company disposes of the property, or the property ceases to qualify as specified energy property, within five years from the date the property is placed in service, then a prorated portion of the Section 1603 payment must be repaid. For tax purposes, the Section 1603 payments are not included in federal and certain state taxable income and the basis of the property is reduced by 50% of the payment received. Deferred grant income of $4,158,508 and $3,995,058 in the accompanying consolidated balance sheets at December 31, 2009 and September 30, 2010, respectively, represents the benefit of the basis difference to be amortized to income tax expense over the life of the related property.

During 2010, the Company received notice that a customer intended to terminate an energy service agreement at the end of 2010. As a result, the Company adjusted the remaining useful life of the corresponding equipment. The adjustment to the useful life resulted in approximately $2,400,000 of additional depreciation expense during the three and nine months ended September 30, 2010. The remaining book value of approximately $500,000 will be depreciated in the fourth quarter.

Deferred Financing Fees

Deferred financing fees relate to the external costs incurred to obtain financing for the Company. All deferred financing fees are amortized over the respective term of the financing.

Goodwill

The Company has classified as goodwill the excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. The Company assesses the impairment of goodwill and intangible assets with indefinite lives on an annual basis (December 31^st) and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company would record an impairment charge if such an assessment were to indicate that, more likely than not, the fair value of such assets was less than their carrying values. Judgment is required in determining whether an event has occurred that may impair the value of goodwill or identifiable intangible assets.

Factors that could indicate that impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in the base stock price of public competitors for a sustained period of time. Although the Company believes goodwill and intangible assets are appropriately stated in the accompanying consolidated financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance.

Other Assets

Other assets consist primarily of notes and contracts receivable due to the Company. In 2003, the Company acquired an asset which was substantially monetized with a residual based on an expectation of the contract running its full term. During the second quarter of 2010, the Company received notice that the customer intended to prepay the contract at the end of 2010. Accordingly, the Company recorded a non-cash charge of approximately $2.1 million related to the unexpected prepayment of the long-term receivable.

Asset Retirement Obligations

The Company recognizes a liability for the fair value of required asset retirement obligations (“AROs”) when such obligations are incurred. The liability is estimated based on a number of assumptions requiring management’s judgment, including equipment removal costs, site restoration costs, salvage costs, cost inflation rates and discount rates and is accreted to its projected future value over time. The capitalized asset is depreciated using the convention of depreciation of plant assets. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement cost incurred is recognized as an operating gain or loss in the consolidated statement of income and comprehensive income. As of December 31, 2009, and September 30, 2010, the Company had no AROs.

Other Liabilities

Other liabilities consist primarily of deferred revenue related to multi-year operation and maintenance contracts which expire as late as 2031. Other liabilities also include the fair value of derivatives.

Revenue Recognition

The Company derives revenue from energy efficiency and renewable energy products and services. Energy efficiency products and services include the design, engineering, and installation of equipment and other measures to improve the efficiency, and control the operation,

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

of a facility’s energy infrastructure. Renewable energy products and services include the construction of small-scale plants that produce electricity, gas, heat or cooling from renewable sources of energy, the sale of such electricity, gas, heat or cooling from plants that the Company owns, and the sale and installation of solar energy products and systems.

Revenue from the installation or construction of projects is recognized on a percentage-of-completion basis. The percentage-of-completion for each project is determined on an actual cost-to-estimated final cost basis. Maintenance revenue is recognized as related services are performed. In accordance with industry practice, the Company includes in current assets and liabilities the amounts of receivables related to construction projects realizable and payable over a period in excess of one year. The Company recognizes revenue associated with contract change orders only when the authorization for the change order has been properly executed and the work has been performed and accepted by the customer.

When the estimate on a contract indicates a loss, or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire expected loss immediately, regardless of the percentage of completion.

Billings in excess of costs and estimated earnings represents advanced billings on certain construction contracts. Costs and estimated earnings in excess of billings under customer contracts represent certain amounts that were earned and billable but not invoiced at December 31, 2009, and September 30, 2010.

