CUSTOM Q INC - FORM 10-Q - November 14, 2011

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - CUSTOM Q INC	Financial_Report.xls
EX-31.2 - CERTIFICATION - CUSTOM Q INC	grhu_10q-ex3102.htm
EX-32.1 - CERTIFICATION - CUSTOM Q INC	grhu_10q-ex3201.htm
EX-31.1 - CERTIFICATION - CUSTOM Q INC	grhu_10q-ex3101.htm
EX-32.2 - CERTIFICATION - CUSTOM Q INC	grhu_10q-ex3202.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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

For the transition period from ______ to ______.

Commission File Number: 000-54240

GREENHOUSE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Nevada			26-2903011
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

5171 Santa Fe Street, Suite I San Diego, CA			92109
(Address of principal executive offices)			(Zip Code)

(858) 273-2626

(Registrant’s telephone number, including area 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 Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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 x 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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o	Accelerated Filer o
Non-Accelerated Filer o	Smaller Reporting Company x

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

As of November 14, 2011 the registrant had 28,077,566 shares of its Common Stock, $0.001 par value, issued and outstanding.

GREENHOUSE HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

September 30, 2011

INDEX

PART I – FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three months and Nine months ended September 30, 2011 and 2010 (unaudited)	5
	Condensed Consolidated Statements of Shareholders’ Equity for the Nine months ended September 30, 2011 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2011 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	31
Item 3	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
		36
PART II – OTHER INFORMATION		36

Item 1.	Legal Proceedings	36
Item 1.A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	(Removed & Reserved)	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
		37
SIGNATURES		38

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GREENHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,		December 31,
	2011		2010
	(unaudited)
ASSETS

Current assets:
Cash	$	31,405	$	63,373
Accounts receivable, net		277,417		1,931,408
Costs and estimated earnings in excess of billings		64,014		99,065
Prepaid expenses and other current assets		96,470		151,973
Deferred issuance costs		43,620		-

Total current assets		512,926		2,245,819

Property and equipment, net		513,442		487,513

Non-current assets:
Goodwill		3,574,902		2,244,367
Intangible assets, net		1,713,933		1,957,395
Security deposits		9,139		9,327
Distribution rights, net		656,667		686,667

Total assets	$	6,981,009	$	7,631,088

See accompanying notes to unaudited condensed consolidated financial statements.

GREENHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2011			2010
	(unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	1,275,991		$	1,754,165
Accrued expenses		523,429			297,799
Billings in excess of costs and estimated earnings		148,900			1,267,726
Advances from shareholders		44,900			50,000
Advances from officers		107,906			57,489
Current portion of notes payable		873,610			197,250
Current portion of notes payable, related parties		571,286			366,330
Total current liabilities		3,546,022			3,990,759

Notes payable, net of current portion		148,089			171,251
Notes payable, net of current portion, related parties		1,361,946			348,670
Acquisition liability		54,390			-
Deferred income taxes		672,500			800,000
Total liabilities		5,782,947			5,310,680

Commitments and contingencies - Note 10

Shareholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, none outstanding		-			-
Common stock, $.001 par value, 300,000,000 shares authorized, 27,077,566 and 25,738,831 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		27,078			25,739
Additional paid in capital		11,768,801			9,047,705
Accumulated deficit		(10,564,854	)		(6,753,036	)
Accumulated other comprehensive loss		(32,963	)		-
Total shareholders' equity		1,198,062			2,320,408

Total liabilities and shareholders' equity	$	6,981,009		$	7,631,088

See accompanying notes to unaudited condensed consolidated financial statements.

GREENHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Revenues	$	470,392		$	1,724,277		$	2,871,583		$	4,427,951

Cost of goods sold		479,930			1,081,904			1,863,681			2,594,196

Gross profit (loss)		(9,538	)		642,373			1,007,902			1,833,755

Operating expenses:
Compensation		675,444			728,547			1,922,708			2,010,553
Selling, general and administrative		763,161			876,424			2,550,536			2,310,409

Total operating expenses		1,438,605			1,604,971			4,473,244			4,320,962

Loss from operations		(1,448,143	)		(962,598	)		(3,465,342	)		(2,487,207	)

Other income (expense):
Interest		(267,889	)		(28,867	)		(641,521	)		(237,416	)
Change in acquisition liability		33,810			-			167,580			-
Other expense		-			-			-			(250,000	)

Loss before income taxes		(1,682,222	)		(991,465	)		(3,939,283	)		(2,974,623	)

Benefit for income taxes		(42,500	)		-			(127,465	)		-

Net loss		(1,639,722	)		(991,465	)		(3,811,818	)		(2,974,623	)

Other comprehensive loss:

Foreign currency translation loss		(33,705	)		-			(32,963	)		-

Total comprehensive loss	$	(1,673,427	)	$	(991,465	)	$	(3,844,781	)	$	(2,974,623	)


Net loss per share - basic and diluted	$	(0.06	)	$	(0.04	)	$	(0.14	)	$	(0.13	)

Weighted average number of shares outstanding -
Basic and Diluted		27,027,625			23,979,685			26,569,030			22,840,848

See accompanying notes to unaudited condensed consolidated financial statements.

GREENHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Nine Months Ended September 30, 2011

(unaudited)

	Common stock										Accumulated other			Total
					Additional			Accumulated			comprehensive			shareholders'
	Shares		Amount		paid in capital			deficit			loss			equity

Balance, December 31, 2010		25,738,831	$	25,739	$	9,047,705		$	(6,753,036	)	$	-		$	2,320,408

Stock and warrants issued for stock subscriptions		368,004		368		551,632			-			-			552,000

Stock issuance costs		-		-		(51,500	)		-			-			(51,500	)

Stock issued for payment of accounts payable		94,748		95		142,027			-			-			142,122

Stock issued for services		147,500		147		200,603			-			-			200,750

Warrants issued in conjunction with debentures		-		-		551,748			-			-			551,748

Compensation expense of stock options issued to employees, consultants and vendors		-		-		289,992			-			-			289,992

Stock issued in consideration for extension of debenture payment		74,627		75		49,925			-			-			50,000

Stock issued for the acquistion of Control Engineering		653,856		654		986,669			-			-			987,323

Foreign currency translation adjustment		-		-		-			-			(32,963	)		(32,963	)

Net loss for the nine months ended September 30, 2011		-		-		-			(3,811,818	)		-			(3,811,818	)

Balance, September 30, 2011		27,077,566	$	27,078	$	11,768,801		$	(10,564,854	)	$	(32,963	)	$	1,198,062

See accompanying notes to unaudited condensed consolidated financial statements.

GREENHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(3,811,818	)	$	(2,974,623	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		315,311			38,890
Loss on disposal of property and equipment		4,783			-
Common stock and options issued for services		481,293			79,991
Stock issued in consideration for extension of debenture payment		50,000			-
Interest expense related to converted debt		-			154,153
Interest expense related to converted accounts payable		47,374			-
Accretion of deferred interest on debentures payable		101,361			-
Accretion of warrant discount to debentures payable		353,071			-
Interest accrued on notes payable, related parties		23,982			-
Change in acquistion liability		(167,580	)		-
Deferred income taxes		(127,500	)		-
Change in allowance for doubtful accounts		9,857			-
Changes in operating assets and liabilities:
Accounts receivable		1,763,987			(1,337,368	)
Costs and estimated earnings in excess of billings		35,051			-
Prepaid expenses and other assets		67,465			(159,406	)
Accounts payable		(477,183	)		403,892
Accrued expenses		225,089			219,602
Billings in excess of costs and estimated earnings		(1,118,826	)		924,776

Net cash flows used in operating activities		(2,224,283	)		(2,650,093	)

Cash flows from investing activities:
Purchase of other intangibles		-			(3,600	)
Net cash received from acquisition		42,030			42,333
Purchase of property and equipment		(3,630	)		(366,769	)

Net cash flows provided by (used in) investing activities		38,400			(328,036	)

Cash flows from financing activities:
Deferred issuance costs		(43,620	)		(121,233	)
Advances from shareholder		7,400			-
Advances from officers		360,271			94,527
Repayments to shareholder		(12,500	)		-
Repayments to officers		(309,855	)		(101,109	)
Payments on notes payable		(96,824	)		(105,221	)
Payments on notes payable, related parties		(111,817	)		(610,364	)
Proceeds from notes payable		-			310,802
Proceeds from issuance of debentures		700,000			-
Proceeds from notes payable, related parties		1,166,020			389,828
Stock issuance costs		(51,500	)		-
Proceeds from share issuances		552,000			3,396,607

Net cash flows provided by financing activities		2,159,575			3,253,837

Effect of exchange rate fluctuations on cash		(5,660	)		-

Net increase (decrease) in cash		(31,968	)		275,708

Cash at beginning of period		63,373			3,869

Cash at end of period	$	31,405		$	279,577

See accompanying notes to condensed consolidated financial statements.

