Lime Energy's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: lime energy (LIME)

Lime Energy Co. (NASDAQ:LIME)

Q4 2013 Earnings Conference Call

March 31, 2014 16:30 ET

Executives

Glen Akselrod - Founder & President, Bristol Capital Ltd.,

Adam Procell - President, CEO and COO

Jeff Mistarz - CFO, EVP, Treasurer and Corporate Secretary

Analysts

Charles Finnie - EFW

Operator

Good day, ladies and gentlemen, and welcome to the Lime Energy Company 2013 Year-End Results Conference Call. My name is Whitley, and I'll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Glen Akselrod, spokesperson. Please proceed.

Glen Akselrod

Thank you, Whitley. And good afternoon and thank you for taking the time to join Lime Energy's 2013 fourth quarter and year-end financial results call. With us today is Adam Procell, 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 Web site, www.lime-energy.com, or for the 10-K on the SEC website.

Before I hand the discussion over to Adam, I want to remind everyone that the call today will include some statements that will be considered forward-looking regarding company's strategy, operations and financial performance. Those statements are subject to many uncertainties in the 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 this call is being broadcast live over the Internet, and can be accessed on the Lime Energy Web site and also on Thomson/CCBN network. There will be a replay available on either Web site until June 31, 2014.

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

Adam Procell

Thank you, Glen. And thank you everybody for getting on today.

Lime Energy completed a year in 2013 which was critical in the development of our company. Jeff will cover the numbers after I give a brief overview and the numbers for 2013 reflect a year in which Lime faced a lot of work to put past issues behind us; year in which we implemented our decision to sell off low growth, low margin, non-performing business units. Was a year in which we carried the corporate overhead of the diverse platform that we had been even as our revenue shrunk to that of a new focused business and was a year that required investment in our most promising business providing utility clients with energy efficiency resources through small business, energy efficiency programs.

But the numbers do not reflect that the overwhelming success that Lime had in 2013 across all of these challenges. In 2013, Lime restated and got current with our audited financials allowing our continued listing on NASDAQ.

During 2013, Lime completed the sale of three separate business units resulting in a complete corporate focus on our utility programs business. At the end of 2013, Lime Energy lowered our corporate overhead with a rightsizing of corporate management, to set the new leaner business that was created with a singular focus.

At the conclusion of 2013, Lime Energy raised $6.5 million of capital including the introduction of a new investor. That $6.5 million was used to solidify our balance sheet, focus on enhancing our technology platform and training and to create a more robust allied force partnership.

Most importantly throughout 2013 and all of its challenges Lime Energy was able to retain key employees. And for the surprise of many we managed to continue with what is an exciting five-year story of building innovative business which has established a leadership position in one of the fastest growing segments of the clean energy industry.

Company that Lime Energy is today is essentially the business which has been discussed in past earnings calls as our utility programs business. For those of you who have not followed the development of this business at Lime what we do is, we design, we administer, we implement energy efficiency programs for utilities that are directed specifically towards those utility small business customers, small and mid-sized facilities.

We developed an innovative integrated services model which along with a proprietary web based technology platform that differentiate Lime in the marketplace both of these are formed by decades of our experience selling energy efficiencies to small businesses. This business has experienced dramatic growth since our first contract award in 2009 and today we are working for six of the largest utility companies in the United States, following a year of investment and the expansion of this business and then the technology that drives it. We are poised for profitability in 2014.

The investments that we have made investments in geographic expansion, investments in starting up new programs, investments in technology and product development have all positioned Lime to better serve our utility clients and their small business customers.

Now 2013 was also a year of great validation for our strategic bets, the company Lime Energy made strategic bets in 2009 and received a lot of validation in 2013, it came from a couple of different places. Early in 2013, there were two authoritative industry reports, one from Lawrence Berkeley National Labs; the other from the American Council for an Energy-Efficient Economy. Each of which cited the need for utilities to take new approaches to unlock the critical energy efficiency resource potential locked up in the small business segment. This new found urgency to drive higher participation from small businesses is exactly what Lime had anticipated when we began to invest in this business four years ago.

The [specific] recommendations in the report align directly with the business that Lime Energy has built. The validation came also from awards. We were awarded the alliance to save energy prestigious Super Nova Star energy efficiency award in 2013. This award was in recognition of Lime's innovative integrated services approach to small business energy efficiency.

And in recognition of the fact that this approach is consistently outperforming the traditional approach as taken by the firms that have dominated the utility, demand side management program space for decades. Further validation came and continues to come in the trend by utilities to specify that small business direct installed programs include the features that Lime's proposals have always had including our integrated services approach. Our pay-for-performance model and critical program design elements launched by Lime that include incentive calculation methodologies.