The Company sells certain products and services in bundled arrangements, where multiple products and/or services are involved. The Company divides bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative fair value of all elements. The fair value is determined based on the price of the deliverable sold on a stand-alone basis.

The Company recognizes revenue from the sale and delivery of products, including the output from renewable energy plants, when produced and delivered to the customer, in accordance with specific contract terms, provided that persuasive evidence of an arrangement exists, the Company’s price to the customer is fixed or determinable and collectibility is reasonably assured.

The Company recognizes revenue from O&M contracts and consulting services as the related services are performed.

For a limited number of contracts, under which the Company receives additional revenue based on a share of energy savings, such additional revenue is recognized as energy savings are generated.

Direct Expenses

Direct expenses include the cost of labor, materials, equipment, subcontracting and outside engineering that are required for the development and installation of projects, as well as preconstruction costs, sales incentives, associated travel, inventory obsolescence charges and, if applicable, costs of procuring financing. A majority of the Company’s contracts have fixed price terms; however, in some cases the Company negotiates protections, such as a cost-plus structure, to mitigate the risk of rising prices for materials, services and equipment.

Direct expenses also include the costs of maintaining and operating the small-scale renewable energy plants that the Company owns, including the cost of fuel (if any) and depreciation charges.

Income Taxes

The Company provides for income taxes based on the liability method. The Company provides for deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities calculated using the enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return.

The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law,

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on a quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions.

The Company’s liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the examination process.

The Company considers matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; the Company has no plans to appeal or litigate any aspect of the tax position; and the Company believes that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. The Company also accrues for potential interest and penalties, related to unrecognized tax benefits in income tax expense.

Foreign Currency Translation

The local currency of the Company’s foreign operations is considered the functional currency of such operations. All assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at year-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the year. Translation adjustments are accumulated as a separate component of stockholders’ equity. Foreign currency translation gains and losses are reported on the consolidated statements of income and comprehensive income.

Financial Instruments

Financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, long-term contract receivables, accounts payable, long-term debt and interest rate swaps. The estimated fair value of cash and cash equivalents, restricted cash, accounts receivable, long-term contract receivables and accounts payable approximates their carrying value. See below for fair value measurements of long-term debt. See Note 10 for fair value of interest rate swaps.

Stock-Based Compensation Expense

Stock-based compensation expense results from the issuances of shares of restricted common stock and grants of stock options and warrants to employees, directors, outside consultants and others. The Company recognizes the costs associated with restricted stock, option and warrant grants using the fair value recognition provisions of Accounting Standards Codification (“ASC”) 718, Compensation — Stock Compensation (formerly SFAS No. 123(R), Share-Based Payment) on a straight-line basis over the vesting period of the awards.

Stock-based compensation expense is recognized based on the grant-date fair value. The Company estimates the fair value of the stock-based awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of stock-based awards requires the use of highly subjective assumptions, including the fair value of the common stock underlying the award, the expected term of the award and expected stock price volatility.

The assumptions used in determining the fair value of stock-based awards represent management’s estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors change, and different assumptions are employed, the stock-based compensation could be materially different in the future. The risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant, with maturities approximating the expected life of the stock options.

The Company has no history of paying dividends. Additionally, as of each of the grant dates, there was no expectation to pay dividends over the expected life of the options. The expected life of the awards is estimated using historical data and management’s expectations. Because there was no public market for the Company’s common stock prior to its initial public offering, management lacked company-specific historical and implied volatility information. Therefore, estimates of expected stock volatility were based on that of publicly-traded peer companies, and it is expected that the Company will continue to use this methodology until such time as there is adequate historical data regarding the volatility of the Company’s publicly-traded stock price.

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

The Company is required to recognize compensation expense for only the portion of options that are expected to vest. Actual historical forfeiture rate of options is based on employee terminations and the number of shares forfeited. This data and other qualitative factors are considered by the Company in determining to use a 22% forfeiture rate in recognizing stock compensation expense. If the actual forfeiture rate varies from historical rates and estimates, additional adjustments to compensation expense may be required in future periods. If there are any modifications or cancellations of the underlying unvested securities or the terms of the stock option, it may be necessary to accelerate, increase or cancel any remaining unamortized stock-based compensation expense.

