Lime Energy's (LIME) CEO Adam Procell on Q4 2015 Results - Earnings Call Transcript

| About: lime energy (LIME)

lime energy co. (NASDAQ:LIME)

Q4 2015 Results Earnings Conference Call

March 30, 2016, 04:30 PM ET

Executives

Glen Akselrod - Investor Relations, Bristol Capital Ltd.

Adam Procell - President and CEO

Mary Colleen Brennan - CFO

Analysts

Operator

Good day, ladies and gentlemen and welcome to Lime Energy Co. Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Glen Akselrod, Spokesperson. Please go ahead.

Glen Akselrod

All right, thank you. And good afternoon and thank you everyone for taking the time to join Lime Energy's 2015 fourth quarter year end results conference call. With us today is Adam Procell, President and CEO and Colleen Brennan, company’s CFO.

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 the 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 in the call today.

I also refer you to the complete forward-looking statement disclosure in the earnings release, which is incorporated by reference for the purposes 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 Lime Energy's website or on the StreetEvents Network operated by Thomson Reuters. There will be a transcript posted on the Lime Energy website once available after the call.

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

Adam Procell

Thanks very much Glen. Thank you all for getting on the call. I want to start off by thanking all of Lime Energy employees for their continued commitment to the company as we built together. I thank all of our utility clients for their partnership, as we work together to bring innovative products and services to market, and as we together envision the utility of the future.

I thank all of those who have shown their support through investment, many of whom are no doubt listening to today's call. I am going to highlight for you today what transpired for Lime Energy in 2015, which was a very busy year and Colleen will then cover our 2015 financials in detail.

Lime Energy entered 2015 fresh off of what can be best described as a rebuilding year. 2014 had seen the installation of a completely new executive management team. It’s aligned [ph] for the first time focused solely on bringing energy services of scale to small businesses and it’s our critical working capital raise which allowed us to recover from years of struggle. In fact, we raised our capital in late December of 2014.

So 2014 was a rebuilding year, 2015 was clearly our time to reap the benefits of the rebuilding and capitalize on the opportunities that the market afforded us, and we did just that.

In March of last year, Lime completed the acquisition that our then major competitor EnerPath, a $40 million company in its own right, with a 20 year track record of quality and highly-rated customer service.

We shared a lot in terms of culture, vision and history of innovation. We secured additional capital to close this deal in cash, and spent the rest of the year integrating the two companies.

The net effect as Colleen will cover in more detail was the creation of a Lime Energy which would almost be unrecognizable to anyone who had observed the company in 2014. We created a Lime Energy that did a $125 million on a pro forma basis, up from $60 million for Lime in 2014, with gross profit margins of 33.5%, up from 30% in 2014.

That delivered nearly $6 million of adjusted EBITDA, excluding certain one-time costs, with 270 employees, up from a 150 a year earlier, which serves 16 utility territories in 10 states, up from 7 utility territories in 6 states a year earlier.

We created a Lime Energy which today is serving 1.5 million small business customers where we delivered comprehensive energy services with an exclusive incentive as the utilities small business program provider.

And importantly these utility contracts have allowed us to build a vertically integrated platform for marketing, sales and implementation of solutions for small business. A platform which is unique in the marketplace, and right to be the channel for bringing new products and services to this segment.

We said that this could be built and we built it. A national platform for bringing energy services at scale to small businesses. So what will be some of those products and services?

Many energy efficiency products have already been included in many of our programs, various LED lighting products, refrigeration equipment and controls, heating and cooling equipment, tunics [ph] and replacements.

We have field personnel today that are selling energy efficiency upgrades together with demand response projects, bringing together two areas that the utility industry has been trying to combine for years and opening up an entirely new revenue stream for Lime Energy. Very soon we believe that our channel will be used for providing solar PV and storage solutions for small businesses.

And cost of these technologies come down the way that LED lighting products have, we will see them adopted in the small business market. And ultimately our goal is to sell these small businesses more of what they want, building on the – what we sold them to date which is where our operating cost and improve facility.

Lime Energy is built a very innovative business in a short period of time and today we're providing unique solutions to utilities and their small business customers. For better or worse, and in my opinion it’s both, we have done this perhaps the most dynamic times in the history of the utility and energy industries. Frankly there couldn’t any more moving parts, in fact, they are all moving.

This movement makes an industry right for innovation and this has provided Lime with an opportunity to compete favorably with the status quo, with the old guard of utility program implementation.

At the same time, as regulators and utilities find their way through what has been described as a rebirth of one of the most complex industries in America, Lime is faced with an almost constant demand for continued innovation.

While we've built a leadership position in providing energy services to small businesses, we've also built the company which is seen as the leader in developing and deploying creative solution to the utility industries challenges.