GREENHOUSE HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

	Nine Months Ended September 30,
	2011			2010
Supplemental disclosure of cash flow information:

Cash paid during the period for:
Interest	$	113,107		$	114,361

Income taxes	$	-		$	800


Non-cash investing and financing activities:
Conversion of notes payable to common stock	$	-		$	873,533

Issuance of common stock for payment of accounts payable	$	94,748		$	-

Deferred issuance costs adjusted to additional paid in capital in conjunction with share issuances	$	-		$	273,973

Issuance of 653,856 shares of common stock for acquistion of Control Engineering, Inc.	$	987,323		$	-

Contingent acquistion liabilty from acquisition of Control Engineering, Inc.	$	221,970		$	-

Issuance of 19,800,000 shares of common stock in exchange for retirement of 800,000 shares of common stock in Green House Holdings	$	-		$	12,560

Issuance of 1,200,000 shares of common stock for reverse merger	$	-		$	1,200

Issuance of 50,000 shares of common stock in exchange for assignment of distribution rights	$	-		$	200,000

Issuance of 45,000 shares of common stock for prepaid services	$	-		$	60,750

Issuance of 1,118,750 shares of common stock for acquisition of Life Protection, Inc.	$	-		$	3,504,105

Issuance of 321,839 warrants as discount to debentures payable in conjunction with issuance of debentures	$	551,748		$	-

Issuance of 6,000 shares of common stock for prepaid services	$	9,449		$	-

The following was the consideration given in the acquisition of Control Engineering, Inc.:

Issuance of 653,856 shares of common stock	$	987,323
Contingent acquistion liabilty of 147,000 shares of common stock		221,970

The following were the fair value of identifiable assets acquired and liabilities assumed in the acquisition of Control Engineering, Inc.

Accounts receivable	$	119,853
Prepaid expenses		2,325
Property and equipment		96,234
Accounts payable		(93,757	)
Accrued expenses		(541	)
Notes payable		(147,339	)
Notes payable, related parties		(140,047	)
Goodwill		1,330,535

See accompanying notes to unaudited condensed consolidated financial statements.

GREENHOUSE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2011

(unaudited)

Note 1 – Organization and going concern

Organization

R Squared Contracting, Inc. (“R Squared”) was incorporated in the State of California on January 2, 2007. Green House Holdings, Inc. (“GHH”) was organized under the laws of the State of Nevada on September 18, 2009. On September 20, 2009, a securities exchange agreement was entered into by and among GHH and R Squared and all of the equity holders of R Squared (“R Squared Shareholders”). Under this agreement, GHH acquired all of the issued and outstanding shares of R Squared from the R Squared Shareholders in exchange for an aggregate of 800,000 shares of GHH common stock. R Squared became a wholly owned subsidiary of GHH and the 800,000 shares represent 100% of the total outstanding shares of GHH.

On January 7, 2010, GreenHouse Holdings, Inc., f/k/a Custom Q, Inc. (“GreenHouse” or the "Company") approved an amendment to its Articles of Incorporation (the “Amendment”) to change its name to GreenHouse Holdings, Inc. and to effect a forward-split such that 5 shares of common stock were issued for every 1 share of common stock issued and outstanding immediately prior to filing of the Amendment (the “Forward Split”). On January 7, 2010, GreenHouse entered into an Agreement and Plan of Share Exchange (the “Exchange Agreement”) with Green House Holdings, Inc., a Nevada corporation, and the stockholders of GHH whereby GreenHouse acquired all of the issued and outstanding common stock of GHH in exchange (the “Exchange”) for 19,800,000 newly issued shares of common stock and options to purchase 784,000 shares of common stock (after giving effect to the Forward Split) of GreenHouse. As a result, GreenHouse completed a reverse merger in which GHH merged with the Company and GHH became a wholly-owned subsidiary of the Company (the “Merger”).

On June 2, 2010, the Company incorporated a 99.8% owned subsidiary in Mexico, Green House Soluciones S.A. de C.V. ("GH Soluciones").

The addition of Control Engineering’s suite of services will allow the Company to not only realize greater profit margins on demand response implementations but more importantly be able to package a complete turnkey Auto-Demand Response program that can be adopted by utilities across the country. Pursuant to the CEI Agreement, the Company acquired, from the Control Engineering Holders, all of the capital stock of Control Engineering in exchange for a maximum aggregate of 800,856 shares of the Company’s newly issued shares of common stock, par value $.001 per share (the “Exchange Shares”).

147,000 of the Exchange Shares shall be deposited in escrow (the “Earn-out Shares”). If CEI generates gross revenues in 2011, including pre-acquisition revenue, from its existing line of business totaling between $2,000,000 - $3,999,999 for the year ending December 31, 2011, the escrow agent shall release 73,500 of the Earn-out Shares to the Control Engineering Holders. If CEI generates gross revenues in 2011, including pre-acquisition revenue, from its existing line of business in excess of $4,000,000, the escrow agent shall release 147,000 of the Earn-out Shares to the Control Engineering Holders. If CEI fails to generate gross revenues in 2011, including pre-acquisition revenue, from its existing line of business in excess of $2,000,000, then the escrow agent shall return any and all remaining Earn-out Shares to be cancelled and retired on the books and records of the Company and returned to unissued status.

The purchase price was determined by the total market value of the newly issued shares on May 23, 2011, totaling $1,209,293, which was based on the closing market price of the Company's common stock on the acquisition date. The Earn-out Shares have been classified as a liability until the performance targets are met (the “Acquisition Liability”). The Acquisition Liability is revalued at the fair market value of the Company’s common stock at each reporting date until the uncertainty has been resolved, and for the three and nine months ended September 30, 2011, resulted in a gain of $33,810 and $167,580, respectively, that has been included in other income in the accompanying condensed consolidated statements of operations.

The acquisition has been accounted for under the purchase method. The initial accounting of the excess of the purchase price paid over the fair value of the assets and liabilities acquired is not complete as a significant portion of the assets acquired were intangible assets that need to be appraised. As a result, the full amount of the excess of the purchase price paid over the fair value of the assets and liabilities has been classified as goodwill as of September 30, 2011. None of the goodwill recognized is expected to be deductible for income tax purposes. Revenue and net loss generated by Control Engineering from the acquisition date through September 30, 2011 was $701,181 and $28,475, respectively.

Consideration Given:

653,856 shares of Green House Holdings common stock	$	987,323
147,000 contingent shares of Green House Holdings common stock		221,970

Total consideration	$	1,209,293

Fair value of identifiable assets acquired and liabilities assumed:

Cash	$	42,030
Accounts receivable		119,853
Prepaid expenses		2,325
Property and equipment, net		96,234
Accounts payable		(93,757	)
Accrued expenses		(541	)
Notes payable		(147,339	)
Notes payable, related parties		(140,047	)
Total identifiable net assets		(121,242	)

Goodwill		1,330,535

	$	1,209,293

On September 16, 2011, the Company entered into a letter of intent to transact a stock exchange and merge with and into Charlotte, NC-based Premier Alliance Group, Inc. (“Premier”), a leading provider of business and technology advisory and consulting services. The acquisition is subject to certain requirements including due diligence; execution of a definitive purchase agreement, approval by the boards of both companies and various other customary conditions, including the Company’s shareholder approval.

The Company is headquartered in San Diego, California and is a provider of energy efficiency and sustainable facilities solutions. The Company designs, engineers and installs disparate products and technologies that enable its clients to reduce their energy costs and carbon footprint. Its target markets for energy efficiency solutions include government and military, as well as commercial, residential and industrial markets. In addition, the Company develops, designs and constructs rapidly deployable, sustainable facilities primarily for use in disaster relief and security in austere regions.

Going concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, the Company had an accumulated deficit of $10,564,854 at September 30, 2011, a net loss and net cash used in operations of $3,811,818 and $2,224,284, respectively, for the nine months ended September 30, 2011. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan, raise additional capital, and generate sufficient revenues. During the nine months ended September 30, 2011, the Company raised $552,000 through the issuance of equity securities to outside investors, raised $700,000 from the issuance of debt securities to outside investors, and raised $1,166,020 from the issuance of debt securities to related parties. Management believes that the actions presently being taken to further implement its business plan, raise additional capital, and generate revenues provide the opportunity for the Company to continue as a going concern, but there can be no assurances to that effect.

As a result of the decrease in demand for the Company's energy efficiency solutions to the residential market, and the growth in the Company's energy efficiency solutions to the non-residential market, coupled with the Company's new contracts obtained in its Sustainable Facilities segment as disclosed in Note 3 in the notes to the accompanying condensed consolidated financial statements, management has decided to focus the Company's efforts in the non-residential market of the Energy Efficiency Solutions segment, and in the Sustainable Facilities Solutions segment, and temporarily reduce its efforts in the residential market of the Energy Efficiency Solutions segment. The Company has significantly reduced its staff involved in the residential market, and accordingly, the potential for future revenues from the residential market are expected to decline significantly until the staffing levels are restored. Total revenues earned from the residential market during the three months ended September 30, 2011 and 2010, totaled $107,998 and $1,724,277, respectively, and $1,738,885 and $4,427,951, for the nine months ended September 30, 2011 and 2010, respectively.

The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Note 2 – Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated interim financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (which include only normal recurring adjustments except as noted in management's discussion and analysis of financial condition and results of operations) necessary to present fairly the financial position, results of operations and changes in cash flows have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the 2010 Annual Report on Form 10-K, filed March 31, 2011. The results of operations for the nine months ended September 30, 2011, are not necessarily indicative of the operating results for the full year.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Significant estimates included in these financial statements are: (a) revenue recognition on uncompleted contracts and billings in excess of costs and estimated earnings, (b) the excess of the purchase price paid for Control Engineering over the fair value of the assets and liabilities acquired classified as goodwill and (c) amortization of intangible assets. The revenue recognition estimates are based on the ratio that actual costs incurred to date bear to estimated costs at completion. It is at least reasonably possible that a change in these estimates will occur in the near term.

Consolidation

The condensed consolidated financial statements include the accounts of GHH and its wholly-owned subsidiaries, R Squared, Life Protection, GH Soluciones, and Control Engineering. All material intercompany balances have been eliminated in consolidation.