The Company also accounts for equity instruments issued to non-employee directors and consultants at fair value. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the date on which the counterparty’s performance is complete. No awards to individuals who were not either an employee or director of the Company occurred during the year ended December 31, 2009, or the nine months ended September 30, 2010.

Fair Value Measurements

On January 1, 2007, the Company adopted the guidance for fair value measurements. The guidance defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. In addition, in 2009, the Company adopted fair value measurements for all of its non-financial assets and non-financial liabilities, except for those recognized at fair value in the financial statements at least annually. These assets include goodwill and long-lived assets measured at fair value for impairment assessments, and non-financial assets and liabilities initially measured at fair value in a business combination. The Company’s adoption of this guidance did not have a material impact on its consolidated financial statements.

The Company’s financial instruments include cash and cash equivalents, accounts and notes receivable, interest rate swaps, accounts payable, accrued expenses, and short and long-term borrowings. Because of their short maturity, the carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value. The carrying value of long-term variable-rate debt approximates fair value. As of September 30, 2010, the carrying value of the Company’s fixed-rate long-term debt exceeded its fair value by approximately $675,000. This is based on quoted market prices or on rates available to the Company for debt with similar terms and maturities.

The Company accounts for its interest rate swaps as derivative financial instruments in accordance with the related guidance. Under this guidance, derivatives are carried on the consolidated balance sheets at fair value. The fair value of the Company’s interest rate swaps are determined based on observable market data in combination with expected cash flows for each instrument.

Derivative Financial Instruments

Effective January 1, 2009, the Company adopted new guidance which expands the disclosure requirements for derivative instruments and hedging activities.

In the normal course of business, the Company utilizes derivatives contracts as part of its risk management strategy to manage exposure to market fluctuations in interest rates. These instruments are subject to various credit and market risks. Controls and monitoring procedures for these instruments have been established and are routinely reevaluated. Credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract. The measure of credit exposure is the replacement cost of contracts with a positive fair value. The Company seeks to manage credit risk by entering into financial instrument transactions only through counterparties that the Company believes to be creditworthy.

Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates. The Company seeks to manage market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken. As a matter of policy, the Company does not use derivatives for speculative purposes. The Company considers the use of derivatives with all financing transactions to mitigate risk.

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

A portion of the Company’s project financing includes three projects that utilize an interest rate swap instrument. During 2007, the Company entered into two fifteen-year interest rate swap contracts under which the Company agreed to pay an amount equal to a specified fixed rate of interest times a notional principal amount, and to in turn receive an amount equal to a specified variable rate of interest times the same notional principal amount. These interest rate swaps qualified, but were not designated, as cash flow hedges until April 1, 2010. Accordingly, the Company recognized these derivatives in the consolidated statements of income at fair value prior to April 1, 2010, and in the consolidated statements of comprehensive income (loss) thereafter. Cash flows from derivative instruments were reported as operating activities in the consolidated statements of cash flows.

In March 2010, the Company entered into a fourteen-year interest rate swap contract under which the Company agreed to pay an amount equal to a specified fixed rate of interest times a notional principal amount, and to in turn receive an amount equal to a specified variable rate of interest times the same notional principal amount. The swap covers a notional amount of $27.9 million variable rate note at a fixed interest rate of 6.99% and expires in December 2024.

As of April 1, 2010, and in accordance with accounting standards, the swaps have been designated as cash flow hedges. Accordingly, the Company recognizes the fair value of the swaps in its condensed consolidated balance sheets and any changes in the fair value are recorded as adjustments to other comprehensive income (loss).

With respect to the Company’s interest rate swaps, the Company recorded the unrealized gain (loss) in earnings during the three months ended September 30, 2009 and 2010, of approximately $(354,326) and $0, respectively, as other income (expense) in the consolidated statements of income and comprehensive income. The Company recorded the unrealized gain (loss) in earnings during the nine months ended September 30, 2009 and 2010, of approximately $1,634,619 and $(133,591), respectively, as other income (expense) in the consolidated statements of income and comprehensive income.