From the inception of our small business solutions business in 2009, we have been consistently doing what the industry is talking about, while thought leaders were presenting on the need to address the small business segment with energy efficiency, Lime was already delivering for these – this segment at unprecedented levels.

Then as conference presentations turn to the need to provide multi-measure projects, Lime's sales people and installation partners were already in the field completing projects with lighting, refrigeration and HVAC measures, completing energy efficiency demand response projects.

And when the industry began to talk about performance-based energy efficiency programs, Lime was already working under a power purchase agreement where we are only paid for measured and verified savings.

And today, as regulators in New York, California, New Jersey and elsewhere are talking about putting information in customers hands, which help them manage their energy usage, leveraging private capital to finance deeper energy efficiency and providing customers with pay for performance conjuncts [ph] Lime Energy is already running pilots as we speak which deploy levels of metering, financing and software solutions never before seen in the small business segment.

One of the biggest challenges that we face in this marketplace of change is the uncertainty created by regulators in their attempt to create a market for more clean energy product.

This seems like a good development for Lime and our competitors, but lacking clarity on how they will be rewarded for their future investments in customer energy efficiency, some utilities have slowed down.

Lime is working very hard on advising regulatory proceedings in New York, New Jersey, Ohio and elsewhere, places where the best of intensions are currently jeopardizing all of the great work that has been done in building vibrant energy services market.

We believe the long-term trend in these and other states are very attractive for third party providers with clean energy solutions like Lime. But we have already been bitten by the syndrome of the baby and the backlog.

Based on the timing of these regulatory initiatives we anticipate that the very real challenge in our short term business outlook is at the top line, as well as the bottom line during the first half of 2016.

We've been able to make some decisions already to mitigate this effect, but the nature of our business makes it hard to tear things down quickly, especially when we anticipate that these programs and people will be turned on again in the near future.

The start-up cost and timing makes it better to hang on to some of these costs during the short term lags in programs funding. We are able to redeploy resources from one program to another, but this comes with an efficiency.

And as I said earlier, our ultimate success is dependent upon continued innovation which carries with a continued investment. Following this difficult first half, we anticipate a very strong second half and we are already - have line of sight into much of this ramp in revenue.

The reality is that utilities and regulators alike must find ways to unleash the potential for clean energy solution on the customer side of the meter and the environmental goals and electric utility regulations are in placed through 2018 [ph] to make this happen.

Lime Energy has built a business pointed toward a long-term market opportunity and even as we face challenges with program slowdowns due to regulatory uncertainty, Lime continues our winning ways.

In the last six months eight of our programs have been re-competed and Lime went eight for eight, being awarded new contracts under each of these programs. We additionally were granted extensions by two other utility clients and importantly we won new contracts for new utility territories in Texas and Kentucky, where we will be rolling out our solutions for the first time.

In addition to all of this, in 2015, we moved our headquarters to New York, New Jersey and completed a re-branding of the company post EnerPath acquisition. We remain confident in the value of what we have built and in the long-term prospects for the market providing energy services for the commercial building sector.

With that, I'll turn it over to Colleen, who will discuss our 2015 financial performance in more detail, before we open it up for questions.

Mary Colleen Brennan

Thank you, Adam. Good afternoon everyone I am going to provided you with a brief overview of our financial results for 2015. Our revenue from continuing operations for 2015 was $112.6, which represents a 91.5% or a $53.8 million increase from the $58.8 million earned in 2014. This is primarily driven by the acquisition of EnerPath, which was $34.1 million and by higher revenues from our existing utility program, which was $19.7 million.

Our gross profit increased $20.1 million or 113.9% to $37.8 million during 2015 from $17.7 million in 2014. Our gross profit margin increased from 30% in 2014 to 33.5% in 2015.

The improvement in our gross margin was the result of improved efficiencies in existing programs and higher margin contributions from our new programs, including the EnerPath program and renewed program.

The improvements in operating efficiency was due to a combination of the continued development of our software platform, changes we have made to some of our processes and additional trading and experiences of people working in these programs.

Selling, general, and administrative expense of our continuing operations was $35.1 million, which was $14.9 million higher than the amount reported for 2014. Our SG&A as a percentage of revenue declined from 34.3% in 2014 to 31.1% in 2015.

Included in the 2015 SG&A expenses, approximately 477,000 of cost associated with the restatement of our financial statement and the defense we made at stockholder lawsuit. This was 336,000 less than the amount incurred in 2014 for similar expenses.

The company's acquisition of EnerPath resulted in cost of $1.9 million during 2015 and amortization of intangibles resulted in cost of 879,000 during 2015. We incurred $1.3 million of interest expense in 2015 compared to 189,000 in 2014.

Additionally, we recorded a loss on extinguishment of debt of $1.4 million and a loss of 996,000 from the change in the derivative liability in connection with the note issuance to Bison Capital to finance the EnerPath acquisition.

