Lime Energy Co. (NASDAQ:LIME)
Q1 2016 Earnings Conference Call
May 13, 2016 4:30 PM ET
Glen Akselrod – Investor Relations
Adam Procell – President and Chief Executive Officer
Colleen Brennan – Chief Financial Officer
Todd Felte – Source Capital Group
Good day, ladies and gentlemen, and welcome to the Q1 2016 Lime Energy 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I’d now like to turn the call over to Glen Akselrod, Spokesperson. Sir, you may begin.
All right, thank you, Jaime, and good afternoon and thank you everybody for taking the time to join Lime Energy's 2016 first quarter 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 will 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 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.
Thank you, Glen, and thank you all for getting on the call. As I did when we spoke about six weeks ago, I want to thank all the Lime’s team members and thank our clients for their continued hard work, which has resulted in unprecedented levels of clean energy solutions being deployed in the facilities of small mid sized businesses across the country, nearly half of which are low income communities. For the work that has generated vast amounts of energy efficiency resources, required to meet regulatory mandates placed on our utility solutions clients, and for the work that is creating green jobs, creating great jobs and delivering on the promise of our nation’s transition to low carbon economy.
As always I thank our investors, who continually show their support for our mission, a mission to create a company better positioned to capitalize on the disruptive change that we see in technology, environmental regulation and the utility business model. We’ve had tremendous progress made in our intelligent efficiency solutions offerings for facilities as a program manager and customer service platform for our utility clients and most certainly as is becoming a data driven company, whose knowledge regarding energy efficiency deployment and commercial buildings is leading the way and the rethinking of how energy is used in America.
So, I want to give a quick overview of the Q1 numbers, Colleen will get into these numbers in more detail in just a few moments. When we did speak six weeks ago, we talked about the challenges that we would face in the first half of 2016. Now, there are three primary challenges that our utility solutions business faced in the first quarter. First, we had two major programs that were recompeted at the very end of 2015. The good news is that we were awarded contracts for both. The bad news is that the process required the programs sales that come to with standstill.
In one program’s case, the standstill was for two months. And these program pauses, hurt our Q1 numbers, and they will continue to sting into the second quarter. Second challenge that we faced is that New York States regulatory proceeding titled Reforming the Energy Vision, or REV, while intended to improve the market for the products and services that Lime sells has caused uncertainty for the states utility. While REV stated that utilities should not lower the annual goals that they had under the successful energy efficiency portfolio of standards, some utilities have done just that.
While the utilities actions are understandable given the uncertainty and the slow pace of the initiative, it is unfortunate consequence of the process that is intended to posture more clean energy and a consequence, which cause unexpected reductions in Lime revenue throughout Q1 and likely into Q2. Thirdly, in New Jersey, where we have been the largest provider under the state-wide program run by the board of public utilities, we had the program unexpectedly stop at the end of 2015 without a plan for how it would run in 2016. This has been a month to month process of waiting for what will likely be a recompete under which Lime would hope to be successfully awarded a contract.
But the state still has not clarified what this process will be or the timing of it, which means that as – the program that’s been Lime’s largest and steadiest will be missing from our revenue in both Q1 and Q2. These are not insignificant challenges and they showed up in our Q1 numbers. While year-over-year revenue was up 26.5% on the strength of the EnerPath acquisition, it was in fact down on a pro forma basis. Our gross profit margins were flat, which is a failure to leverage our procurement power, something that we anticipate will improve as we move forward in 2016.
SG&A was up 72% also the effect of the EnerPath acquisition. But the clear disparity between revenue and SG&A growth demonstrates the sudden drop in revenue that we felt from the three challenges that I just discussed earlier. Our differentiator in the market is the machine that we have built which allows cost effective small business customer acquisition and the implementation of energy efficiency projects at scale. This machine is not inexpensive to operate and it would not have been prudent to disassemble the machine during our revenue dip in the first half. So we didn’t.
Our reasoning was that that is machine would be fed at scale again in the second half of the year, in fact, as early as Q2, which is where the good news comes. The two programs that were paused after wanting to re-competes are up and running. In both cases with improvements that include incentive calculation changes that will increase revenue, expand customer’s ability and new energy efficiency measures.
We’ve been awarded new utility programs in Kentucky and Texas and have staffed up these programs where we will see revenue as early as Q3. Both of these programs have the potential to back-fill lost revenue from the installed New York State Programs. And we have taken resources previously dedicated to the New Jersey program and utilized them to move forward in several territories without out traditional utility solutions offering in place. And this is something that I want to discuss briefly before I turn it over to Colleen.