Accounts receivable

R Squared grants unsecured credit to individuals primarily located in Southern California. Life Protection grants unsecured credit to commercial and military customers primarily located in the United States. Control Engineering grants unsecured credit to commercial and public utility customers primarily located in the United States. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expenses, if any. At September 30, 2011 and December 31, 2010, the allowance for doubtful accounts is $9,857 and $0, respectively.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure to its customers.

Deferred issuance costs

Costs relating to the future issuance of equity securities are deferred. When the additional equity securities are issued, the deferred costs are charged to additional paid-in-capital. The Company has certain deferred issuance costs as of September 30, 2011 consisting of legal and other expenses relating to the proposed issuance of common stock.

Property and equipment

Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives ranging from 3 years to 5 years. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.

Goodwill and other intangible assets

Goodwill represents the excess of acquisition consideration paid over the fair value of identifiable net tangible and identifiable intangible assets acquired. Goodwill and other indefinite-lived intangible assets are not amortized, but are reviewed for impairment at least annually, in the third quarter, or earlier upon the occurrence of certain triggering events.

Goodwill is allocated among and evaluated for impairment at the reporting unit level. Management evaluates goodwill for impairment using a two-step process provided by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles — Goodwill and Other. The first step is to compare the fair value of each of our reporting units to their respective book values, including goodwill. If the fair value of a reporting unit exceeds its book value, reporting unit goodwill is not considered impaired and the second step of the impairment test is not required. If the book value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the book value of that goodwill. If the book value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company determined that there were no impairments of goodwill and other intangible assets as of September 30, 2011 or December 31, 2010. Intangible assets with determinable useful lives are amortized using the straight-line method over the expected life of the assets.

Impairment of long-lived assets

In accordance with ASC 360, Property, Plant, and Equipment, the Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company determined that there were no impairments of long-lived assets as of September 30, 2011 or December 31, 2010.

Revenue recognition

In accordance with ASC 605, Revenue Recognition, contract revenues are recognized using the percentage of completion method in the ratio that costs incurred bear to total estimated costs at completion. Adjustments to contract cost estimates are made in the periods in which the facts which require such revisions become known. Unapproved change orders are not considered as part of the contract until it has been approved by the customer. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. If final total cost is anticipated to exceed the contract amount, the excess of cost over contract amount is immediately recognized as a loss on the contract.

Customer billings and costs and estimated earnings on uncompleted contracts

The Company classifies cumulative customer billings that exceed the sum of total contract costs incurred plus the gross profit earned to date as billings in excess of costs and estimated earnings. Cumulative costs incurred plus estimated gross profit earned to date that exceeds customer billings are classified as costs and estimated earnings in excess of billings. See Note 3, “Costs and estimated earnings on uncompleted contracts,” for further information.

Other expense

Immediately prior to the Merger that was completed on January 7, 2010, the Company consummated a Stock Purchase Agreement with Cindy Kostoff, GreenHouse’s then principal shareholder and officer and director, whereby the Company acquired 4,000,000 of GreenHouse’s 4,240,000 outstanding shares from Ms. Kostoff for the purchase price of $250,000. This expense has been classified as other expense in the nine months ended September 30, 2010.

Foreign currency translation

On June 2, 2010, the Company incorporated a 99.8% owned subsidiary in Mexico, Green House Soluciones S.A. de C.V. ("GH Soluciones"). This subsidiary utilizes the local currency as its functional currency. Assets and liabilities in the condensed consolidated balance sheets have been translated at the rate of exchange as of the balance sheet date. Revenues and expenses are translated at the average exchange rate for the period. The resulting translation adjustments are reported under accumulated other comprehensive income (loss).

Income taxes

The Company follows ASC 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period of enactment.

The Company adopted the application of uncertain tax positions of ASC 740, Income Taxes, during 2009. The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2011 and December 31, 2010, the Company does not have a liability for unrecognized tax uncertainties.

The Company's policy is to record interest and penalties on uncertain tax positions as income tax expense. As of September 30, 2011 and December 31, 2010, the Company has no accrued interest or penalties related to uncertain tax positions.

Net loss per common share

Net loss per common share is computed pursuant to ASC 260, Earnings Per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period. As of September 30, 2010, there were 973,359 warrants and 1,335,000 options outstanding to purchase shares of common stock. As of September 30, 2011, there were 1,745,229 warrants and 934,000 options outstanding to purchase shares of common stock. However, these potentially dilutive shares are considered to be anti-dilutive and are therefore not included in the calculation of net loss per share.

Stock-based compensation

For employee stock options issued under the Company’s stock-based compensation plans, the fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model, and an estimated forfeiture rate is used when calculating stock-based compensation expense for the period. For employee restricted stock awards and units issued under the Company’s stock-based compensation plans, the fair value of each grant is calculated based on the Company’s stock price on the date of grant and an estimated forfeiture rate when calculating stock-based compensation expense for the period. The Company recognizes the compensation cost of stock-based awards upon vesting of the award.

The Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees ("ASC 505-50"). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Any stock options issued to non-employees are recorded in expense and additional paid-in capital in shareholders' equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each period.

Any benefits of tax deductions in excess of recognized stock-based compensation will be reported as a financing activity rather than an operating activity in the statements of cash flows. This requirement will reduce net operating cash flows and increase net financing cash flows in certain periods.

As there is not sufficient public market history for its common stock, the Company determined the volatility for options granted based on an analysis of reported data for a peer group of companies. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies as well as the historical volatility of the Company’s common stock. The expected life of options has been determined utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.

Effect of recent accounting pronouncements

The Company reviews new accounting standards as issued. No new standards had any material effect on these condensed consolidated financial statements. The accounting pronouncements issued subsequent to the date of these condensed consolidated financial statements that were considered significant by management were evaluated for the potential effect on these condensed consolidated financial statements. Management does not believe any of the subsequent pronouncements will have a material effect on these condensed consolidated financial statements as presented and does not anticipate the need for any future restatement of these condensed consolidated financial statements because of the retro-active application of any accounting pronouncements issued subsequent to September 30, 2011 through the date these condensed consolidated financial statements were issued.

Note 3 – Costs and estimated earnings on uncompleted contracts

Costs and estimated earnings on uncompleted contracts as of September 30, 2011 and December 31, 2010 consisted of the following:

Costs incurred on uncompleted contracts	$	657,014		$	1,164,719
Estimated earnings		435,596			341,611

		1,092,610			1,506,330

Less: billings to date		1,177,496			2,674,991

	$	(84,886	)	$	(1,168,661	)

Included in the accompanying condensed consolidated balance sheets at September 30, 2011 and December 31, 2010, costs and estimated earnings on uncompleted contracts consisted of the following:

	September 30,			December 31,
	2011			2010

Costs and estimated earnings in excess of billings on uncompleted contracts	$	64,014		$	99,065

Billings in excess of costs and estimated earnings on uncompleted contracts		(148,900	)		(1,267,726	)

	$	(84,886	)	$	(1,168,661	)

As of September 30, 2011 and December 31, 2010, the Energy Efficiency Solutions (“EES”) segment had a backlog of approximately $0 and $747,000, respectively. See Note 11, “Subsequent events”, for additional work won in the EES segment subsequent to September 30, 2011. In the Sustainable Facilities Solutions (“SFS”) segment, in January 2011, Life Protection signed a contract (the “OceanSafe Contract”) to provide sustainable textured coating product to OceanSafe, a manufacturer of leading-edge steel structural insulated panels, for use in the construction of energy efficient buildings. The contract value is not to exceed $28,000,000. Subject to required regulatory approvals, the delivery of coating is expected to start in the first quarter of 2012 and continue for a period of approximately 18 months. In May 2011, Life Protection signed a contract (the “Pinnacle Contract”) with Pinnacle Performance Group for the design, development and construction of a national security training center. As of September 30, 2011, the estimated contract value is approximately $100,000,000 and is expected to start in the first quarter of 2012 and continue for a period of approximately two years. In August 2011, Life Protection signed a contract with SAAB Training USA (the “SAAB Contract”) for the design, development and construction of a blast observation booth at a United States military location. As of September 30, 2011, the estimated contract value is approximately $171,000 and is expected to be completely performed in the fourth quarter of 2011. See Note 11, “Subsequent events”, for additional work won in the SFS segment subsequent to September 30, 2011.

Note 4 – Property and equipment, net

Property and equipment at September 30, 2011 and December 31, 2010 consisted of:

	September 30,			December 31,
	2011			2010

Land	$	290,735		$	318,036
Vehicles		129,777			112,776
Leasehold improvements		198,099			94,887
Furniture and equipment		60,327			53,876
		678,938			579,575
Less: accumulated depreciation and amortization		(196,365	)		(122,456	)
Project in progress		30,869			30,394

Property and equipment, net	$	513,442		$	487,513

Depreciation and amortization expense for the three months ended September 30, 2011 and 2010 was $6,144 and $14,446, respectively. Depreciation and amortization expense for the nine months ended September 30, 2011 and 2010 was $41,849 and $38,890, respectively.

The carrying amount of the vehicles that serve as collateral on the vehicle loans is $31,015 and $55,685 at September 30, 2011 and December 31, 2010, respectively.

As of September 30, 2011 and December 31, 2010, the Company had assets with a net book value of $293,915 and $320,892, respectively, that were held outside of the United States.