Earnings Per Share

Basic earnings per share is calculated using the Company’s weighted-average outstanding common shares, including vested restricted shares. When the effects are not anti-dilutive, diluted earnings per share is calculated using the weighted-average outstanding common shares and the dilutive effect of preferred stock, warrants and stock options as determined under the treasury stock method.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2010				2009				2010
Basic and diluted net income		$	8,194,475			$	12,040,917			$	10,332,833			$	21,026,233
Basic weighted-average shares outstanding			9,559,545				34,434,352				9,576,548				20,563,849
Effect of dilutive securities:
Preferred stock			19,260,000				4,396,304				19,260,000				14,250,988
Stock options			6,401,244				4,614,735				5,571,428				4,698,670
Warrants			405,046				—				404,991				—
Diluted weighted-average shares outstanding			35,625,835				43,445,391				34,812,967				39,513,507

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

Business Segments

The Company reports four segments: U.S. federal, central U.S. region, other U.S. regions and Canada. Each segment provides customers with energy efficiency and renewable energy solutions. The other U.S. regions segment is an aggregation of three regions: northeast U.S., southeast U.S. and southwest U.S. These regions have similar economic characteristics — in particular, expected and actual gross profit margins. In addition, they sell products and services of a similar nature, serve similar types of customers and use similar methods to distribute their products and services. Accordingly, these three regions meet the aggregation criteria set forth in ASC 280. The “all other” category includes activities, such as O&M and sales of renewable energy and certain other renewable energy products, that are managed centrally at the Company’s corporate headquarters. It also includes all corporate operating expenses — salary and benefits, project development costs and general, administrative and other costs — not specifically allocated to the segments. For the three months ended September 30, 2009 and 2010, unallocated corporate expenses were $4,459,359 and $7,712,229, respectively. Income before taxes and unallocated corporate expenses for all other for the three months ended September 30, 2009 and 2010, was $4,856,033 and $866,405, respectively. For the nine months ended September 30, 2009 and 2010, unallocated corporate expenses were $15,390,452 and $21,700,187, respectively. Income before taxes and unallocated corporate expenses for all other for the nine months ended September 30, 2009 and 2010, was $13,061,956 and $9,671,347, respectively. See Note 12.

Recent Accounting Pronouncements

In 2009, the FASB issued an accounting pronouncement establishing the ASC as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities. This pronouncement was effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards were superseded. The Company adopted this new accounting pronouncement during 2009, and it did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued guidance on subsequent events, which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the guidance during 2009, and it did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued guidance on improving disclosures about fair value measurements. This guidance has new requirements for disclosures related to recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances and settlements in a rollforward reconciliation of Level 3 fair-value measurements. This guidance is effective for the first reporting period beginning after December 15, 2009, and, as a result, it was effective for the Company beginning January 1, 2010. The Level 3 reconciliation disclosures are effective for fiscal years beginning after December 15, 2010, which will be effective for the Company for the year ending December 31, 2011. The Company does not expect that its adoption of the guidance will have a material impact on its consolidated financial statements.

In September 2009, the FASB issued guidance related to revenue arrangements with multiple deliverables as codified in ASC 605, Revenue Recognition (“ASC 605”). ASC 605 provides greater ability to separate and allocate arrangement consideration in a multiple element revenue arrangement. In addition, ASC 605 requires the use of estimated selling price to allocate arrangement considerations, therefore eliminating the use of the residual method of accounting. ASC 605 will be effective for fiscal years beginning after June 15, 2010, and may be applied retrospectively or prospectively for new or materially modified arrangements. Earlier application is permitted. The Company does not expect that its adoption of this guidance will have a material effect on its consolidated financial statements.

3. BUSINESS ACQUISITIONS AND RELATED TRANSACTIONS

In September 2009, the Company acquired Byrne Engineering, Inc. (“Byrne”) for an initial cash payment of $674,110, and contingent earn-out which is estimated to be $1,010,914. The total fair value of the consideration is $1,685,024.