I'm going to provide a little bit more detail in the year 2013 for Lime, probably what we faced, what we accomplished and how the hard work of 2013 has positioned us for success now and in the future.

First from financial health, in August of 2013, Lime Energy completed an exhaustive one-year effort to restate prior financial periods. This was an effort that we believe was critical in order to restore faith in our client controls and were part of our reporting responsibilities as a public company.

In September of 2013, Lime Energy exchanged outstanding convertible notes for preferred stock, raising an additional $2.5 million of working capital through the sale of its preferred stock.

In October 2013, we effected a one-to-seven reserve stock split, which together with the restatement, the exchange of notes and the additional working capital allowed our continued listing on NASDAQ giving our clients the continued assurance that the public markets and associated regulations provide.

At the conclusion of 2013, Lime Energy raised an additional $6.5 million of working capital, which will allow us to continue our expansion to meet increasing demand from existing clients in 2014.

I will talk for a second about the divestiture of non-performing businesses that I alluded to in the opening. Throughout 2013 Lime Energy's management and staff were engaged in the process of selling various business units. This included the Q1 sale of the ESCO services unit all through the end of the year in Q4 when we sold off our energy asset business and our service business. In December we completed the sale of our federal contract business unit.

Transition of projects and personnel went on throughout 2013 as reflected in our financials and we are all complete by the start of 2014. This divestiture process is something that is behind us.

I will talk a little bit about the investment we made in our business in 2013. Lime Energy's performance-based model requires that we invest at the onset of a new program with a new utility. In 2013, we started three new programs while completing start-up on two others.

Two of these new programs were significant investments because they represented a move into new geographic regions. With the Duke Energy progress program in North and South Carolina, Lime has made a significant commitment to expanding our program offerings in the Southeast.

Over the course of 2013, this included hiring more than 25 staff opening regional offices and warehouse locations as well as bringing strength of our partner network to the Carolinas. We've also established a national operation center for all of our programs in our Huntersville, North Carolina headquarters.

Together with our strategic partner, Duke Energy Lime has seen tremendous success in this program as it kicked off across 2013 and currently together with Duke, we ought to work on its expansion in 2014.

With the opening of our office in Columbus, Ohio and the start off of our AEP-Ohio program, we added over 15 staff in 2013 to our Midwest presence. Bringing this integrated service model into the Midwest by the time when many of those states are ramping up their energy efficiency goals and financial commitments to energy efficiency proved very timely. We are looking forward to expanding this beyond the already successful AEP-Ohio program.

For a moment, I would like to talk about our investments across 2013 in our technology platform and in product development. We went through seven distinct development cycles and platform updates in our proprietary technology platform direct install. Significant investments were made in the platform as well as in the documentation processes and training of our staff. Sales force, the construction team, the administration teams all of which utilized this technology platform.

Some of the highlights of what we accomplished were updating the pricing and costing module, supporting regional tax calculations which facilitates our geographic expansion. Supply chain management updates, the introduction of several complex non-lighting measures, expanding our energy efficiency retrofit capability to refrigeration motors, HVC and other measures.

Support for energy audit data that can be imported from a third party, which strengthens our ability to utilize our partner network. We developed the capability to capture electronic signatures in our iPad audit tool creating seamless customer experience and the ability to develop the project and close the sale in a single visit.

We made several other important updates not the least of which was hardening all aspects of security to conform with the security requirements and protocols for utility clients including Duke Energy. The direct installed platform has been certified secure for use by Duke Energy.

As far as training goes, we formalized the corporate training program in 2013 that addresses the development needs of our team members across a variety of areas. Technical areas, sales areas, construction management conducted regular training throughout the year and this included internal subject matter expert sharing knowledge from one program to the other as well as utilizing outside professional training programs.

Lime Energy is committed to helping our team members to the excellent work they do and this often requires a great deal of training to ensure that we have a team which can meet the needs of our utility clients moving forward. That training took place in 2013 and continues in 2014.

Few words quickly on the market before I hand it over to Jeff. As the industry struggles to identify what the utility of the future will look like Lime's model for small business energy efficiency is emerging has an important way for utilities to establish a productive relationship with this long overlooked segment. Segment which represents the vast majority of the utility is commercial customers. Customers' that use more than 35% of the electricity in the United States and spend as much as $60 billion every year on energy efficiency – I'm sorry $60 billion a year on energy.

And the expertise that Lime has developed in our integrated service approach, expertise across customer engagement sales and marketing, operation, logistics and data analytics is proving to be the necessary ingredient for a utility partner, which can unlock the many benefits of this engagement between utilities and their small business customers.

Interestingly the value that Lime provides is proving to go well-beyond compliance with energy efficiency resource standards, utilities are seeing benefits across customer satisfaction which serve in many cases as the primary driver.