Note 5 – Intangible assets, net

Intangible assets, net, consisted of the following at September 30, 2011 and December 31, 2010:

	Average life	September 30,			December 31,
	(in years)	2011			2010

Non-amortizable:
Trademarks	Indefinite	$	3,600		$	3,600

Amortizable:
Customer relationships	7		1,033,000			1,033,000
Technologies	8		359,000			359,000
Licenses	5		315,000			315,000
Trade names	8		236,000			236,000
Other	3		119,000			119,000
			2,065,600			2,065,600
Accumulated amortization			(351,667	)		(108,205	)

Total other intangibles, net		$	1,713,933		$	1,957,395

Amortization of intangible assets was $81,150 and $0 for the three months ended September 30, 2011 and 2010, respectively, $243,462 and $0 for the nine months ended September 30, 2011 and 2010, respectively, and is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Expected remaining amortization of intangible assets for each of the next five years is as follows:

Remainder of 2011	$	81,152
2012	$	324,616
2013	$	311,389
2014	$	284,948
2015	$	263,948

Note 6 – Distribution rights

Pursuant to an agreement dated January 14, 2009 between the Company and E-Fuel Corporation (“E-Fuel”), (the “Distribution Agreement”), the Company acquired exclusive rights to distribute E-Fuel equipment, parts and accessories used in the production of ethanol for certain counties in the state of California. The term of the Distribution Agreement is for three years and may be extended for an additional one year term by the mutual written consent of the Company and E-Fuel. Under the terms of the Agreement, the Company is required to order minimum quantities (See Note 10). The Company paid E-Fuel a $500,000 distribution fee to acquire the limited exclusive distribution rights. The distribution fee will be amortized using the straight-line method over the initial three year term of the Distribution Agreement; beginning when the Company completes its beta testing of the E-Fuel equipment. The Company anticipates yearly amortization expense to be approximately $167,000.

On August 10, 2010, the Company acquired the exclusive distribution rights to distribute Polyethylene Ballistic Material to the Department of Defense from G3 Shielding Technology, Inc. The term of the Distribution Agreement is for two years and may be extended for additional one year periods. The Company has estimated the useful life of the agreement to be five years. The Company issued 50,000 shares of its restricted common stock to acquire the exclusive distribution rights. The distributions rights were recorded at the market value of the Company’s common stock on August 10, 2010 of $4.00 per share or $200,000. The distribution fee is being amortized over the five year estimated useful life. $10,000 and $0 was amortized in the three months ended September 30, 2011 and 2010, respectively, and $30,000 and $0 in the nine months ended September 30, 2011 and 2010, respectively, and is included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations. The Company anticipates $40,000 of amortization expense in the years 2011, 2012, 2013 and 2014 and $26,667 in 2015.

Note 7 – Advances from shareholders and officers

During the year ended December 31, 2010, the Company received an unsecured advance of $50,000 from an unaffiliated shareholder. The amount owing on the advance was $37,500 and $50,000 as of September 30, 2011 and December 31, 2010, respectively.

During the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company received unsecured advances of $91,283 and $58,979, respectively, from Justin Farry, its Chief Financial Officer. The amount owing on the advances was $31,438 and $21,909 as of September 30, 2011 and December 31, 2010, respectively.

During the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company received unsecured advances of $268,987 and $103,633 from Chris Ursitti, its Chief Innovation Officer. The amount owing on the advances was $76,468 and $5,292 as of September 30, 2011 and December 31, 2010, respectively. Subsequent to September 30, 2011, Chris Ursitti sold and assigned this indebtedeness to a third party. See Note 11, “Subsequent events”, for further information.

During the nine months ended September 30, 2011, the Company received unsecured advances of $7,400 from an affiliated shareholder. The amount owing on the advances was $7,400 as of September 30, 2011.

During the year ended December 31, 2009, the Company received unsecured advances of $37,588 from Russ Earnshaw, its President. The amount owing on the advance was $0 and $30,288 as of September 30, 2011 and December 31, 2010, respectively.

Note 8 – Notes payable

Notes payable at September 30, 2011 and December 31, 2010 consisted of:

	September 30,		December 31,
	2011		2010

Vehicle and equipment loans	$	53,109	$	45,500
Debentures payable, net of discount		793,177		190,493
Promissory notes		175,413		132,508
Related party promissory notes		1,933,232		715,000

Total long-term debt		2,954,931		1,083,501

Less: current portion		1,444,896		563,580

Long-term portion	$	1,510,035	$	519,921

Minimum future obligations under the notes payable as of September 30, 2011 are as follows:

Twelve Months ending
September 30,

2012	$	1,444,896
2013		329,049
2014		8,783
2015		2,380
2016		-
Thereafter		1,169,823
	$	2,954,931

Vehicle and Equipment loans

In 2008, the Company purchased two vehicles that were financed through GMAC. Interest on the GMAC loans is 9.75% per annum and monthly payments approximate $950. Final payments for both loans are due in July 2013. In 2009, the Company purchased one vehicle that was financed through Ford Motor Credit. Interest on the Ford Motor Credit loan is 10.89% per annum and monthly payments approximate $570. Final payment on the loan is due in May 2014. The vehicle loans are secured by the vehicles.

In 2007, Control Engineering purchased a vehicle that was financed through Ironstone Bank. Interest on the Ironstone Bank loan is 7.99% and monthly payments approximate $346. Final payment on the loan is due in July 2012. The vehicle loan is secured by the vehicle.

In July 2009, Control Engineering purchased computer equipment that was financed through Dell Commercial Credit. Interest on the loan is 29.99% and monthly payments approximate $367. Final payment on the loan is due in May 2015.

In May 2011, Control Engineering purchased computer equipment that was financed through Dell Financial. Interest on the loan is 18% and monthly payments approximate $166. Final payment on the loan is due in May 2015.

Debentures payable

On October 22, 2010, the Company authorized the issuance of debentures in an aggregate amount of $344,828 and warrants to purchase 137,931 shares of common stock at the price of $2.50 per share which expire in five years, in connection with a Securities Purchase Agreement with certain purchasers. The debentures carried an original issue discount of $44,828 that is accreted over the term of the debenture as interest expense. The warrants issued in connection with the debentures have been valued at $147,443 and have been recorded as a discount to the debentures. The warrant value is amortized as interest expense over the term of the debentures. On February 18, 2011, the debenture holders agreed to amend the repayment terms of the debentures, deferring the start of the ten equal, monthly repayments to August 1, 2011, and extending the maturity date to May 1, 2012. In consideration for the amendment, the Company issued to the debenture holders an additional debenture with a maturity date of May 1, 2012, with a principal amount equal to $44,828, payable in ten equal, monthly repayments beginning August 1, 2011. On August 18, 2011, the debenture holders agreed to extend the due date of the August 1, 2011 monthly repayment to November 1, 2011, in consideration for 24,349 shares of the Company’s common stock, par value $0.001 per share. The amount of the debentures, net of the original issue and warrant discounts, is $309,473 and $190,493 as of September 30, 2011 and December 31, 2010, respectively. Subsequent to September 30, 2011, the Company agreed to settle and pay the debentures. See Note 11, “Subsequent events”, for further information.

On February 18, 2011, the Company authorized the issuance of debentures in an aggregate amount of $804,598 and warrants to purchase 321,839 shares of common stock at the price of $2.50 per share which expire in five years, in connection with a Securities Purchase Agreement with certain purchasers. The debentures carried an original issue discount of $104,598 that is accreted over the term of the debenture as interest expense. The warrants issued in connection with the debentures have been valued at $551,748 and have been recorded as a discount to the debentures. The warrant value is amortized as interest expense over the term of the debentures. The debentures are repayable in ten equal, monthly repayments beginning on August 1, 2011, with a maturity date of May 1, 2012. On August 18, 2011, the debenture holders agreed to extend the due date of the August 1, 2011 monthly repayment to November 1, 2011, in consideration for 50,278 shares of the Company’s common stock, par value $0.001 per share. The amount of the debentures, net of the original issue and warrant discounts, is $483,704 as of September 30, 2011. Subsequent to September 30, 2011, the Company agreed to settle and pay the debentures. See Note 11, “Subsequent events”, for further information.

Promissory notes

On July 22, 2010, Green House Soluciones, S.A. de C.V., a subsidiary of the Company, purchased approximately 25 acres of land in Jalisco, Mexico, for a total price of approximately $318,000. The purchase was financed by a promissory note to the sellers. The note is non-interest bearing and is secured by the land. A 10% deposit of approximately $31,000 was paid on July 22, 2010 and an additional payment of $62,000 was made on August 20, 2010. The balance of the purchase price is payable in 10 monthly payments of approximately $21,000 beginning on September 30, 2010 and ending on June 30, 2011. The Company is currently negotiating an extension of the past due repayments. The balance outstanding on the promissory note totaled $50,472 and $132,508 at September 30, 2011 and December 31, 2010, respectively.

On July 5, 2008, Control Engineering, a subsidiary of the Company, modified a promissory note it entered into with Ironstone Bank on April 5, 2007 in the original amount of $150,000 (the “Ironstone Note”). Interest accrues on the Ironstone Note at the rate of 6.25% per annum and is secured by a 2nd lien deed of trust on the office space occupied by Control Engineering. Under the Ironstone Note, Control Engineering shall make 59 monthly payments of $1,259 beginning August 5, 2008, and a final payment of the entire balance then due of approximately $113,000 on July 5, 2013. The balance on the Ironstone Note totaled $124,941 at September 30, 2011.

Related party promissory notes

On October 8, 2008, the Company issued an unsecured promissory note (the “Note”) to Pacific Consortium Investments (“Pacific”) in the amount of $300,000. Interest accrues on the note at the rate of 5% per annum. Under the term of the Note, the Company shall make 36 monthly payments beginning on June 15, 2010. Subsequent to execution of the Note, Pacific advanced the Company additional amounts totaling $200,000 which are treated as additional borrowings under the Note. The controlling party of Pacific is an unaffiliated shareholder of the Company. The last monthly payment made was on January 15, 2011 and the Company is currently negotiating an extension of the past due repayments. The principal amount owing under the Note was $476,399 and $490,000 as of September 30, 2011 and December 31, 2010, respectively.

