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LIME > SEC Filings for LIME > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for LIME ENERGY CO.


9-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion regarding the Company along with our financial statements and related notes included in this quarterly report. This quarterly report, including the following discussion, contains forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance and achievements in 2013 and beyond may differ materially from those expressed in, or implied by, these forward-looking statements. See Cautionary Note Regarding Forward-Looking Statements.

Overview

We are a leader in designing and implementing energy efficiency programs that enable our utility clients to reach their underserved markets and achieve their energy reduction goals. Utility-sponsored energy efficiency programs help reduce customer demand for electricity. Using less electricity when demand is high (like on a hot summer day) can mean fewer new power plants and a smaller electric distribution system, which saves money and benefits the environment. We offer utilities energy efficiency program delivery services targeted to their small and medium-sized business customers. Our programs help these businesses use less energy through the upgrade of existing equipment with new, more energy efficient equipment. This service allows the utility to delay investments in transmission and distribution upgrades and new power plants, while at the same time providing benefits to their clients in the form of lower energy bills, improved equipment reliability, reduced maintenance costs and a better overall operating environment.

Our nine energy efficiency programs operate exclusively within the utility sector and our clients include two of the five largest investor-owned utilities in the country. We focus on deploying direct install energy efficiency solutions for small and mid-size commercial and industrial business programs that improve energy efficiency, reduce energy-related expenditures and lessen the impact of energy use on the environment. Currently, these solutions include energy efficient lighting upgrades and energy efficient mechanical upgrades. We also have expertise in water conservation, building controls, refrigeration and facility weatherization. We are prepared to offer these measures should they become eligible within a utility program. Our small business direct install (SBDI) programs provide a cost-effective avenue for our utility clients to offer products and services to a hard-to-reach customer base, while satisfying aggressive state-mandated energy reduction goals. Our direct install model is a turnkey solution under which we contract with our utility clients to design and market their small and mid-size energy efficiency programs within a defined territory, perform the technical audits, sell the solution to the end-use customer and oversee the implementation of the energy efficiency measures. This model makes it easy and affordable for small businesses to upgrade to new, more energy efficient equipment.

We are also a qualified contractor under the Army Corps of Engineers' Facility Repair and Renewal program ("FRR"). As part of this program we provide project investigation and design-build execution for all types of facility repairs, conversions, renovations, alterations, additions, construction and equipment installation in the federal buildings in the U.S. and its territories. Since late 2009, we have been awarded six FRR contracts with total contract value of $25.6 million.


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Results of Operations

Revenue

We generate the majority of our revenue from the sale of our services and the products that we purchase and resell to our clients. We charge our utility clients based on an agreed to rate schedule based on the item installed or the savings generated. Our contracts with the Army Corps of Engineers are all fixed-price contracts under which we bill the Army Corps on a monthly basis for work completed in the prior month as specified in the contract. A typical project for a small business utility client can take anywhere from a few hours to a few weeks to complete, whereas our projects for the Army Corps can take six months to two years to complete. Our revenues are somewhat seasonal with the strongest sales occurring in the second half of the year.

Gross Profit

Gross profit equals our revenue less costs of sales. The cost of sales for our business consists primarily of materials, our internal labor, including engineering, and the cost of subcontracted labor.

Gross profit is a key metric that we use to evaluate our performance. Gross profit depends in large part on the volume and mix of products and services that we sell during any given period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") include the following components:

direct labor and commission costs related to our employee sales force;

costs of our non-production management, supervisory and staff salaries and employee benefits, including the costs of share-based compensation;

costs related to insurance, travel and entertainment, office supplies and utilities;

costs related to marketing and advertising our products;

                      legal and accounting expenses; and



                      costs related to administrative functions that serve to
support our existing businesses, as well as to provide the infrastructure for
future growth.

Amortization of Intangibles

When we acquire companies we allocate the purchase price to tangible assets (such as property, equipment, accounts receivable, etc.), and identifiable intangible assets (such as contract backlogs, customer lists, technology, trade name, etc.), with the balance recorded as goodwill. We amortize the value of certain intangible assets over their estimated useful lives as a non-cash expense.

Interest Expense, Net

Net interest expense consists of interest expense net of interest income. Net interest expense represents the interest costs associated with our subordinated convertible term notes (including amortization of the related debt discount and issuance costs), the term note used to finance the construction of the Zemel


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Road generating facility. Interest income includes earnings on our invested cash balances and amortization of the discount on our long-term receivables.