In August 2010, the Company acquired Quantum Engineering and Development, Inc. (“Quantum”) for a cash payment of $6,150,000. The total fair value of the consideration is $6,150,000.

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

The 2009 and 2010 acquisitions were accounted for using the acquisition method in accordance with ASC-805, Business Combinations. The purchase price for each has been allocated to the assets based on their estimated fair values at the date of acquisitions. The excess purchase price over the estimated fair value of the next assets acquired has been recorded as goodwill. In each acquisition, identified intangible assets had de minimis value as the Company was primarily acquiring an assembled workforce in addition to the tangible net assets identified below.

		2009				2010
Cash		$	—			$	11,059
Accounts receivable			—				8,354,669
Accounts receivable retainage			—				423,927
Costs and estimated earnings in excess of billings			—				1,947,639
Prepaid expenses and other current assets			18,177				33,922
Property and equipment			113,842				127,512
Goodwill			2,280,739				2,539,561
Other assets			—				18,551
Accounts payable			(345,181	)			(6,374,371	)
Accrued liabilities			(1,010,914	)			(657,681	)
Billings in excess of cost and estimated earnings			—				(274,788	)
Long-term debt, net			(382,553	)			—
Purchase price		$	674,110			$	6,150,000
Total, net of cash received		$	674,110			$	6,138,941
Total fair value of consideration		$	1,685,024			$	6,150,000

The allocation of the purchase price for the 2009 acquisition is final and based on management’s best estimates. The allocation of the purchase price for the 2010 acquisition is preliminary and based on management’s best estimates.

The results of the acquired companies since the dates of the acquisitions have been included in the Company’s operations as presented in the accompanying consolidated statements of income and comprehensive income and consolidated statements of cash flows. Pro forma information has not been presented as the acquisitions are not material. The year-to-date revenue and pre-tax income (loss) of Byrne and Quantum, in 2009 and 2010, respectively, following their corresponding acquisition dates, is as follows:

		2009				2010
Byrne:
Revenues		$	95,009			$	2,705,604
Pre-tax income (loss)		$	(16,477	)		$	(131,522	)
Quantum:
Revenues		$	—			$	1,608,631
Pre-tax income (loss)		$	—			$	290,612

4. INCOME TAXES

The provision for income taxes was approximately $4,306,000 and $4,863,000, for the three months ended September 30, 2009 and 2010, respectively. The provision for income taxes was approximately $5,193,000 and $8,381,000, for the nine months ended September 30, 2009 and 2010, respectively. The effective tax rate changed to 28.8% for the three months ended September 30, 2010, from 34.4% for the three months ended September 30, 2009.

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

The effective tax rate changed to 28.5% for the nine months ended September 30, 2010, from 33.4% for the nine months ended September 30, 2009. The rate variance between the periods is due mainly to the Company’s change in its permanent items from 2009 to 2010. The overall rates vary from the statutory rate due to the benefit of certain energy efficiency preferences the Company generates during the year.

5. STOCK INCENTIVE PLANS

In 2000, the Company’s Board of Directors approved the Company’s 2000 Stock Incentive Plan (the “2000 Plan”) and authorized the Company to reserve 12,000,000 shares of common stock for issuance under the 2000 Plan. In 2001 and 2002, the Company’s Board of Directors authorized the Company to reserve an additional 4,000,000 shares of common stock for issuance under the 2000 Plan, bringing the total number of shares of common stock reserved under the 2000 Plan to 16,000,000. In 2003 and 2006, the Company’s Board of Directors authorized the Company to reserve an additional 4,500,000 shares of common stock for issuance under the 2000 Plan, bringing the total number of shares of common stock reserved under the 2000 Plan to 20,500,000. In 2009, the Company’s Board of Directors authorized the Company to reserve an additional 8,000,000 shares of common stock for issuance under the 2000 Plan, bringing the total number of shares of common stock reserved under the Plan to 28,500,000. The 2000 Plan provides for the issuance of restricted stock grants, incentive stock options and nonqualified stock options. The Company will grant no further stock options or restricted stock awards under the 2000 Plan.