During the year ended December 31, 2009, the Company issued an unsecured note payable in the amount of $300,000 and received an additional unsecured loan in the amount of $30,536 from one of its principal shareholders and former Chief Executive Officer. During the year ended December 31, 2010, the Company received an additional unsecured loan in the amount of $42,100 from its principal shareholder and former Chief Executive Officer. The note has a stated interest rate of 4%, with interest payments due monthly, and is due upon receipt of equity financing by the Company of at least $5 million. The unsecured loans were fully repaid during the year ended December 31, 2010. The amount owing under the note as of June 30, 2011 and December 31, 2010 was $154,784 and $215,000, respectively. The loans are non-interest bearing. Subsequent to September 30, 2011, Chris Ursitti sold and assigned this indebtedeness to a third party. See Note 11, “Subsequent events”, for further information.

During the year ended December 31, 2009, the Company issued an unsecured note payable in the amount of $25,000 to an unaffiliated shareholder. This note was payable upon receipt of equity financing by the Company on or before January 4, 2010, and is non-interest bearing. The note holder received 15,000 shares of common stock upon receipt of equity financing by the Company. The amount owing under the note was $10,000 as of September 30, 2011 and December 31, 2010.

During the nine months ended September 30, 2011, the Company borrowed $176,745 from an unaffiliated shareholder and issued an unsecured note payable in the amount of $176,745 to the unaffiliated shareholder. Interest accrues on the note at the rate of 5% per annum and is payable on the maturity date of the note. The maturity date of the note is December 31, 2025. The amount owing under the note, including accrued interest of $4,673, was $181,418 as of September 30, 2011.

During the nine months ended September 30, 2011, the Company issued an unsecured note payable in the amount of $250,000 to an unaffiliated shareholder. Interest accrues on the note at the rate of 5% per annum and is payable on the maturity date of the note. The maturity date of the note is December 31, 2025. The amount owing under the note, including accrued interest of $5,208, was $255,208 as of September 30, 2011.

During the nine months ended September 30, 2011, the Company issued an unsecured note payable in the amount of $237,800 to an unaffiliated shareholder. Interest accrues on the note at the rate of 5% per annum and is payable on the maturity date of the note. The maturity date of the note is December 31, 2025. The amount owing under the note, including accrued interest of $4,582, was $242,382 as of September 30, 2011. Subsequent to September 30, 2011, the unaffiliated shareholder sold and assigned this indebtedeness to a third party. See Note 11, “Subsequent events”, for further information.

During the nine months ended September 30, 2011, the Company issued an unsecured note payable in the amount of $132,256 to an unaffiliated shareholder. Interest accrues on the note at the rate of 5% per annum and is payable on the maturity date of the note. The maturity date of the note is December 31, 2025. The amount owing under the note, including accrued interest of $2,952, was $135,208 as of September 30, 2011. Subsequent to September 30, 2011, the unaffiliated shareholder sold and assigned this indebtedeness to a third party. See Note 11, “Subsequent events”, for further information.

During the nine months ended September 30, 2011, the Company issued an unsecured note payable in the amount of $351,219 to an unaffiliated shareholder. Interest accrues on the note at the rate of 5% per annum and is payable on the maturity date of the note. The maturity date of the note is December 31, 2025. The amount owing under the note, including accrued interest of $4,390, was $355,609 as of September 30, 2011.

During the nine months ended September 30, 2011, simultaneous with the closing of the CEI Agreement, the Company issued unsecured notes payable in the aggregate amount of $86,645 to the Control Engineering Holders and an unsecured note payable in the amount of $53,402 to a company controlled by one of the Control Engineering Holders to replace the outstanding loans owed to them by Control Engineering as of the closing date of the CEI Agreement. The notes are payable on May 19, 2012 and bear interest at the rate of 5% per annum. The notes are convertible at any time at the option of the holders into shares of the Company’s common stock at a conversion price equal to the closing bid price of the Company’s common stock on the date of delivery of a notice of conversion, subject to customary anti-dilution adjustments. The amount owing under the notes, including accrued interest of $2,177, was $122,224 as of September 30, 2011.

Note 9 – Shareholders’ equity

Private offering of equity securities

Subsequent to the Merger, the Company accepted additional subscriptions in an offering of its units comprised of 16,667 shares of common stock and warrants to purchase an additional 5,500 shares of common stock at an exercise price of $2.50 per share and expiring in three years (the “Units”) offered pursuant to Regulation D of the Securities Act of 1933, as amended. The Company sold 140.26 Units for a total of $3,506,610 aggregating to 159.26 Units for a total of $3,981,610 during the year ended December 31, 2010, and an additional 22.08 Units for a total of $552,000 during the nine months ended September 30, 2011. See below for valuation of warrants issued.

Stock and warrants issued for services

During the nine months ended September 30, 2011, two vendors of the Company elected to accept 94,748 shares of the Company’s common stock as payment on accounts payable. The common stock shares were valued at the fair value of the Company's common stock on the date of issuance of $1.50 per share, resulting in a beneficial conversion expense of $47,374. During the nine months ended September 30, 2011, the Company issued 147,500 shares of its common stock to various individuals and entities for services rendered and to be rendered. The common stock shares were valued at the estimated cash value of the services rendered at a weighted average of $1.36 per share, resulting in an expense of $191,301 which is included in selling, general and administrative expense in the condensed consolidated statement of operations, and prepaid expense of $9,449 which is included in prepaid expenses and other current assets in the condensed consolidated balance sheet at September 30, 2011.

2010 equity plan

In January 2010, the Company adopted the 2010 Equity Incentive Plan (the “2010 Plan”). Under the 2010 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, stock appreciation rights, and restricted stock awards, which are restricted shares of common stock. The Company reserved a total of 2,000,000 shares of common stock for issuance under the 2010 Plan. Generally, the 2010 Plan provides for options with terms of 10 years.

During the nine months ended September 30, 2011, the Company issued no options to employees and non-employee directors. As of September 30, 2011, there was unrecognized compensation costs of $582,461 related to stock options. The Company expects to recognize those costs over a weighted average period of 1.85 years as of September 30, 2011. Future option grants will increase the amount of compensation expense to be recorded in these periods.

During the nine months ended September 30, 2011, the Company issued 45,000 options to non-employee individuals with a weighted-average grant date fair value of $1.88. Due to the variable accounting of stock-based compensation awards to non-employees described in Note 2 above, the Company recognized income of $19,453 and $0 as a recovery of non-employee stock based compensation for the nine months ended September 30, 2011 and 2010, respectively, on the unvested non-employee options outstanding as of September 30, 2011, and on the options that vested during the nine months ended September 30, 2011. Future option grants will increase the amount of compensation expense to be recorded in these periods.

The Company estimated the fair value of non-employee stock options using the Black-Scholes option pricing model. The fair value of non-employee stock options is being expensed over the requisite service period of the awards. The fair value of non-employee stock options was estimated using the following assumptions:

Stock price	$2.95 - $2.99
Contractual term	3 - 10 years
Expected volatility	76 - 82%
Risk-free interest rate	1.8 - 3.5%
Dividend yield	0

Warrants

During the nine months ended September 30, 2011, the Company issued warrants to purchase 121,440 shares of the Company’s common stock in conjunction with sales of its Units. These warrants have lives of three years and were valued at a weighted average of $1.47 per warrant, or $178,930 using the Black-Scholes option pricing model with the following assumptions:

Stock price	$2.11 - $2.94
Contractual term	3 years
Expected volatility	85 - 87%
Risk free interest rate	1.9 – 2.4%
Dividend yield	0

The volatility was based on comparable volatility of other companies since the Company had no significant historical volatility. The risk free interest rate was based on the three year treasury rates, as applicable to the contract term. The dividend yield was assumed to be zero. The fair value of the warrants issued for the sale of the Company’s Units totaling $178,930 for the nine months ended September 30, 2011 was recorded to additional paid-in capital.

On February 18, 2011, the Company issued debentures in the amount of $804,598 and warrants to purchase 321,839 shares of the Company’s common stock at an exercise price of $2.50. The warrants have a life of five years and were valued at $1.714 per warrant, or $551,748, based upon a valuation utilizing Monte-Carlo simulation analysis. The stock price on the date of grant was $2.40. Volatility, which was determined to be 82%, was based on comparable volatility of other companies since the Company had no significant historical volatility. The risk free interest rate was based on the twenty-year treasury rate and the probability of future financing was estimated at 100%. The fair value of the warrants was recorded as a discount to the debentures and is amortized, using the straight-line method, as interest expense over the term of the debentures. Subsequent to September 30, 2011, the warrants were re-priced. See Note 11, “Subsequent events”, for further information.

Note 10 – Commitments and contingencies

Distribution agreement

Pursuant to the Distribution Agreement (Note 6), the Company will be required to order a minimum number of units of the E-Fuel equipment which will be determined upon completion of the beta testing. The Company is not required to purchase any units of E-Fuel equipment until the Company completes its beta testing of the E-Fuel equipment.

Master Subscription Agreement

The Company is subject to a Master Subscription Agreement (“MSA”) with SalesForce.com, Inc., a San Diego based software licensing company (“SalesForce”), for the provision of SalesForce licenses and related products and services to the Company. The MSA calls for advance subscription payments of $12,600 each on February 24, 2011, August 24, 2011 and February 24, 2012. The August 24, 2011 payment has not yet been made. The MSA terminates on August 24, 2012.

