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Lime Energy (NASDAQ:LIME)

Q3 2013 Earnings Call

November 14, 2013 4:30 pm ET

Executives

Glen Akselrod

John E. O'Rourke - Chief Executive Officer and Director

Jeffrey R. Mistarz - Chief Financial Officer, Chief Accounting Officer, Executive Vice President, Treasurer and Secretary

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Lime Energy Co. Earnings Conference Call. My name is Brianna, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Glen Akselrod, spokesperson. Please proceed.

Glen Akselrod

Thank you, Brianna. Good afternoon, and thank you for taking the time to join Lime Energy's 2013 third quarter results -- financial results conference call. With us today is John O'Rourke, CEO; and Jeff Mistarz, CFO. I hope all of you had a chance to review the earnings announcement released earlier today, and which can be accessed on Lime's website, www.lime-energy.com, or for the 10-Q on the SEC website.

Before I hand the discussion over to John, I want to remind everyone that the call today will include some statements that will be considered forward-looking regarding the company's strategy, operations and financial performance. Those statements are subject to many uncertainties and some company's operations and business environment, some of which we'll talk about on the call.

I'll also refer you to the complete forward-looking statement disclosure in the earnings release, which is incorporated by reference for the purpose of this call. I'd also like to refer you to the disclosures made in the company's quarterly and annual filings with the SEC. Finally, before we get started, I want to mention that this call is being broadcast live over the Internet, and can be accessed on the Lime Energy website and also on the Thomson/CCBN network. There will be a replay available on either website until February 14, 2014.

With that, I'll hand the discussion over to John.

John E. O'Rourke

Thank you, Glen, and thank you and good afternoon, everyone. Results for the quarter were in line with our expectations. We continue to feel solid improvement year-over-year in both gross margin and revenue growth. Our utility business is demonstrating clear signs of operating stability in the wake of solid execution against key initiatives enacted earlier in the year.

We believe these trends will continue into 2014 and 2015. We have seen strong new business activity in the third quarter, as more utilities look to deploy energy efficiency for their small business customers. Lime's unique sales and deployment model and track record of success is increasingly being sought after by utilities in their efforts to cost effectively deploy efficiency in their hard-to-reach markets.

Highlights for the third quarter include: consolidated revenue from continuing operations increased 54.9% year-over-year, gross profit increased 125% year-over-year, and excluding one-time expenses, SG&A increased 4.4% year-over-year.

In September, our contract with National Grid was extended for another 2 years. We converted all our outstanding subordinated notes to preferred stock, and raised $2.5 million through the sale of additional shares of preferred stocks.

We promoted Adam Procell to President and Chief Operating Officer, consistent with our initiative to strengthen the leadership team, as discussed on our last call. In October, we regained compliance with NASDAQ's requirements for continued listing.

Early this month, we completed the sale of our landfill plant in Florida, and repaid the term loan with PNC Bank in full, and just last week, closed on the sale of our regional services business in Bethlehem, Pennsylvania. All of the above will help to pave the way for what we hope will be a clean first quarter in 2014.

In the near term, our gross margin may fluctuate as we continue to ramp the utility business and refine our back office and administrative processes. To date, we are moving in the right direction. Our SG&A, as a percent of revenue, remains high at these revenue levels, however, we expect this to decline as revenues increase later this year.

We are striving to achieve the right balance between reducing SG&A as a percent of revenue, supporting and managing our growth, and continuing to make investments in our technology platform that eventually will drive efficiencies in the business, while we improve service engagement levels with our clients, resulting in better program pricing levels and expanded opportunities in 2014 and 2015.

As I stated on my previous calls, our goal is to turn our profit in the fourth quarter, absent any commercial or operational interruptions in the business. I discussed the need to overcome several difficult and important challenges, including improving our gross margin profile, strengthening our balance sheet, reducing SG&A as a percent of revenue and continuing to invest smartly in our technology and IT infrastructure. I feel like we are making good progress in addressing each of these challenges.

Our efforts in the gross margin area are showing strong improvement, as evidenced in the published results. We are accelerating our efforts to strengthen the balance sheet, and we are continually rolling out new enhancements to our technology.

So with that, I would now like to turn the call over to Jeff Mistarz, our Chief Financial Officer.

Jeffrey R. Mistarz

Good afternoon, everyone. Thanks, again, for joining us on this conference call. I'm going to provide a quick review of our results through September 30. I'd like to start by explaining that this quarter, we have included the results from GES-Port Charlotte our FRR contract and our service business in discontinued operations, along with the results from our public sector business, the bulk of which we sold in February. GES-Port Charlotte, FRR and service were all included in continuing operations in prior periods, which means you can't really compare the results for the third quarter to our prior filings, and we'll therefore provide you adjusted numbers for prior periods as I go through this review.