Our integrated services model provides the utilities with a clear distribution channel to their commercial customers for energy savings technologies. And this is critically important to the utility to their small business customers and to the manufacturers of these products.

Where we are today, Lime Energy currently operates small business direct install programs for six of the nation's top 25 electric utilities, programs in which we are providing customer engagement and energy efficiency programs for over 500,000 small businesses. We are leaders in the small business energy efficiency at a moment when the industry is looking increasingly at this segment to drive growth in energy efficiency resource acquisition.

Lime has a significant presence in the Northeast, the Southeast and the Midwest and we are working with utilities in other regions to capitalize on Lime's historical presence in those areas to do more small business direct install.

As far as where we are going, we are continuing our business development efforts. These are efforts in pursuing new utility program contracts, efforts which in the recent past have resulted over $300 million of contract wins, which have facilitated our growth to-date. Between expansion with existing clients and the addition of new clients, the market offers Lime more than adequate opportunities for growth. We expect that any growth this year will come from expansion with existing clients and currently we are very focused on delivering excellence for these existing clients across the customer satisfaction and the delivery of energy efficiency goals.

We are confident that our business development efforts will continue to drive growth in 2015 and beyond.

I'm going to hand it over to Jeff now to discuss the financials in more detail before I wrap up.

Jeff Mistarz

Thanks Adam.

Good afternoon everyone. I'm going to provide you with a quick overview of our financial results for 2013.

Our revenue from continuing operations for 2013 was $51.6 million, which represents a 45.5% increase or $16.1 million over the $35.4 million earned in 2012. Approximately $12 million of this increase was from our four new programs which started generating revenue for the first time in 2013. The five programs that were in existence during 2012 experienced 12% increase in combined revenue either as a result of the continued ramp up of new programs or expansion or contract goals within the existing programs.

Our gross profit increased $6.5 million or 88.2% to $13.8 million during 2013 and $7.3 million in 2012. Our gross profit margin increased from 20.7% in 2012 to 26.8% in 2013. The improvement in our gross profit margin is the result of the increased contributions from new utility programs which generally have better margins than our older programs. And improvements in operating efficiency within existing programs.

The improvements in operating efficiency were due to a combination of continued development of our software platform, changes we made to some of our process and additional training and the experience of our people working in these programs.

Selling, general and administrative expenses from our continuing operations was $22.9 million, which was $5000 less than the amount reported in 2012. Our SG&A as a percentage of revenue declined from 64.7% in 2012 to 44.5% in 2013. Included in the 2013 SG&A expense was approximately $2.6 million of cost associated with the restatement of our financial statements and the difference that related to stockholder lawsuits. This was $259,000 less than the amount incurred in 2012 for similar expenses.

For 2013, SG&A expense also included $327,000 of share-based compensation expense related to the accelerated vesting of options and restricted stock – from terminating employees. All other SG&A expense declined $73,000 during 2013. As the result of these initiatives we undertook to reduce overhead costs.

The restatement of our historical financial statements was completed in July 2013. In late January 2014, we agreed to terms of a settlement on the stockholder security lawsuit and the stockholder derivative suit was dismissed last week. As a result, we expect that the cost related to the restatement and stockholder lawsuits will decline significantly in 2014. We also believe that the initiatives we took in 2013 to reduce overhead costs will further reduce our SG&A expense by an additional $1 million to $2 million in 2014.

Interest expense for continuing operations increased $1.8 million to $2.1 million during 2013, from $215,000 in 2012. All of this increase was related to the subordinated notes we issued in October 2012. And then exchange for shares of our Series A preferred stock in September 2013, when the sub-debt was exchanged for preferred stock, we wrote-off the balance of the debt discount in deferred issuance costs incurring a $1.2 million non-cash charge that's been included in interest expense for 2013.

With the conversion of the sub-debt and repayment of the term loan were used to fund the construction of the GES Port-Charlotte landfill generating facility, we have no remaining debt outstanding, plus we will have no interest expense for 2014.

A loss from discontinued operations declined $11.6 million or 72% to $4.4 million during 2013 from $16.1 million in 2012. Discontinued operations represent the results of our ESCO business, which we sold in February 2013. GES Port-Charlotte, which we sold in November 2013; our regional service business, which we also sold in November 2013; and our contract with the Army Corps of Engineers, which we sold in December 2013.

We are still working to close out a couple of contracts that we did not sell with the ESCO business that we anticipate will be closed out in early 2014. Activities related to closing of these legacy projects are likely to generate a small loss from discontinued operations during 2014.

Our dividend expense for 2013 was $2.9 million including $2.5 million of non-cash deemed dividends associated with the warrants issued with the Series A and Series B preferred stock and the adjustment in the conversion price of the Series A preferred – upon the conversion, I'm sorry upon the issuance of the Series B preferred stock. The remaining $326,000 of dividend expense was accrued on the outstanding preferred stock and paid on December 31, 2013 through the issuance of additional shares of preferred stock.

