Lime Energy Company (NASDAQ:LIME)
Q2 2014 Earnings Conference Call
August 14, 2014 04:30 PM ET
Glen Akselrod - IR
Adam Procell - President and CEO
Colleen Brennan - CFO
Good day, ladies and gentlemen, and welcome to the Q2 2014 Lime Energy Corporation Earnings Conference Call. My name is Whitley and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session (Operator Instructions).
I would now like to turn the conference over to your host for today Mr. Glen Akselrod, spokesperson. Please proceed.
Thank you, Whitley, and good afternoon and thank you everybody for taking the time to join Lime Energy's 2014 second quarter financial results conference call. With us today is Adam Procell, President and CEO; and Colleen Brennan, company’s CFO.
I hope all of you have had a chance to review the earnings announcement from earlier today and which could be accessed on Lime's Web site, www.lime-energy.com, or for the 10-Q on the SEC Web site.
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 today.
I also want to refer you to the complete forward-looking statement disclosure in the earnings release, which is incorporated by a reference for the purposes of this call. I'd also like to reference 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 the Thomson Reuters network. There will be a replay available on either Web site until November 2014.
With that, I'll hand the discussion over to Adam.
Thank you, Glen. And thank you all for getting on the call. Today, we are going to cover Lime Energy’s second quarter results. I will give you an overview now, and Colleen Brennan, our Chief Financial Officer and Treasurer, will give you more details in a few moments.
I am also going to cover today several other important topics in my remarks, primarily some thoughts on where exactly Lime Energy is today. Specifically, I will discuss where we are with respect to profitability, and most important commitment that this management team has made to our investors. I will discuss where we are with respect to growth, a vital element for any public company, certainly a small one; and I will discuss where we are with respect to the energy and industry and obviously the mix have much changed presenting great opportunities to companies which are able to understand where this change will shake out.
First a few brief comments on our second quarter results. We saw the gross margin improvement and we saw the reduction in SG&A that we had projected for the second quarter. Our revenue was not where it needed to be. We see this performance as a signal that there are many of the changes we have made and improvements we have made in the first half of the year are working, including the rightsizing and reorganizing of the management team, our renegotiating terms with our suppliers and improving our technology platform.
We believe that our main challenge now is to consistently drive the top line, and we’ve identified three key areas of focus in order to make this happen. First is the cash needed to fulfill our obligations to our sub-contractors in a timely fashion, cash raised through our recent convertible notes closes in outstanding working capital gap; also an initiative that we have to secure revolving fund for customer financing, we anticipate we will put the businesses on a very solid cash footing going forward. Both of these initiatives, one is complete and the other is underway as we speak.
Second opportunity to improve is to continue our progress towards sales efforts. We’ve instituted a professional sales career path at Lime, one of which helps us attract and retain top sales talent and we have formalized our sales training around this career path. We’ve also instituted an improved compensation plan. We put this in place last quarter and it has already made a difference in our ability to generate consistent sales.
The third is in overall commitment to human capital, which is designed to make Lime a great place to work and to inspire our team members to maintain the pace that is required to innovate as Lime is doing in our industry. We expect to launch this initiative in the third quarter. Colleen will give you more color on the financials in a moment. But a summary is that they paint a very encouraging picture of the direction in which our business is moving, and that we have a detailed plan in place to generate the revenue that is needed for consistent profitability.
With these comments I’ve give you a sense of where we anticipate Lime is headed with respect to profitability. This is our most important goal, as I mentioned. And our objective for Q3 is to be positive at the operating income line an objective which we feel is within our grasp. We project our revenue based on the energy efficiency goal for each of our contracts and to hit these goals in Q3, we expect to be profitable. This requires that our sales force consistently hits their weekly goals and then our construction management teams consistently put the solid projects on the ground. We expect our sales training and working capital initiatives, that I mentioned earlier, will help us achieve this goal.
As far as where Lime Energy is with respect to growth, last week’s press release was an indication of our ability to grow our business with existing clients as well as the security program awards. Our client management and business develop strengths have been evident throughout the last five years of growth having added new long term contracts with the nation’s top utilities, which we expect would add in-total an additional $430 million in additional revenue. We expect that we have more than $260 million of this revenue in front of us, and various contracts which spread over the next five years which provides a very nice runway for continued 15% to 20% growth and continued innovation.