Starting with our third quarter results. Our revenue from continuing operations increased 54.9% or $4.7 million to $13.4 million during the third quarter of 2013 from $8.6 million during the third quarter of 2012. Sequentially, the third quarter revenue was 8.3% or $1 million higher than the revenue earned during the second quarter of this year, and 19.1% or $2.1 million higher than the first quarter. The growth in our quarterly revenue was largely driven by the new utility contracts that have come online during the last quarter.

Our gross profit increased 125.2% or $2.1 million during the third quarter to $3.7 million from $1.6 million earned during the same period last year. Gross profit for the third quarter was 17.9% higher than the gross profit earned during the second quarter and 41% higher than the first quarter.

Our gross profit margin increased from 19.1% during the third quarter of 2012 to 20.8% for the fourth quarter of 2012 to 23.4% for the first quarter of 2013 to 25.5% for the second quarter, and 27.7% for the third quarter of the year. The continued expansion of our gross profit margin is due to improved efficiencies within our programs and the higher margins associated with newer programs.

We believe that the opportunities for continued -- we believe there are opportunities for continued improvement in our gross profit margin and future periods as we continue to focus on improving our operations and the new programs become a larger portion of our overall revenue mix.

Our SG&A expense declined $764,000 or 11.8% to $5.7 million during the third quarter of 2013 when compared with the year-earlier period. Costs related to the restatement and stockholder lawsuits declined $841,000 to $657,000 during the third quarter of 2013 from $1.5 million during the third quarter of 2012.

Our SG&A expense, including these charges, increased $77,000 or 1.6% when compared to the same period last year. Utility-related SG&A increased $245,000, driven by the new utility programs where we've opened new offices and hired staff to execute in these new territories. Corporate SG&A and SG&A associated with program utility overhead declined by $322,000 when compared to the year-earlier period.

Our SG&A expense, excluding restatements and lawsuit-related costs declined $88,000 or 1.7% from the second quarter of 2013 or was $289,000 or 7.9% higher than the first quarter again due to expenses associated with the new utility programs.

The loss from discontinued operation declined $1.5 million or 81.7% to $329,000 during the most recent quarter from $1.8 million during the third quarter of 2012. This loss compares to $2.1 million loss during the second quarter of the year and $3 million loss during the first quarter. The continued reduction in the loss from discontinued operations is primarily due to the sale of the public sector business in February and the continued wind down of projects we retained from that sale.

We still have a couple of projects that we are in the process of closing out, and hope to have them all completed within the next month or 2. Once new contracts are finished, the only remaining discontinued operations we will have will be associated with the FRR contract, which has projects that will not close off until late spring or early summer next year.

Our net interest expense increased $1.5 million during the third quarter of 2013 when compared to the third quarter of 2012. The holders of our subordinated notes converted their notes to preferred on September 3 of this year.

We have previously capitalized certain costs associated with this issuance, and we're amortizing those costs over the terms of the notes. Upon the conversion of the notes, we expensed the unamortized balance of this capitalized expense, resulting in a $1.3 million noncash charge to interest expense during the period.

All of this combined to result in a 41.8% or $2.8 million reduction in our net loss for the quarter, with our net loss declining from $6.6 million to $3.8 million for the third quarter of 2012. Our adjusted EBITDA loss, excluding the loss from discontinued operations, declined $2.6 million or 61.1% to $1.7 million for the third quarter of 2013 compared to a loss of $4.3 million for the third quarter of 2012.

Adjusting this further to remove the restatement costs, the adjusted EBITDA loss was $1 million, which was down from $2.8 million for the third quarter of 2012. Comparable figures, excluding discontinued operations and the restatement and lawsuit expenses for the first and second quarters of 2013 were a loss of $1.8 million and a loss of $1.6 million. As you can see, we're making consistent progress in reducing the loss from our continuing operations.

Adjusted EBITDA is a non-GAAP financial measure we are providing because we believe that it provides a meaningful comparison of operating result to prior period results. For information on the calculation of adjusted EBITDA, please refer to our earnings announcement, which is available on the Form 8-K filed this afternoon. You can access on the SEC's EDGAR site or through our website.

Now looking at the 9 months results, our revenue increased $12.3 million or 49% to $37.5 million when compared to the $25.2 million earned during the first 9 months of 2012. Again, this increase was primarily the result of revenue for new utility contracts won or started since the beginning of 2012.