Three months Ended March 31, 2013 Compared to Three months Ended March 31, 2012

Consolidated Results (in thousands)



                                                 Three Months Ended
                                                     March 31,               Change
                                                  2013         2012        $         %

Revenue                                        $    11,999   $ 11,525   $    474     4.1 %
Cost of sales                                        9,377      9,475        (98 )  -1.0 %
Gross profit                                         2,622      2,050        572    27.9 %

Selling, general and administrative expenses         6,241      5,321        920    17.3 %
Amortization of intangibles                              6         70        (64 ) -91.4 %
Operating loss                                      (3,625 )   (3,341 )     (284 )   8.5 %

Interest expense, net                                 (304 )      (52 )     (252 ) 484.6 %

Loss from continuing operations                     (3,929 )   (3,393 )     (536 )  15.8 %

Loss from operation of discontinued business        (2,777 )     (795 )   (1,982 ) 249.3 %

Net loss                                       $    (6,706 ) $ (4,188 ) $ (2,518 )  60.1 %

The following table presents the percentage of certain items to revenue:

                                                 Three Months Ended
                                                     March 31,
                                                 2013         2012

Revenue                                            100.0 %      100.0 %
Cost of sales                                       78.1 %       82.2 %
Gross profit                                        21.9 %       17.8 %

Selling, general and administrative expenses        52.0 %       46.2 %
Amortization of intangibles                          0.1 %        0.6 %
Operating loss                                     -30.2 %      -29.0 %

Interest expense, net                               -2.5 %       -0.5 %

Loss from continuing operations                    -32.7 %      -29.4 %

Loss from operation of discontinued business       -23.1 %       -6.9 %

Net loss                                           -55.9 %      -36.3 %


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Revenue. Our consolidated revenue increased $474 thousand, or 4.1%, to $12.0 million during the first quarter of 2013, from $11.5 million during the first quarter of 2012. Revenue from our utility business increased approximately 27%, or $2.4 million. The increase in revenue from the utility business was partially offset by a decline in revenue from our FRR contract of approximately $1.9 million. Revenue from our utility business benefited from contributions from new utility programs started within the past year, including our contracts with Central Hudson, AEP Ohio and Duke Energy Progress. Revenue under the FRR program varies depending on the number of projects we are working on at any particular time and the stage the project is in. We were working on three projects during both the first quarter of 2012 and 2013, however two of the three 2013 projects were in the design phase, during which we generate significantly less revenue. We expect continued growth in the revenue from our utility business, as all of our new programs ramp up to a steady state of operation during the second half of 2013. We also expect increased revenue from the FRR contract during the second half of the year, as projects move from design to construction.

Gross Profit. Our gross profit for the first quarter of 2013 increased $572 thousand or 27.9%, to $2.6 million during the first quarter of 2013, when compared to the $2.0 million earned during the first quarter of 2012. This increase was the result of higher revenue and an improvement in our gross profit margin, which increased from 17.8% during the first quarter of 2012, to 21.9% during the first quarter of 2013. Our gross profit margin improved due to the shift in the mix of business resulting from the change in revenue contribution from our utility business and the FRR contract. The gross margin also benefited from an improvement in the gross margin earned by the utility business due to improvements in operating efficiencies and increased revenue from our new programs. We expect our gross margins will continue to fluctuate on a quarterly basis as a result of changes in our mix of business. However, we believe our gross margins should continue to exceed the levels earned during 2012, due to the changes we have implemented in our utility business and from contributions from new utility programs.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased $920 thousand or 17.3%, to $6.2 million during the first quarter of 2013, when compared to the $5.3 million of expense for the first quarter of 2012. All of the increase in the 2013 SG&A expense was the result of costs related to the restatement of our financial statements and to the stockholder lawsuits, which totaled $1.3 million during the quarter. Adjusting for these expenses, our SG&A expense would have declined approximately $360 thousand, or 6.7%. Our SG&A expense, including the restatement and lawsuit related costs, increased from 46.2% of revenue to 52.0%, however it declined to 41.4% when these one-time expenses are excluded. We believe that it is reasonably possible that we will incur an additional $750 thousand to $1.2 million of costs related to the restatement and lawsuits. We believe that as revenue increases, with increased contributions from our new utility programs, and the restatement and lawsuit related costs decline, our SG&A as a percentage of revenue will decline to less than 25% of revenue later this year.