The recognition of the potential revenue of these contracts will depend on receipt of several regulatory approvals and on Lime’s ability of sell sufficient program services under these contracts. We also anticipate the opportunity to add new clients in the coming years that the popularity of Lime’s innovative performance and output base small business energy efficiency programs continues to grow.
We see ourselves as a leader in this space and with limited competition for the integrated services package that we provide.
With respect to where Lime Energy is in the energy industry and where the energy industry is heading, this is what they are so excited about coming to work every day, it’s the direct result of the hard work, the vision and innovation of our team members over the last five years. Lime is on the forefront of the dramatic shift in the way U.S. utilities operate, delivering the cleanest and most cost effective energy resource available energy efficiency. We are providing the utility the future with a megawatt power plant that we believe enables our utility customers have once to better engage their customers, meet resource and capacity needs, deliver shareholder return and satisfy environmental regulations.
Rather than continually producing electricity for consumption, with Lime Energy’s megawatt power plants, we produced a stream of energy efficiency projects to continually meet demand by permanently reducing it. The megawatt power plants produce several vital products related to this project stream, including improved clean energy resources and customer satisfaction ratings for our utility client, lowering monthly energy bills for their small business customers, new jobs and economic development for our communities, a competitive and cost effective compliance mechanism for regulators, and meeting power requirements with a resource more cost effective than any competing form of generation as demonstrated in countless industry reports most recently by the American Council for an energy efficient economy.
With that, I will turn it over to Colleen to discuss the financials in more detail, before I provide closing remarks.
Thank you, Adam. Good afternoon everyone and thanks for joining us this afternoon. I’m going to provide you with a brief overview of the results for the three months and six months periods ended June 30, 2014.
Beginning with the results of the quarter, our consolidated revenue increased 5% or 647,000 to 13.6 million during the most recent quarter as compared to 12.9 million to the prior year period. The increase over the second quarter of 2013 was primarily due to higher revenues from our Duke Progress program in the Carolinas, which was still ramping up during the second quarter of 2013. For the balance of the year, we are expecting revenue from our energy efficiency business to show a 16.5% growth over the revenues from our energy efficiency business in 2013.
Our gross profit for the quarter increased 17.7% or 663,000 to 4.4 million from 3.8 million from the prior year period. Our gross profit margin increased from 29% during the second quarter of 2013 to 32.5% during the second quarter of 2014. The improvement in our gross margin was due to a combination of increased contributions from new and/or renewed utility programs, which generally have better gross margins than the older programs as well as improvements in operating efficiency. We expect our gross margins to remain in the range earned this prior quarter with fluctuations up or down in future periods, depending on the level of contribution from individual program.
Our selling, general and administrative expenses declined 750,000 from 5.4 million during the second quarter of 2013 to 4.7 million during the second quarter of 2014. The overall decline was due to reductions in overhead related SG&A resulting from cost cutting moves, which we implemented in late 2013. This was partially offset by cost related to restatement we completed in 2013 and the associated stockholder losses in SEC investigation, which increased by 19,000 to 306,000 during the last quarter from 287,000 incurred during the second quarter of 2013.
We expect our cost cutting initiatives will continue to contribute to reductions in our SG&A relative to last year for the balance of 2014. The increase in our quarterly revenue, in combination with the improvement in our gross margin and reduction in our SG&A expense, all contributed to an 88.1% or 1.7 million reduction in our loss from continuing operations, which was 229,000 for the second quarter of this year versus 1.9 million for the second quarter of 2013. There was a gain from discontinued operations of 55,000 compared to a loss of 128,000 in the prior year period. We have a couple of legacy public sector projects that we are working to close out that have a only ongoing activities related to businesses we have either sold or closed down. We expect we’ll have small quarterly losses from discontinued operation for the next quarter until all these projects are completed.
All of this contributed to a 91.5% or 1.9 million reduction in our net loss for the quarter. Our net loss for the second quarter of 2014 was 174,000 compared to 2 million for the prior year period.
Now turning the six month results, our revenue for the six months period ended June 30, 2014 increased 1.7 million or 7.1% to 25.9 million due the reasons outlined earlier. We expect our revenue for the second half of the year will exceed the revenue for the first six months with revenue peaking during the fourth quarter. We expect that our current contracts and our recent award of a five-year contract extension for the Duke Energy Progress territory and expansion to the Duke Energy Carolina’s territory will drive this growth.