The derivative liability is recorded at fair value which was determined to be $5.6 million as of the note issuance date and $6.6 million as of the December 31, 2015. The 996,000 increase in the fair value of the derivative liability was recorded as a loss. We did not incur any of these costs in 2014.

Our interest income increased 93,000 to 193,000 in 2015 from 100,000 earned during 2014. Substantially all of the interest income during the periods represented amortization of the discount on our long-term receivables.

Our dividend expense increased by $1.7 million in 2015 to $1.3 million from $3 million in 2014. Our 2015 dividend expense was for accrued dividends on our Series C preferred stock. Our dividend expense for 2014 was $3 million, including $1 million of non-cash deemed dividend associated with the warrants issued with Series A and Series B preferred stock and the adjustment in the conversion prices to Series A preferred upon the issuance of the Series B preferred stock.

The remaining $1.9 million of dividend expense is accrued on the outstanding preferred stock and all the 27,000 was paid on December 22nd, 2014 through the issuance of additional shares of preferred stock and subsequently converted to common stock.

Loss from discontinued operations was 632,000 compared to a profit of 7,000 in 2014. Discontinued operations represents the results of our ESCO business, which we sold in February 2013. GES-Port Charlotte which we sold in November of 2013, our regional service business which we sold in November of 2013 and our contract with the Army Corps of Engineers, which we sold in December of 2013. We closed at the remainder of the contract that we did not sell with ESCO business in 2015.

Our loss from continuing operations decreased 107,000 or 4.1% to $2.5 million for 2015, from a loss of $2.6 million for the same period in 2014. Adjusting for the 477,000 of non-recurring expenses related to our 2013 restatement, and related legal expenses, our loss from continuing operations was $2 million compared to $1.8 million in 2014.

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.

Adjusted EBITDA increased to $2.6 million from a loss of $1.5 million. Excluding acquisition cost, expenses related to the 2013 restatement, cost of the defense of the stockholder lawsuit, cost in expenses related to the SEC investigation and the change in revenue recognition method, adjusted EBITDA increased to $5.6 million from a loss 701,000.

In terms of liquidity, we had $6.8 million of cash and cash equivalent, including $1.3 million of restricted cash as of December 31, 2015, compared to $6 million including restricted cash of 500,000 as of December 31, 2014.

Operating activities generated net cash of $1.7 million during 2015 compared to consuming $13.4 million during 2014, representing an increase in cash of $15.1 million over that prior year period.

The cash generated by operating activities before changes in assets and liabilities, which is basically our net loss excluding non-cash items, increased to $1.3 million, a $2 million net improvement from the 706,000 consumed during 2014.

The changes in assets and liabilities, i.e., the changes in networking capital generated 373,000 during 2015 compared to consuming $12.7 million during the prior year period. We expect to generate or consume modest amounts of cash from changes in working capital related to assets and liabilities in future periods of our sales growth events as we anticipate they will.

We consumed $13 million of cash in investing activities during 2015 compared to 638,000 during 2014. The cash consumed during 2015 included the $11 million used to acquired EnerPath and $2 million used for capital expenditures. $1.3 million of which was used to continue to develop the software platform used by our utility programs. All the cash consumed during 2014 was for capital expenditures, the largest portion of which was used to continue to develop the software platform as well.

During 2015, financing activities generated a $11.3 million of cash, compared to $12.6 million generated during 2014. Approximately $11.7 million we raised from the note issuance to Bison in the first quarter of 2015 was partially offset by 480,000 of cash paid for deferred financing costs.

During 2014 we raised $2 million due to sales of shares of Series B preferred stock, $10 million due to sales of shares of Series C preferred stock and $1 million from the 2014 issuance of term notes. This is partially offset by a 367,000 of cost related to the preferred stock issuance.

On July 24 2015 we entered into a loan and security agreement with Heritage Bank of Commerce. The loan agreement provides a secured two year revolving credit facility pursuant to which we are permitted to borrow up to an aggregate of $6 million which is available to fund working capital and other general corporate purposes. Our ability to draw on the credit facility is subject to customary conditions.

I think that summarizes all the important points of 2015. So I'll now it back over to Adam.

Adam Procell

Thank you, Colleen. In summary, Lime Energy is well positioned to provide much needed services to small business customers which meet the changing needs of the electric utility industry. As this industry continues to take shape, Lime will continue to make the investments which position us to be a leader in the space with a differentiated offer. We will remain at the forefront of serving utility clients and their small business customers.

And with that, we will open it up to questions.

Question-and-Answer Session

Operator

Adam Procell

Thank you. So thank you, again, for everyone for tuning in and we look forward to speaking to you again on our Q1 call. Thank you very much.

Operator

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good-day.

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