Lime Energy is built a company which has unique capabilities across marketing, sales, engineering and project implementation, driving our unique ability to make money by bringing new technologies to small and mid-size businesses nationally. And we’ve combined these capabilities with expertise in energy and communications technology, as well as software development. The result is something that you don’t see every day in the clean energy space a company with a great product as well as the access to a market for that product. We are today a data-driven, intelligent, efficiency company, we’re not the only one, but we believe that we may be the one with the most near term ability to deploy successfully.
This company was built on the back of our utility solutions business, which sells the energy efficiency resources or the kilowatt hours not used, which we aggregate across thousands of SMB projects sold – which we sell to utility clients. This provides utilities with important environmental compliance instrument, or it enables them to meet corporate commitments for sustainability, or it does both. In all cases it results in improved levels of customer satisfaction.
This is a great business. And all regulatory indicators show that the demand for this will only increase with most regulatory initiatives built on goals which run through 2030 or even 2015. But even adding up lines, industry-leading 16 utility programs, with those of our competitors, we’re only scratching the surface of the nation’s 28 million small businesses, scratching the surface of the 96% of U.S. commercial building stock that is under 100,000 square feet. And that’s 5.4 million buildings. These are buildings that are wasting 30% of the energy that they use, this is the market that Lime is uniquely qualified to address and the one at which we have pointed the company that we’ve built.
So even as we write out the storm in what our thankfully temporary reductions in utility program activities, Lime is making great progress in moving toward our future, a future that will see our salesforce and geographic presence increase, that will see our products and services mature, that will see us get more sticky with our small business customers, that will see us become increasingly valuable as a partner to those with clean energy products in search of a market. We have our work cut out for us. But one thing that can be said of the Lime team is that we have never had it easy. We look forward to the continued battle in the phase of all the challenges and all the opportunities that have been thrown on us.
With that, I want to turn it over to Colleen, to walk through the Q1 numbers in detail. But before I do, I’m sure that most of you are aware that Colleen will be leaving us at the end of this month. This will be her last earnings call. She has led us through two years of these calls across a period of great expansion, 140% growth, to be exact. Through two major capital raises and an acquisition. Colleen has been a strong partner and importantly, she has worked hard to ensure that she leaves Lime’s accounting and finance function in good shape. She is working closely with Bruce Torkelson, who has joined us on facilitating in fact a transition.
So I thank Colleen for her two years of service. And Colleen the floor is yours.
Thanks Adam. Thank you for the kind words and good afternoon everyone and thanks again for joining us. I’m going to provide you with a brief overview of the results for the three months period ended March 31, 2016. Our consolidated revenue increased $4.8 million, or 26.5%, to $23.1 million during the first quarter of 2016 from $18.3 million during the first quarter of 2015. The increase in revenue was driven primarily by the acquisition of EnerPath and increases in revenue from existing programs that was partially offset by decreases in other existing programs. We expect our growth in for future periods to continue to moderate, unless there is an increase or decrease in the number of programs on which we are working.
The increase in revenue led to $1.4 million, or 26.2% increase in our gross profit during the first quarter of 2016 to $6.9 million when compared to $5.5 million for the first quarter of 2015. Our gross profit margin decreased slightly from 30.1% during the first quarter of 2015 to 30% during the first quarter of 2016.
This decrease in our gross profit margin was a result of the levels of contribution of individual programs. We believe our gross profit margin will improve as we have negotiated more favorable pricing from our suppliers. However, we’ll fluctuate up or down depending on the level of contribution from individual programs, all of which have slightly different margin profiles. The gross profit margin we earn in the future may also be affected by the addition of new programs or the loss to many of the existing programs.
Our selling, general, and administrative expenses increased $4.2 million, or 72.2%, to $10 million during the three month period ended March 31, 2016 from $5.8 million for the same period in 2015. The increase was primarily due to the acquisition of EnerPath. The company incurred acquisition cost of $218,000 during the first quarter of 2016, a decrease of $476,000, or 68.6%, from $694,000 for the same period in 2015.
The Company’s acquisition of EnerPath resulted in cost for amortization of intangibles of $335,000 during the first quarter of 2016, as compared to $31,000 for the same period in 2015. We incurred interest expense of $976,000 in first quarter of 2016, compared to $60,000 in the first quarter of 2015. Additionally, we recorded a loss on extinguishment of debt of $2.1 million related to the second amendment of our Note with Bison Capital and a loss of $756,000 from the change in the derivative liability in connection with the Note.
The derivative liability is recorded at fair value, which was determined to be $7.4 million as of March 31, 2016, and $6.6 million as of December 31, 2015. The $756,000 increase was recorded at the loss. The increase in our quarterly gross profit was more than offset by the substantial increase in SG&A. The changes in the derivative liability and the extinguishment of debt resulting in a $4 million increase in our loss from continuing operations before income taxes from $3.3 million for first quarter 2015 to $7.3 million for first quarter 2016.