The Company’s 2010 Stock Incentive Plan (the “2010 Plan), which became effective upon the closing of the Company’s initial public offering, was adopted by the Company’s Board of Directors in May 2010 and approved by its stockholders in June 2010. The 2010 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards and other stock-based awards. Upon its effectiveness, 10,000,000 shares of the Company’s Class A common stock were reserved for issuance under the 2010 Plan.

Grants of Restricted Shares

In October 2006, the Company issued 2,000,000 shares of restricted stock to the Company’s principal and controlling shareholder under the 2000 Plan as consideration for providing an indemnification to the Company’s surety provider (see Note 8). The shares vested entirely upon the date three years from the date of grant. The stock was issued when the fair value was estimated to be $3.41 per share. The Company recorded an expense of $443,136 during the three months ended September 30, 2009 related to this award. The Company recorded an expense of $1,412,872 during the nine months ended September 30, 2009 related to this award. This award vested in full in October 2009.

Stock Option Grants

The Company has also granted stock options to certain employees and directors under the 2000 Plan. At September 30, 2010, 8,206,250 shares were available for grant under the 2000 Plan; however, the Company will grant no further stock options or restricted stock awards under the 2000 Plan. The following table summarizes the activity under the 2000 Plan for the period ended September 30, 2010:

						Weighted-
						Average
		Number of				Exercise
		Options				Price
Outstanding at December 31, 2009			9,450,200			$	2.680
Granted			856,000				13.045
Exercised			(1,795,706	)			1.479
Forfeited			(211,400	)			1.837
Outstanding at September 30, 2010			8,299,094			$	4.178
Options exercisable at September 30, 2010			5,844,444			$	2.829
Expected to vest at September 30, 2010			1,913,691			$	7.361
Options exercisable at December 31, 2009			7,033,550			$	2.145

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

The weighted-average remaining contractual life of options expected to vest at September 30, 2010 was 4.71 years.

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

			Outstanding Options												Exercisable Options
							Weighted-
							Average				Weighted-								Weighted-
							Remaining				Average								Average
Exercise			Number				Contractual				Exercise				Number				Exercise
Prices			Outstanding				Life				Price				Exercisable				Price
$	0.450			42,500				0.27			$	0.450				42,500			$	0.450
	0.750			400,000				1.20				0.750				400,000				0.750
	0.875			1,024,700				1.80				0.875				1,024,700				0.875
	1.500			20,000				2.33				1.500				20,000				1.500
	1.750			243,500				2.79				1.750				243,500				1.750
	1.875			162,500				3.00				1.875				162,500				1.875
	2.750			1,173,750				3.79				2.750				1,155,750				2.750
	3.000			60,000				4.33				3.000				60,000				3.000
	3.250			1,308,144				2.95				3.250				1,162,344				3.250
	3.410			1,033,000				2.79				3.410				708,550				3.410
	4.220			919,000				3.46				4.220				506,500				4.220
	6.055			1,056,000				5.19				6.055				258,100				6.055
	13.045			856,000				6.07				13.045				100,000				13.045
				8,299,094												5,844,444

Under the terms of the 2000 Plan and the 2010 Plan, all options expire if not exercised within ten years after the grant date. The options generally vest over five years at a rate of 20% after the first year, and at a rate of 5% every three months beginning one year after the grant date. If the employee ceases to be employed by the Company for any reason before vested options have been exercised, the employee has 90 days to exercise vested options or they are forfeited.

The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value of options granted. The Company will recognize the compensation cost of stock-based awards on a straight-line basis over the vesting period of the award.

The determination of the fair value of stock-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The following table sets forth the significant assumptions used in the model during 2009 and 2010:

		Year Ended				Nine Months
		December 31,				Ended September 30,
		2009				2010
Future dividends		$	—			$	—
Risk-free interest rate			2.00-2.94	%			2.59-3.11	%
Expected volatility			57%-59	%			57%-59	%
Expected life		6.5 years				6.5 years

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

The Company will continue to use judgment in evaluating the expected term, volatility and forfeiture rate related to the stock-based compensation on a prospective basis, and incorporating these factors into the Black-Scholes pricing model. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. In addition, any changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period that the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the accompanying consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the accompanying consolidated financial statements. These expenses will affect the direct expenses, salaries and benefits and project development costs expenses.