Dissolution agreement

On November 9, 2010, the Company’s subsidiary, Life Protection, entered into an agreement with the other members of its subsidiary, LPI-R.O.A.D.House, LLC, for the dissolution of the LLC. Pursuant to the agreement, Life Protection was required to pay to the other members a lump-sum payment of $115,000 upon the completion of, and collection on, a specific contract in progress, and after all contract vendors have been paid. This required payment was made during the second quarter of 2011 and is included in selling, general and administrative expense for the nine months ended September 30, 2011. Additionally, Life Protection will be required to make payments of $50,000 each should two specific potential customer contracts be consummated. As of the date of this report, these potential contracts have not been consummated, nor is there any assurance that such contracts will ever be consummated.

General litigation

The Company is involved in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company's financial position, results of operations, or liquidity.

Note 11 – Subsequent events

In October 2011, Life Protection was selected to provide its Rapidly Deployable Units (“RDU’s”) for an Urban Warfare Training Center at Fort Benning. The first phase of the overall contract represents $130,000 in revenue to the Company. The project entails remodeling of the existing facility with uniquely designed, rapidly deployable structures that will be coated to create the appearance of specific urban settings. LPI and Yeargan Construction, the primary contractor for the winning bid, were selected over several other reputable companies, opening the door to future opportunities with the Department of Defense and Fort Benning.

In November 2011, Control Engineering received a purchase order for approximately $811,000 to perform controls automation and energy efficient upgrades to a state mental hospital.

On November 1, 2011, the Company entered in a letter agreement with certain of its holders (the “Holders”) of debentures in the aggregate amount of $1,194,254 (the “Debentures”) whereby the Company and the Holders agreed to settle and pay the Debentures (the “Settlement”). The Company agreed to issue the Holders an aggregate of 2,000,000 shares of the Company’s common stock (the “Shares”), par value $0.001 per share (the “Common Stock”), 1,000,000 of which were deliverable upon execution of the agreement and the balance on December 1, 2011, in exchange for an aggregate amount of $600,000 of the Debentures (the “Exchange Debentures”). In addition, the Holders warrants to purchase an aggregate 459,770 shares of Common Stock at the exercise price of $2.50 per share were re-priced to $0.40 per share with additional anti-dilution provisions. If the daily volume weighted average price (“VWAP”) of the Shares for each of the 20 trading days immediately following the issuance of the Shares divided by 20 is less than $0.30, then, within 3 trading days after the end of such 20 trading day period, the Company shall issue to the Holders an additional number of shares of Common Stock equal to the difference between (a) the original principal amount of the Exchange Debentures divided by the VWAP average and (b) the Shares. In terms of the Settlement, the Holders agreed to sell and assign the remaining aggregate amount of $594,254 of the Debentures to Isaac Blech (“Blech”), a Director of Premier, with whom the Company has signed a letter of intent to merge with and into. In exchange for Blech’s surrender of such assigned Debentures to the Company, the Company issued to Blech a demand convertible promissory note in the amount of $594,254, convertible into shares of Common Stock at the price of $0.30 per share, subject to adjustment..

In addition, on November 1, 2011, Blech purchased indebtedness of the Company in the aggregate amount of $1,067,122 from certain shareholders and lenders of the Company (the “Founders”) which were the holders and/or makers of promissory notes, loans, advances and other indebtedness of the Company and/or one of its affiliates, originally issued to the Founders. Upon the sale and assignment of such indebtedness to Blech from the Founders, the Company issued to Blech a demand convertible promissory note in the amount of $1,067,122, convertible into shares of Common Stock at the price of $0.30 per share, subject to adjustment.

Further, on November 1, 2011, in consideration for a bridge loan in the amount of $500,000, the Company made a Secured Convertible Promissory Note in favor of Premier, in the principal amount of $500,000 (the “Bridge Note”). The Bridge Note is convertible into shares of Common Stock at the rate of 70% of the volume weighted average price for the twenty (20) trading days prior to the date a notice of conversion is given to the Company. The Note is secured by a general security interest in all of the Company’s assets.

Note 12 – Segment information

The Company operates in two business segments: Energy Efficiency Solutions ("EES") and Sustainable Facilities Solutions ("SFS"). The EES segment provides the following services: Energy Efficiency and Demand Response Solutions, Automation and Control Solutions, Facility Retrofitting and Renewable Energy and Cogeneration. The SFS segment develops, designs and constructs rapidly deployable, sustainable facilities primarily for use by the United States military and for disaster relief and security organizations in austere regions.

The performance of the business is evaluated at the segment level. Cash, debt and income taxes generally are managed centrally. Accordingly, we evaluate performance of our segments based on operating earnings inclusive of an appropriate allocation of corporate overhead expenses exclusive of financing activities and income taxes. Reporting segment assets are the owned or allocated assets used by each segment. Segment information is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Revenue
Energy Efficiency Solutions	$	442,903		$	1,724,277		$	2,520,716		$	4,427,951
Sustainable Facility Solutions		27,489			-			350,867			-
	$	470,392		$	1,724,277		$	2,871,583		$	4,427,951

Loss from operations
Energy Efficiency Solutions	$	(1,148,079	)	$	(962,598	)	$	(2,490,902	)	$	(2,487,207	)
Sustainable Facility Solutions		(300,064	)		-			(974,440	)		-
	$	(1,448,143	)	$	(962,598	)	$	(3,465,342	)	$	(2,487,207	)


Depreciation and amortization expense
Energy Efficiency Solutions	$	6,144		$	14,446		$	41,849		$	38,890
Sustainable Facility Solutions		91,150			-			273,462			-
	$	97,294		$	14,446		$	315,311		$	38,890


Capital Expenditures
Energy Efficiency Solutions	$	(14,948	)	$	324,099		$	1,212,922		$	366,769
Sustainable Facility Solutions		-			-			-			-
	$	(14,948	)	$	324,099		$	1,212,922		$	366,769

							September 30,			December 31,
							2011			2010

Total Assets
Energy Efficiency Solutions							$	4,401,473		$	3,141,606
Sustainable Facility Solutions								2,579,536			4,489,482
							$	6,981,009		$	7,631,088

Note 13 – Unaudited Pro Forma Condensed Combined Statement of Operations

The following unaudited pro forma condensed combined statement of operations is presented to illustrate the estimated effects of the CEI Agreement. The unaudited pro forma condensed combined statement of operations was prepared using the unaudited historical condensed statement of operations of the Company and Control Engineering. The unaudited pro forma condensed combined statement of operations should be read in conjunction with the Company's audited statement of operations for the year ended December 31, 2010 which is included in its December 31, 2010 Annual Report on Form 10-K.

The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2011 assumes that the CEI Agreement was consummated at the beginning of the period presented. The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2011 combines the unaudited condensed statement of operations of the Company for the nine months ended September 30, 2011 with the unaudited condensed statement of operations of Control Engineering for the period January 1, 2011 to May 23, 2011.

The information presented in the unaudited pro forma condensed combined statement of operations does not purport to represent what the Company’s results of operations would have been had the CEI Agreement occurred as of the dates indicated, nor is it indicative of our future results of operations for any period. You should not rely on this information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience after the CEI Agreement. The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SETEMBER 30, 2011 (UNAUDITED)

	GreenHouse Holdings, Inc. and Subsidiaries Historical			Control Engineering, Inc. Historical			Pro Forma Adjustments			Ref	Combined
				(1)

Revenues	$	2,871,583		$	454,134		$	-			$	3,325,717

Cost of goods sold		1,863,681			283,220			-				2,146,901

Gross profit		1,007,902			170,914			-				1,178,816

Operating expenses		4,473,244			150,532			-				4,623,776

(Loss) income from operations		(3,465,342	)		20,382			-				(3,444,960	)

Other income (expense)		(346,476	)		(1,745	)		-				(348,221	)

Loss (income) before income taxes		(3,811,818	)		18,637			-				(3,793,181	)

Income tax expense (benefit)		-			-			-				-

Loss (income) before noncontrolling interest		(3,811,818	)		18,637			-				(3,793,181	)

Income attributable to noncontrolling interest		-			-			-				-

Net (loss) income		(3,811,818	)		18,637			-				(3,793,181	)

Preferred stock dividends		-			-			-				-

Deemed dividend on preferred stock		-			-			-				-

Net (loss) income available for common shareholders	$	(3,811,818	)	$	18,637		$	-			$	(3,793,181	)

Net (loss) income per share:
Basic	$	(0.14	)	$	0.03		$	-			$	(0.14	)
Diluted	$	-		$	-		$	-			$	-

Weighted average number of shares, basic and diluted:
Basic		26,569,030			653,856			(323,335	)	(2)		26,899,551
Diluted		26,569,030			653,856			(323,335	)	(2)		26,899,551

________________

(1)	Represents unaudited results of operations of Control Engineering, Inc. from January 1, 2011 to May 23, 2011. Control Engineering's results of operations from May 24, 2011 to September 30, 2011 are consolidated with GreenHouse Holdings, Inc.

(2)	The adjustment to weighted average number of common shares outstanding reflects the change necessary to calculate shares outstanding as if Control Engineering was acquired on January 1, 2011.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains various forward-looking statements regarding the business, financial condition, results of operations and future plans and projects of GreenHouse Holdings, Inc. and its subsidiaries (hereinafter collectively referred to as “the Company”, “us”, “we” or “our”). Forward-looking statements discuss matters that are not historical facts and can be identified by the use of words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “can,” “could,” “may,” “will,” “would” or similar expressions. In this report, for example, we make forward-looking statements regarding, among other things, our expectations about the rate of revenue growth in specific business divisions and the reasons for that growth and our profitability, our expectations regarding an increase in sales, strategic traction and sales and marketing spending, uncertainties relating to our ability to compete, uncertainties relating to our ability to increase our market share, changes in coverage and reimbursement policies of third-party payors and the effect on our ability to sell our products and services, the existence and likelihood of strategic acquisitions and our ability to timely develop new products or services that will be accepted by the market.