Our gross profit for the first half of 2014 increased 27.7%, or 1.8 million, to 8.1 million. Again, this increase was driven by the higher revenue and improved margins from our utility business. Our consolidated gross profit margin improved from 26.4% to 31.5% year-over-year. We expect our gross margin will improve slightly over the remaining quarters of 2014.
Our SG&A expense declined by 1.9 million or 16.3% to 9.6 million during the first half of 2014 compared to the 11.4 million of expense for the first half of 2013. SG&A costs, related to our restatement and stockholder lawsuits, which totaled 1.6 million for the six months of 2013, were 595,000 for the comparable period of 2014. Our SG&A expense, as a percent of revenue, declined from 47.4% during the first half of 2013 to 37% during the first half of 2014. However, when adjusted for one-time expenses related to the restatement we completed in July 2013 and the stockholder lawsuits and SEC investigation, SG&A declined to 34.7% of revenue. Still away from where we want to be, but a good step in the right direction.
Our loss from continuing operations declined 4.2 million or 75% to 1.4 million for the first half of 2014 from a loss of 5.6 million for the same period in 2013. Adjusting for the one time restatement and legal expenses of 595,000, our loss from continuing operations declined 3.2 million or 80% to 798,000. We are very focused on continuing to increase the profitability of the energy efficiency business, primarily through increases in revenue, while continuing to control the growth of our overhead cost. This, we believe, is the path we must follow to achieve profitability.
In terms of our liquidity, we had 504,000 of unrestricted cash as of June 30, 2014 compared to 6.9 million as of December 31, 2013.
Net cash used in operating activities consumed 8.2 million during the first six months of 2014, compared to consuming 1.6 million during the year earlier period, representing a decrease from cash of 6.6 million or 408.9% over the prior year period. The cash consumed by operating activities before changes in assets and liabilities, which is basically our net loss excluding non-cash items, decreased by 6.5 million to 413,000 and was down 94% from the 6.9 million consumed during the second quarter of 2013. The changes in assets and liabilities, for example, the changes in net working capital, consumed 7.7 million during the first half of 2014 compared to generating 5.3 million during the prior year period.
During the first half of 2014, we used funds raised in December 2013 and January of 2014 to bring of many of our accounts payable back into agreed-to-terms with our vendors. We expect to consume more modest amounts of cash from changes in working capital related assets and liabilities in future periods as we continue to work-down our accounts payable balances, and if our sales grows we anticipate, we expect that they will. We continue to closely monitor our working capital position and believe that if the profitability of our core business, the energy efficiency business, continues to improve, as we believe it will our operations should turn cash flow positive before the end of the year. We converted our outstanding sub-debt to preferred stock in September of 2013, therefore, while we had interest expense last year, this year we have dividend expense.
Included in the first six month’s dividends’ expense of 1.9 million, was 1 million of non-cash deemed dividend expense associated with the 2 million we raised in February through sale of Series B preferred stock. The actual dividends accrued on outstanding preferred shares totaled 943,000 for the first six months.
I think that covers everything for the second quarter. So, I will now turn it back to Adam.
Thank you, Colleen. Before we open it up for questions, I just want to reiterate that Lime is projecting profitability in Q3 and profitability for 2014. We anticipate revenue to grow in the second half and we anticipate finishing 2014 with over $60 million in revenue. I also wanted to be clear that Lime is confident that the strategic decisions that we’ve made are paying-off, and that the innovative offerings, which we’ve developed, will play an important role in delivering services for the utility of the future.
Lime Energy has a voice in several key regulatory proceedings nationally, and we are making it clear, that there is a better way to deliver clean energy than the traditional means. We’ve broken down barriers in growing our Company and in bringing energy efficiency upscale to America’s small and mid-size businesses. We are confident that utilities will continue to view these services as incredibly valuable.
And with that, we’ll open it up to questions.
(Operator Instructions) There are no questions in queue. I’ll now turn the call back over to Adam. Please proceed.
Okay. Well, again, I want to thank everyone for getting on and their continued interest in Lime Energy. And on behalf of the team and all of our team members, we thank you and we look forward to talking to again in another quarter.
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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