Turning to our liquidity position, as of December 31, 2013, we had unrestricted cash of $6.9 million and restricted cash of $500,000 compared to unrestricted cash of $2 million and restricted cash of $500,000 on December 31, 2012. Subsequent to December 31, 2013, we raised an additional $2 million of cash through the sale of additional shares of our preferred Series B further bolstering our liquidity position.

During 2013, operating activities consumed $3 million of cash as compared to consuming $14 million during 2012. Breaking this down a little further, operating activities before changes in current assets and current liabilities consumed $10.8 million of cash in 2013 as compared to consuming $20.4 million during 2012. This improvement was due to the reduction in our loss for the year excluding non-cash charges.

Changes in current assets and current liabilities generated cash of $7.8 million during 2013 compared to generated cash of $6.5 million during 2012. Collections on receivables of discontinued operations and an increase in our accounts payable were the primary contributors to cash generated from changes in assets and liabilities during 2013.

We believe that if our revenue grows and our gross profit margin improves as we believe they will, and we are successful in reducing our overhead costs and the loss from discontinued operations, our cash flows that will continue to improve to the point that they turn positive later this year.

We further believe that this in combination with the cash that we had on hand at the end of 2013 plus the $2 million raised in February should be sufficient to fund our operations for the foreseeable future.

I think that summarizes all the important points for 2013. So I will now turn it back to Adam.

Adam Procell

Thanks Jeff. And in summarizing to maybe try to give you a little bit of the mindset of the management team where we are?

Lime Energy is moving forward, we have learned from our past, but we are not dwelling on it. We believe that we have a philosophy of culture and core values which will ensure our success and our longevity.

We are committed today as we have ever been to the core values of Lime Energy, chief among them integrity. We focused on this everyday. We focus on the integrity of our individual team members and the integrity of our company. We focus on in every interaction that we have.

We focus on the integrity of our work products, our installations for small businesses then the integrity of the energy efficiency that we are providing to our utility clients. Lime Energy is doing something important which we are passionate about something that we believe in. When you find something that you would love to do and you work very hard, there is good chance that you would be very good at what you do.

Lime Energy today is very good of what we do for our utility clients. The philosophy of our management team is quite simple; we strive to first create a good work environment for each and every one of our team members and to invest in their excellence. We believe that this in term will result in driving value for our clients and the value that we drive for our clients is what will create returns for our shareholders. Take care of your employees, they will take care of your clients and that will take care of your shareholders.

Lime Energy believes in what we are doing today and what we are doing is driving critical value that the world needs. And with that I would like to thank you all again for begin on the call today. We will open it up to some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Charles Finnie with EFW. Please proceed.

Charles Finnie - EFW

Sounds like this amounts to a private phone call that is in a conference call. Hi, guys. Can you hear me?

Adam Procell

Hi, Charlie, can hear you.

Charles Finnie - EFW

Good. So I didn't hear much commentary or even see numbers broken out on the fourth quarter by itself as opposed to the full year. Is there any, do you guys have any commentary on that just – this is an indicator of how the business might be improving in course of your profitability?

Jeff Mistarz

Yes. The fourth quarter is summarized in our 10-K. Revenue for the quarter was about $14 million, which was inline with that we expected for the quarter. The loss for the quarter was $3 million, which was down from $3.8 for the third quarter. So we had some restatement costs, some lawsuit related costs that hit the quarter that did impact that number as well.

Charles Finnie - EFW

Okay. And Jeff, you mentioned that you guys hope to be profitable later this year, can you – is it a possibility in the first half versus the second half, can you give us a little more specificity on that?

Jeff Mistarz

Well, our year typically – our business typically ramps throughout the year. So the question is, when do we hit that point? And at the same time, the cost related to the restatements and the lawsuits are declining. But the good news we got last week, hopefully they would be declining a little bit faster than we initially expected. And they should wrap up in the first half of the year.

So there is a chance we would get the profitability in the second quarter but more likely in the second half of the year really depends on how quick the things wrap up. But the summer looks like [weather wise] and cost related to the lawsuits.

Charles Finnie - EFW

Okay. Last question, any commentary on RFP activity that could result in new business in 2014?

Jeff Mistarz

We really can't comment on perspective business, rather than say that we are active trying to raise more new contracts.

Charles Finnie - EFW

Okay. All right. Thanks so much.

Jeff Mistarz

Thanks.

Operator

There are no further questions in the queue.

Jeff Mistarz

All right, everybody. Well, thank you for joining us today and we will talk to you after the first quarter is completed.

Adam Procell

Thanks everyone.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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