Although these forward-looking statements reflect the good faith judgment of our management, such statements can only be based upon facts and factors currently known to us. Forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. As a result, our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, set forth in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 31, 2011. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Corporate History

On June 2, 2010, the Company incorporated a 99.8% owned subsidiary in Mexico, Green House Soluciones S.A. de C.V. ("GH Soluciones").

On September 8, 2010, the Company and its wholly-owned subsidiary, Green House Holdings, Inc., entered into an Agreement and Plan of Share Exchange (the “ LPI Agreement”) with Life Protection, Inc., a North Carolina corporation (“Life Protection”) and shareholders of Life Protection (the “Life Protection Holders”). Pursuant to the LPI Agreement, the Company acquired, from the Life Protection Holders, all of the capital stock of Life Protection in exchange for an aggregate of 1,118,750 shares of the Company’s newly issued shares of common stock, par value $.001 per share. The purchase price was determined by the total market value of the newly issued shares on September 8, 2010, totaling $3,546,348, which was based on the closing market price of the Company's common stock on the acquisition date. The acquisition has been accounted for under the purchase method.

On May 23, 2011, the Company entered into an Agreement and Plan of Share Exchange (the “CEI Agreement”) with Control Engineering, Inc., a Delaware corporation (“Control Engineering”), and shareholders of Control Engineering (the “Control Engineering Holders”). Control Engineering is headquartered in Costa Mesa, California and is a provider of automation and control solutions including engineering, installation and integration services to a wide range of industries. Pursuant to the CEI Agreement, the Company acquired, from the Control Engineering Holders, all of the capital stock of Control Engineering in exchange for a maximum aggregate of 800,856 shares of the Company’s newly issued shares of common stock, par value $.001 per share (the “Exchange Shares”). 147,000 of the Exchange Shares shall be deposited in escrow (the “Earn-out Shares”). If CEI generates gross revenues in 2011, including pre-acquisition revenue, from its existing line of business totaling between $2,000,0000- $3,999,999 for the year ending December 31, 2011, the escrow agent shall release 73,500 of the Earn-out Shares to the Control Engineering Holders. If CEI generates gross revenues in 2011, including pre-acquisition revenue, from its existing line of business in excess of $4,000,000, the escrow agent shall release 147,000 of the Earn-out Shares to the Control Engineering Holders. If CEI fails to generate gross revenues in 2011, including pre-acquisition revenue, from its existing line of business in excess of $2,000,000, then the escrow agent shall return any and all remaining Earn-out Shares to be cancelled and retired on the books and records of the Company and returned to unissued status. The purchase price was determined by the total market value of the newly issued shares on May 23, 2011, totaling $1,209,293, which was based on the closing market price of the Company's common stock on the acquisition date. The acquisition has been accounted for under the purchase method.

On September 16, 2011, the Company entered into a letter of intent to transact a stock exchange and be acquired by Charlotte, NC-based Premier Alliance Group, Inc. (“Premier”), a leading provider of business and technology advisory and consulting services. The acquisition is subject to certain requirements including due diligence; execution of a definitive purchase agreement, approval by the boards of both companies and various other customary conditions, including the Company’s shareholder approval.

Company Overview

GreenHouse is a provider of energy efficiency and sustainable facilities solutions. The Company designs, engineers and installs products and technologies that enable our clients to reduce their energy costs and carbon footprint. We have two business segments, Energy Efficiency Solutions (EES) and Sustainable Facilities Solutions (SFS). We serve residential, industrial, commercial, government and military markets in the United States and abroad.

The Energy Efficiency Solutions segment offers our clients a full range of services to address their energy efficiency needs based on our ability to identify and deliver significant return on our clients’ investments, improve the quality of their physical workspaces, maximize their operational savings and reduce their maintenance costs. Specifically, the EES segment provides the following services:

	§	Energy Efficiency and Demand Response Solutions.
	§	Facility Retrofitting.
	§	Renewable Energy and Cogeneration.

The Sustainable Facilities Solutions segment develops, designs and constructs rapidly deployable, sustainable facilities primarily for use by the United States military and for disaster relief and security organizations in austere regions. Major customers for these products include the U.S. Department of Defense and local law enforcement.

See footnote disclosures in the accompanying unaudited condensed consolidated financial statements for further segment information.

Results of Operations

Results of Operations for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Revenues for the nine months ended September 30, 2011 were approximately $2,872,000 compared to approximately $4,428,000 for the nine months ended September 30, 2010, a decrease of approximately $1,556,000 or 35%. This expected decrease in revenues was a direct result of the Company’s decision in the second quarter of this year to significantly reduce its staff involved in the residential market in response to the softening demand for energy efficient products to residential customers in the EES segment that started in the second quarter. The Company continues to focus its efforts in the non-residential market of the EES segment, which grew revenues to $781,831 for the nine months ended September 30, 2011 compared to $0 for the nine months ended September 30, 2010, and on the SFS segment, which grew revenues to $350,867 for the nine months ended September 30, 2011 compared to $0 for the nine months ended September 30, 2010. The gross profit percentage decreased to 35% for the nine months ended September 30, 2011, from 41% for the nine months ended September 30, 2010, due to a lower gross profit percentage from the residential market for the nine months ended September 30, 2011.

The decrease in demand for the Company's energy efficiency solutions to the residential market has not yet shown signs of improvement, and the Company will continue its reduction of effort in the residential market of the Energy Efficiency Solutions segment. The Company significantly reduced its staff involved in the residential market in the second quarter, and accordingly, the potential for future revenues from the residential market have declined significantly until the staffing levels are restored. Total revenues earned from the residential market during the nine months ended September 30, 2011 and 2010, totaled approximately $1,739,000 and $4,428,000, respectively.

Operating expenses for the nine months ended September 30, 2011 were approximately $4,473,000 compared to approximately $4,321,000 for the nine months ended September 30, 2010, an increase of approximately $152,000 or 4%. Non-cash items included in operating expenses for the nine months ended September 30, 2011 were approximately $797,000 compared to approximately $119,000 for the nine months ended September 30, 2010, an increase of approximately $678,000 or 570%. Approximately $402,000 of this non-cash increase was due to common stock and options issued for services, and the remaining $276,000 of this non-cash increase was due to the depreciation expense of fixed assets and amortization expense of distribution rights and other intangibles. General corporate expenses, including expenses associated with being a publicly-traded company, such as investor relations, public relations, audit and legal fees, director and officer liability insurance, and expenses associated with consummating and integrating our acquisitions, were approximately $902,000 the nine months ended September 30, 2011 compared to approximately $621,000 for the nine months ended September 30, 2010, an increase of approximately $281,000 or 45%. Also included in operating expenses was approximately $115,000 which Life Protection paid in terms of the agreement entered into on November 9, 2010, with the other members of its subsidiary, LPI-R.O.A.D.House, LLC, for the dissolution of the limited liability company. Offsetting these increases in expenses was the reduction in expenses achieved in the residential market of the EES segment. As a result of the decrease in revenue from the residential market, the Company’s sales and marketing expenses consisting primarily of commissions on sales decreased by approximately $548,000. In addition, the Company’s reduction of employees that were targeting residential customers in the EES segment, net of the increase in employee costs in the Company’s non-residential EES segment, resulted in a decrease of approximately $375,000 in the Company’s compensation expenses. The Company continues to focus its resources on its Demand Response Solutions in the EES segment and on the SFS segment, which the Company believes have the greatest potential for more profitable revenue growth.

Interest expense for the nine months ended September 30, 2011 was approximately $642,000 compared to approximately $237,000 for the nine months ended September 30, 2010, an increase of approximately $405,000. Included in interest expense is the non-cash accounting entries to record the expense related to the beneficial conversion of debt of approximately $47,000 and $137,000 for the nine months ended September 30, 2011 and 2010, respectively, a decrease of $90,000. Also included in interest expense is the non-cash amortization expense of the original issue discount and warrant valuation attached to the debentures issued on October 22, 2010 and February 18, 2011 of approximately $454,000 and $0 for the nine months ended September 30, 2011 and 2010, respectively, an increase of $454,000. Also included in interest expense is the non-cash expense of $50,000 related to the stock issued during the nine months ended September 30, 2011 for the extension of the debenture repayment that was due August 1, 2011. The remaining decrease of approximately $9,000 was due to a decrease in accounts payable for the nine months ended September 30, 2011 compared to September 30, 2010.

Change in acquisition liability for the nine months ended September 30, 2011 was $167,580 compared to $0 for the nine months ended September 30, 2010. This other income was due to the revaluation at September 30, 2011, of the acquisition liability for the Earn-out Shares that were issued on the acquisition of Control Engineering on May 23, 2011.

Other expense for the nine months ended September 30, 2011 was $0 compared to $250,000 for the nine months ended September 30, 2010. This expense was due to the one-time costs associated with effecting the reverse merger that took place during the first quarter of 2010.

As a result, net loss was approximately $3,812,000 for nine months ended September 30, 2011 compared to a net loss of approximately $2,975,000 for the nine months ended September 30, 2010.

Results of Operations for the three months ended September 30, 2011 compared to the three months ended September 30, 2010.