Income tax expense was $6,000 in the first quarter of 2016 as compared to $1.2 million income tax benefit in the first quarter of 2015 that we’ve got from the acquisition of EnerPath. There was a loss from discontinued operations of $12,000 compared to a loss of $63,000 in the prior year period. All of this contributed to a $5.3 million increase in our net loss for the quarter.
Our net loss for the first quarter of 2016 was $7.3 million as compared to $2 million for the prior year period. The adjusted EBITDA loss increased $2.8 million to $4.8 million from $2 million in the first quarter of 2015. Excluding expenses for special items including acquisition cost, legal expenses related to our July 2013 restatement, the stockholder lawsuits, SEC investigation and the loss on the extinguishment of debt, the adjusted EBITDA loss increased $2.6 million to a loss of $2.4 million from income of $223,000. In terms of our liquidity, we had $2.4 million of cash and cash equivalent as of March 31, 2016 compared to $6.7 million including $1.3 million of restricted cash as of December 31, 2015.
Net cash used in operating activities was $2.5 million during the first three months of 2016, compared to $19,000 used during the prior year period, representing an increase of $2.5 million over the prior year period. Cash used in operating activities before changes in assets and liabilities increased by $348,000 to $1.23 million and was up $40.6% from the $858,000 consumed during the first quarter of 2015. Changes in assets and liabilities consumed $1.3 million in cash during the first quarter of 2016 compared to generating $839,000 in cash during the prior year period.
As reductions in accounts payable and unearned revenue outstripped reductions in billed and unbilled accounts receivable. We used $546,000 in investing activities during the first quarter of 2016, compared to $11.2 million during the first quarter of 2016. All of the cash consumed during the first quarter of 2016 was for capital expenditures, $291,000 of which was used to continue to develop the software platform used by our utility programs.
During the first quarter of 2015, we spent $11 million to acquire EnerPath and $236,000 for capital expenditures, including $199,000 for software development. We expect to make additional investment in our software platform in future periods as we continue to add to its capabilities in order to increase our operating efficiencies and the value of our programs to our customers.
During the first quarter of 2016, the financing activities generated $40,000 of cash, as compared to $11.4 million during the first quarter of 2016. During the first quarter of 2016, we financed the purchases of two vehicles used to support our utility programs. During the three month period ended March 31, 2015, we raised $11.75 million from the issuance of a convertible notes to fund our acquisition of EnerPath. This was partially offset by $337,000 of cash paid for deferred financing costs.
We continue to closely monitor our working capital position and believe that is the profitability of our core business, the energy efficiency business, continues to improve as we believe it will, our operations should become cash flow positive. I think that covers everything for the third quarter.
So, now I will turn it back to Adam.
Thank you, Colleen. So, as I said earlier, Lime Energy is moving forward with our plans to scale the company that we’ve built, to continue to delivering innovative program solutions to our utility clients and making a difference to our small business customers.
With that, we’ll open it up to questions.
[Operator Instructions] And our first question comes from Todd Felte with Source Capital Group. Your line is now open.
Hi, guys. Just had a couple of questions on the Bison Note and the Amendment, I know there has been some EBITDA amendments to that and it looks like you’re not really coming close to meeting those requirements. So I assume you had to pay the primary and secondary additional principle and interest. And I know you also said that Q1 and Q2 were going to be little rough. Do you anticipate having to pay those all through the year? And then my next question is just about the decreasing cash and if you’re going to need to raise cash again in the near-future.
Todd, thanks for the question. Yes, taken in order. We did pay, as you noted, the two tiers of penalties under the Note Amendment at the end of Q1. We do anticipate a struggle in Q2. I don’t think we’re out of the woods in terms of paying those penalties. I would just say we will pay the penalties again and that would likely be Q2. In terms of paying them all year, we don’t think that. We think the second half will be strong. As I said, we’ve already got sales, which is our wonderful leading indicator. Our sales are trending up already.
So we would anticipate by Q3 and Q4, we’ll be working ourselves out certainly of the second tier penalty, so that’s kind of where we are if we were forecasting how we’re going to come in. And in terms of raising additional capital, we don’t see the need for that. Our liquidity, we’re working to expand the line that we have, but we have a line of credit in place with Heritage Bank. And we are confident that we have the working capital we need I guess I would say to weather the storm. And in our cash flow forecast, we saw ourselves coming out of this later in the year and we don’t anticipate raising additional capital.
Okay, I’ll hop back in the queue. I have a few other questions, but I’ll give someone else a chance. Thank you very much.
Thank you, Todd.
[Operator Instructions] And I’m showing no further questions at this time. I’d like to turn the call back over to Adam Procell for closing remarks.
Thank you, Jamie. And I want to thank everybody again for getting on the call and we’ll get back to work here and look forward to speaking with all of you again in a few months hopefully with a little better news and a better outlook. And so, we’ll talk to you at the end of the next quarter. Thank you.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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