New contracts we have begun work on since January 2012 include our contracts with AEP Ohio, Duke Progress Energy [sic] (Duke Energy Progress) in the Carolinas, Central Hudson in Southeast New York, PSE&G in New Jersey, NSTAR in the Boston area and Efficiency Maine in Maine. Our gross profit increased $4.9 million or 94% to $10.1 million during the first 9 months of 2013 compared to $5.2 million for the year earlier period. Our gross profit margin improved from 20.6% in 2012 to 26.9% during the first 9 months of 2013.

As stated earlier, the improvement on gross margin is due to improvements in our operating efficiency and increasing contribution from our new utility contracts, which generally have higher margins.

Our year-to-date SG&A expense for 2013 was $710,000 or 4.3% higher than the SG&A for the same period in 2012. Restatement and lawsuit-related expenses increased $1.4 million during the first 9 months of 2013 to $2.9 million from $1.5 million for the first 9 months of 2012. Adjusted for these charges, our SG&A expense declined $665,000 or 4.5% despite the SG&A associated with the new programs added since the beginning of 2012.

Our net interest expense increased $2.1 million when compared to last year. Again, $1.3 million of this was associated with the write-off of the sub debt deferred financing cost and debt discount. The balance of this increase was also associated with the sub debt.

We issued the sub debt in October of 2012 so there was no sub debt interest through the first 9 months of 2012, whereas, this year, interest on our sub debt totaled $712,000. With the conversion of the sub debt, we have no remaining debt so there will be no interest expense in future periods.

The loss from discontinued operations declined $738,000 or 17.4% to $3.5 million for the first 9 months, ending September 30, 2013, compared to $4.2 million for the same period last year. This reduction was due to the sale of most of our public sector business in February of this year. Add this all up, and our net loss for the 9 months, ended September 30, 2013, declined $2.9 million or 18.5% to $12.6 million from $15.4 million for the year-earlier period.

Our adjusted EBITDA loss, excluding discontinued operations, declined $2.7 million or 31.1% to $6 million from $8.7 million for the year-earlier period.

To give a better sense of what our continuing business is doing, we'll also present the adjusted EBITDA, excluding discontinued operations and restatement and legal costs related to our shareholder lawsuits in our earnings announcement. This figure declined $4.1 million or 56.8% to a loss of $3.1 million from a loss of $7.2 million during the first 9 months of 2012.

Our net cash consumed by operating activities declined 63.5% or $5.7 million during the first 9 months of 2013 to $3.3 million from $8.9 million during the same period of 2012. The cash consumed by operating activities before changes in assets and liabilities, which is basically our net loss, excluding noncash items, declined $2.2 million year-to-date or 19.1% to $8.5 million from $11.2 million last year.

The changes in assets and liabilities, that is the change in net working capital, generated about $5.3 million during the first 9 months of 2013 compared to generating $2.2 million during the year-earlier period. This $3.6 million improvement was primarily due to improved payment terms we have been able to get from our suppliers and collections on receivables from our discontinued businesses.

I think that pretty much covers everything. So now I'll turn it back to John.

John E. O'Rourke

Thanks, Jeff. I'd like to summarize our thoughts here before we hand it over for questions. We are pleased with the 54% year-over-year revenue growth in the utility business for the quarter, bolstering our efforts to be profitable in the fourth quarter. We are also pleased with the 125% expansion in year-over-year consolidated gross margins.

These improvements in our operating results in combination with the reduction in the restatements and legal costs and the elimination of the loss from discontinued operations, all contributed to the reduction in our net loss for the period. We look forward to a steady decrease in our SG&A as a percent of revenue, mainly as a result of increasing revenue levels through the remainder of the year, and improving operating efficiencies as a result of executing against our key initiatives.

We have been hyper-focused on methodically removing the lingering obstacles in the business, including regaining compliance with NASDAQ listing requirements by executing a reverse stock split, in conjunction with the sub debt conversion, raising an additional $2.5 million through the sale of additional preferred stock, executing the sale of GES-PC, our landfill power generation facility, and repaying the associated term loan, thereby eliminating any threat of default with PNC Bank, and just recently closing on the sale of our regional service business in PA.

Make no mistake about it, we have made huge progress in advancing the ball over the last 3 quarters, and are pleased with our position going into 2014.

Thank you, and with that, I will hand it back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] If there are no questions, this will conclude the question-and-answer session of today's conference, as well as the call.

John E. O'Rourke

Thank you, and good evening, all.

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