Revenues for the three months ended September 30, 2011 were approximately $470,000 compared to approximately $1,724,000 for the three months ended September 30, 2010, a decrease of approximately $1,254,000 or 73%. Revenue from the Company’s residential customers in the EES segment decreased by approximately $1,715,000 in response to the softening demand for energy efficient products to residential customers in the EES segment that started in the second quarter, and the Company’s subsequent decision in the second quarter of this year to significantly reduce its staff involved in the residential market. However, this decrease in revenue was offset by an increase in revenue from the Company’s non-residential customers of approximately $433,000 and an increase in revenue of approximately $28,000 from the Company’s SFS segment. Total revenues earned from the residential market during the three months ended September 30, 2011 and 2010, totaled approximately $9,000 and $1,724,000, respectively. The gross profit percentage decreased from 37% to (2%) for the three months ended September 30, 2011 and 2010, respectively. The primary reason for this decrease was non-recurring job close-out costs related to the residential market of the EES segment.

Continuing from the second quarter, we do not anticipate revenue from the residential market to rebound in the short term, and continue to focus our sales and marketing efforts on our Demand Response and other Energy Efficiency Solutions in the EES segment, which increased revenue from approximately $348,000 for the three months ended June 30, 2011 to approximately $433,000 for the three months ended September 30, 2011, an increase of approximately $85,000 or 24%. Approximately $28,000 of revenue was generated in the SFS segment for the three months ended September 30, 2011 compared to $0 for the three months ended June 30, 2011, as we continued to focus our sales and marketing efforts on developing the relationships to facilitate the progression of the Company’s multi-year, multi-million dollar OceanSafe and Pinnacle Contracts, as disclosed in Note 3 in the notes to the accompanying condensed consolidated financial statements, from award phase to notice to proceed phase. The SFS segment also continued its sales and marketing efforts by submitting proposals and responding to RFP’s on large contract opportunities nationally as well as in Kenya, Saudi Arabia and the Dominican Republic.

Operating expenses for the three months ended September 30, 2011 were approximately $1,439,000 compared to approximately $1,605,000 for the three months ended September 30, 2010, a decrease of approximately $166,000 or 10%. Approximately $261,000 of the decrease was due to the reduction of employees targeting residential customers in the EES segment described above. Sales and marketing expenses, consisting primarily of commissions on sales, decreased by approximately $244,000 as a result of the decrease in revenues of our energy efficient products and services to residential customers described above. The decrease in operating expenses was offset by an increase of approximately $83,000 due to the non-cash depreciation expense of fixed assets and amortization expense of distribution rights and other intangibles, an increase in stock compensation expense of approximately $190,000, an increase of approximately $50,000 in professional fees related to operating a public company, and the remaining increase of $16,000 was due to an increase in general corporate expenses, including expenses associated with being a publicly-traded company

Interest expense for the three months ended September 30, 2011 was approximately $268,000 compared to approximately $29,000 for the three months ended September 30, 2010, an increase of approximately $239,000. This increase is due to the non-cash amortization expense of the original issue discount and warrant valuation attached to the debentures issued on October 22, 2010 and February 18, 2011, as well as the non-cash interest expense related to the stock issued during the three months ended September 30, 2011 for the extension of the debenture repayment that was due August 1, 2011.

Change in acquisition liability for the three months ended September 30, 2011 was $34,000 compared to $0 for the three months ended September 30, 2010. This other income was due to the revaluation at September 30, 2011, of the acquisition liability for the Earn-out Shares that were issued on the acquisition of Control Engineering on May 23, 2011.

As a result, net loss was approximately $1,640,000 for three months ended September 30, 2011 compared to a net loss of approximately $991,000 for the three months ended September 30, 2010.

Liquidity and Capital Resources

Overview

For the nine months ended September 30, 2011, we funded our operations through financing activities consisting primarily of private placements of equity and debt securities with outside investors, and by loans from shareholders and officers. Our principal use of funds during the nine months ended September 30, 2011 has been for the ongoing sales and marketing efforts to develop relationships with and to respond to Requests for Proposals (“RFP’s”) from potential corporate and government customers for our Energy Efficiency and Sustainable Facility solutions; for working capital; and for general corporate expenses.

Liquidity and Capital Resources during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

During the nine months ended September 30, 2011, the Company raised $552,000 by issuing common stock to outside investors, raised $700,000 by issuing debentures to outside investors, received advances from officers and shareholders of approximately $368,000 and repaid approximately $322,000 of advances from officers and shareholders, and issued notes payable to related parties of approximately $1,166,000 and repaid approximately $112,000 of notes payable to related parties.

During the nine months ended September 30, 2010, the Company raised $3,397,000 by issuing common stock to outside investors, received advances from officers and shareholders of approximately $95,000 and repaid approximately $101,000 of advances from officers and shareholders, issued notes payable to related parties of approximately $390,000 and repaid approximately $610,000 of notes payable to related parties, and issued notes payable to third parties of approximately $311,000 and repaid approximately $105,000 of notes payable to related parties.

During the nine months ended September 30, 2010, the holders of the Company’s Convertible Notes that were issued in 2009 were given the opportunity to convert their notes into shares of common stock at a price of $1.275 per share, prior to the occurrence of the terms stated in the Convertible Notes. All of the holders of the Convertible Notes, which were recorded at $750,000 at December 31, 2009, elected to convert their notes, and accrued interest of $23,533, into 606,693 shares of the Company’s common stock in January and February 2010.

The Company will continue to pursue additional equity and debt financing from outside investors, as well as working capital and project-specific debt financing to develop its Energy Efficiency and Sustainable Facilities solutions for sale or lease to customers. However, there can be no assurance that any such financing will be available to the Company on favorable terms, if at all.

Financial Condition

We believe we have access to sufficient financing to pursue our current limited operations through the fourth quarter of 2011. However, we will require additional funds to fully pursue and implement our business plan, and our working capital requirements will depend upon numerous factors. In any event, we will require substantial funds in addition to those presently available to us to develop all of our programs to meet our business objectives. To ensure the continued level of our operations, we are currently exploring various possible financing options that may be available to us. However, we have no binding commitments for any transactions at this time and there can be no assurance that we will consummate any transaction. If we are unable to obtain such capital, we may not be able to:

	•	continue the development of our programs or;
	•	continue operations.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2011.

Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of 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. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our consolidated financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

Our significant accounting policies are summarized in Note 2 of our condensed consolidated financial statements. While all of these significant accounting policies impact the Company’s consolidated financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company and require management to use a greater degree of judgment and estimates. We believe that the estimates and assumptions that are most important to the portrayal of our consolidated financial condition and results of operations, in that they require subjective or complex judgments, form the basis for the accounting for bad debts, our estimate of billings in excess of costs and estimated earnings and percentage of completion on jobs in process, and the allocation of the Control Engineering purchase price to goodwill. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial conditions or results of operations. We suggest that our significant accounting policies be read in conjunction with this Management's Discussion and Analysis of Financial Condition.

Additional Information

We file reports and other materials with the Securities and Exchange Commission. These documents may be inspected and copied at the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You can obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. You can also get copies of documents that the Company files with the Commission through the Commission's Internet site at www.sec.gov.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The disclosure required under this item is not required to be reported by smaller reporting companies; as such term is defined by Item 503(e) of Regulation S-K.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to chief executive and chief financial officers to allow timely decisions regarding disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of such date.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company.

Item 1A . Risk Factors

The disclosure required under this item is not required to be reported by smaller reporting companies; as such term is defined by Item 503(e) of Regulation S-K. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the nine months ended September 30, 2011, the Company accepted additional subscriptions of $552,000 for 22.08 Units in an offering of its securities. Each unit is comprised of 16,667 shares of common stock and warrants to purchase an additional 5,500 shares of common stock at an exercise price of $2.50 per share and expiring in three years (the ”Units”) offered pursuant to Regulation D of the Securities Act of 1933, as amended. Our principal use of funds during the nine months ended September 30, 2011 has been for the ongoing sales and marketing efforts to develop relationships with and to respond to Requests for Proposals (“RFP’s”) from potential corporate and government customers for our Energy Efficiency and Sustainable Facility solutions; for working capital; and for general corporate expenses.

The securities described above were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder. The agreements executed in connection with this sale contain representations to support the Registrant’s reasonable belief that the Investor had access to information concerning the Registrant’s operations and financial condition, the Investor acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the Investor are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act). In addition, the issuances did not involve any public offering; the Registrant made no solicitation in connection with the sale other than communications with the Investor; the Registrant obtained representations from the Investor regarding their investment intent, experience and sophistication; and the Investor either received or had access to adequate information about the Registrant in order to make an informed investment decision.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

On November 14, 2011, the Company accepted the resignation of Justin Farry in his executive capacity as Chief Financial Officer. Mr. Farry’s responsibilities will be assumed by existing employees and consultants of the Company.

Item 6. Exhibits.

Exhibit 31.1			Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)

Exhibit 31.2			Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)

Exhibit 32.1			Certification by the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

Exhibit 32.2			Certification by the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

Exhibit 101*			Interactive Data Files

___________

(1) Filed herewith.

This exhibit is furnished herewith, but not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section. Such certifications will not be deemed to be incorporated by reference in any filing under the Securities Act or the Exchange Act, except to the extent that we explicitly incorporate them by reference.

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.

Date: November 14, 2011		By: /s/ John W. Galt
		John W. Galt
		Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2011		By: /s/ Justin Farry
		Justin Farry
		Chief Financial Officer (Principal Financial Officer)

CUSTOM Q INC - FORM 10-Q - November 14, 2011

Attached files

CUSTOM Q INC Reports