For the three months ended September 30, 2009 and 2010, the Company recorded stock-based compensation expense of approximately $168,278 and $651,352, respectively, in connection with stock-based payment awards. For the nine months ended September 30, 2009 and 2010, the Company recorded stock-based compensation expense of approximately $431,528 and $1,758,503, respectively, in connection with stock-based payment awards. The compensation expense is allocated between direct expenses, salaries and benefits and project development costs in the accompanying consolidated statements of income and comprehensive income based on the salaries and work assignments of the employees holding the options. As of September 30, 2010, there was approximately $9,957,423 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 3.93 years.

6. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

In the ordinary course of business, the Company may be involved in a variety of legal proceedings.

In 2009, a lawsuit was filed against the Company. In the lawsuit, the plaintiff alleged that the Company caused action for damages by soliciting and hiring the plaintiff’s employees. The Company and the plaintiff settled the lawsuit by the Company paying $1.8 million to the plaintiff and in exchange both parties agreed to dismiss the lawsuit and reciprocally release and discharge each other from all claims stated or which could have been stated in the action against each other. The settlement was not construed as an admission of any wrongdoing, but rather was an economic decision to settle and compromise disputed claims. The settlement was recorded in the second quarter of 2009 in general, administrative and other expenses in the accompanying consolidated statements of income and comprehensive income.

On February 27, 2009, the Company received notice of a default termination from a customer for which the Company was performing construction services. The dispute involves the customer’s assertion of its understanding of the contractual scope of work involved and with the completion date of the project. The Company disputes the customer’s assertion as it believes that the basis of the default arose from a delay due to the discovery of and need for remediation of previously undiscovered hazardous materials not identified by the customer during contract negotiations. In February 2010, the Company filed a motion for summary judgment as to a portion of the complaint. In March 2010, the customer filed its response. Discovery is currently ongoing and no date has been set for a hearing on the Company’s motion.

The Company did not record an additional accrual for this matter beyond the adjustments made to the Company’s expected profit on this contract because the Company believes that the likelihood is remote that any additional liability would be incurred related to this matter. Based on the contract termination notice, the Company has adjusted its expected contract revenue and profit until such time as this contingency is resolved. The Company had claims of approximately $3.0 million outstanding with the customer as of September 30, 2010. As of September 30, 2010, the Company has not recognized any revenue or profit associated with these claims.

Compensation Commitment

Related to the Company’s acquisition of Quantum (see Note 3), the former stockholders of Quantum, which are now employees of the Company, will be eligible to receive additional compensation based solely on their continued employment with the Company for annual periods up to three years from the date of the acquisition. Total potential additional compensation is up to $1,150,000 and will be recognized as earned.

7. GEOGRAPHIC INFORMATION

The Company attributes revenue to customers based on the location of the customer. The composition of the Company’s assets at December 31, 2009, and September 30, 2010, and revenues from sales to unaffiliated customers for the three and nine months ended September 30, 2009 and 2010, between those in the United States and those in other locations, is as follows:

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

		December 31,				September 30,
		2009				2010
Assets:
United States		$	322,599,256			$	482,817,540
Canada			52,945,352				65,692,668
		$	375,544,608			$	548,510,208

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2010				2009				2010
Revenue:
United States		$	105,660,564			$	159,173,097			$	236,719,727			$	364,673,963
Canada			26,633,851				32,442,118				57,116,178				73,468,415
Other			—				286,214				1,303,069				742,144
		$	132,294,415			$	191,901,429			$	295,138,974			$	438,884,522

8. RELATED PARTY TRANSACTIONS

The Company’s principal and controlling shareholder provides a limited personal indemnification to the surety companies that provide performance and payment bonds and other surety products to the Company. In 2006, the Company issued 2,000,000 shares of restricted stock to the Company’s principal and controlling shareholder under the 2000 Plan (see Note 5) as compensation for providing the personal indemnification. In 2009, the Company issued an option to purchase 600,000 shares of common stock to the principal and controlling shareholder under the 2000 Plan as compensation for providing the personal indemnification.

9. OTHER INCOME (EXPENSE), NET

Other income (expense), net, consisted of the following items for the three and nine months ended September 30, 2009 and 2010:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2010				2009				2010
Gain realized from derivative		$	2,493,980			$	—			$	2,493,980			$	—
Unrealized gain (loss) from derivatives			(354,326	)			—				1,634,619			$	(133,591	)
Interest expense, net of interest income			(1,156,607	)			(1,703,632	)			(2,454,549	)			(3,474,423	)
Amortization of deferred financing fees			(59,016	)			(306,398	)			(161,662	)			(474,403	)
		$	924,031			$	(2,010,030	)		$	1,512,388			$	(4,082,417	)

During 2009, the Company purchased an interest rate cap from a major bank to mitigate effects of rising interest rates on a fixed rate customer contract for approximately $2.2 million. The Company terminated the agreement in 2009 and realized a gain of approximately $2.5 million in the three and nine months ended September 30, 2009. The Company did not designate this derivative as a cash flow hedge; therefore hedge accounting was not applied.

10. FAIR VALUE MEASUREMENTS

On January 1, 2008, the Company adopted new guidance for its financial assets and liabilities recognized at fair value on a recurring basis (at least annually). The guidance defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also describes three levels of inputs that may be used to measure fair value:

Level 1: Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2: Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

Level 3: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

The following table presents the input level used to determine the fair values of the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2009 and September 30, 2010:

						Fair Value as of
						December 31,				September 30,
		Level				2009				2010
Liabilities:
Interest rate swap instruments			2			$	1,933,535			$	5,905,218
Total liabilities			2			$	1,933,535			$	5,905,218

The fair value of the Company’s interest rate swaps was determined using cash flow analysis on the expected cash flow of the contract in combination with observable market-based inputs, including interest rate curves and implied volatilities. As a part of this valuation, the Company considered the credit ratings of the counterparties to the interest rate swaps to determine if a credit risk adjustment was required.

The Company is also required periodically to measure certain other assets at fair value on a nonrecurring basis, including long-lived assets, goodwill and other intangible assets. The Company determined the fair value used in the impairment analysis with its own discounted cash flow analysis. The Company has determined the inputs used in such analysis as Level 3 inputs. The Company did not record any impairment charges on goodwill or other intangible assets as no significant events requiring non-financial assets and liabilities to be measured at fair value occurred during the year ended December 31, 2009 or the nine months ended September 30, 2010.

11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

At December 31, 2009, and September 30, 2010, the following table presents information about the fair value amounts of the Company’s derivative instruments:

Liability Derivatives as of

December 31, 2009

September 30, 2010

Balance Sheet

Balance Sheet

Location

Fair Value

Location

Fair Value

Derivatives not designated as hedging instruments:

Interest rate swap contracts

Other liabilities

$

1,933,535

Other liabilities

$

—

Derivatives designated as hedging instruments:

Interest rate swap contracts

Other liabilities

$

—

Other liabilities

$

5,905,218

The following tables present information about the effect of the Company’s derivative instruments on accumulated other comprehensive income and the consolidated statements of income and comprehensive income:

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)—(Continued)

						Amount of Loss Recognized in
						Income on Derivative for the Three
						Months Ended September 30, are as
Derivatives Not Designated		Location of Loss Recognized				follows:
as Hedging Instruments		in Income on Derivative				2009				2010
Interest rate swap contracts		Interest income (expense)				$	(354,326	)		$	—

						Amount of Gain (Loss) Recognized
						in Income on Derivative for the Nine
						Months Ended September 30, are as
Derivatives Not Designated		Location of Gain (Loss) Recognized				follows:
as Hedging Instruments		in Income on Derivative				2009				2010
Interest rate swap contracts		Interest income (expense)				$	1,634,619			$	(133,591	)