Amortization of Intangibles. Amortization expense declined $64 thousand to $6 thousand during the first quarter of 2013 from $70 thousand for the first quarter of 2012. This decline was the result of our decision in the fourth quarter of 2012 to reduce the carrying value of assets of the Zemel Road facility. As part of this adjustment, we wrote off the intangible assets associated with this business. After this write-off, our only remaining intangible asset is certain software and technology acquired as part of the acquisition of Applied Energy Management, Inc. in June 2008. This software and technology intangible will become fully amortized during the second quarter of 2013.


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Interest Expense, Net. Net interest expense increased $252 thousand, to $304 thousand during the first quarter of 2013 when compared to $52 thousand during the first quarter of 2012. The components of interest expense for the three-month periods ended March 31, 2013 and 2012 are as follows (in thousands):

Three months ended March 31,                         2013    2012

Line of credit                                       $   3   $   5

Term note                                               50      54

Subordinated notes                                     191       -

Other                                                    -       1

Total contractural interest                            244      60

Amortiztion of deferred issuance costs                  13      17

Amortization of debt discount                           66       -

(Increase) decrease in value of interest rate swap      (5 )     -

Total interest expense                               $ 318   $  77

Total contractual interest and fees (the interest and fees on outstanding debt) increased $184 thousand, to $244 thousand during the first quarter of 2013, from $60 thousand during the first quarter of 2012. Interest expense associated with the subordinated notes which we issued in October 2012 was responsible for all of the increase in our interest expense relative to 2012. The interest on our term note declined $4 thousand dollars, due to reductions in the outstanding principal over the past year.

We have deferred certain costs associated with the issuance of the term loan, subordinated convertible notes and our line of credit. These costs are being amortized over the terms of the associated debt. We incurred $13 thousand and $17 thousand of amortization expense during three-month periods ended March 31, 2013 and 2012, respectively.

In December 2011, we entered into an interest rate swap agreement to fix the interest rate on $1.9 million of the $3.6 million original balance on the term note. This interest rate swap was not designated for hedge accounting under ASC 815, therefore we record changes in its fair value as non-operating interest income or expense with an offsetting entry to a swap asset or swap liability. We recorded income of $5 thousand during the first quarter of 2013 due to an increase in the fair-market value of this interest rate swap during the period. There was no change in the value of the swap during the first quarter of 2012.

Our interest income declined $11 thousand to $14 thousand during the first quarter of 2013, from $25 thousand during the same period in 2012. Almost all of the interest income during both periods was amortization of the discount on our long-term receivables. The decline in amortization was due to a reduction in our long-term receivables, which had historically been used by our C&I customers. We expect these balances to increase in the future due to increased use of extended payment terms by customers under some of our utility programs.


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Liquidity and Capital Resources

As of March 31, 2013, we had cash and cash equivalents of $2.9 million (including restricted cash of $500 thousand), largely unchanged from the balance as of December 31, 2012. Our debt obligations as of March 31, 2013 consisted of a term loan of $3.4 million used to fund a portion of the Zemel Road generating facility, and $6.2 million of subordinated convertible notes.

Our principal cash requirements are for operating expenses, debt service, the funding of accounts receivable, and capital expenditures. We have financed our operations since inception primarily through the sale of equity, as well as through various forms of secured debt.

Three months Ended March 31, 2013 Compared to Three months Ended March 31, 2012

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands):

Three months ended March 31,                            2013       2012

Net cash used in operating activities                 $ (1,581 ) $ (4,396 )
Net cash provided by (used in) investing activities      1,673       (233 )
Net cash (used in) provided by financing activities        (47 )       17

Net Decrease in Cash and Cash Equivalents             $     45   $ (4,612 )

Cash and Cash Equivalents, at beginning of period        2,392      8,290

Cash and Cash Equivalents, at end of period           $  2,437   $  3,678

Net unrestricted cash increased $45 thousand during the three-month period ended March 31, 2013 as compared to decreasing $4.6 million during the same period in 2012.

Operating Activities

Operating activities consumed cash of $1.6 million during the three-month period ended March 31, 2013 as compared to consuming cash of $4.4 million during the same period of 2012.


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Whether cash is consumed or generated by operating activities is a function of the profitability of our operations and changes in working capital. To get a better understanding of cash sources and uses, our management splits the cash used or provided by operating activities into two pieces: the cash consumed or generated by operating activities before changes in assets and liabilities; and the cash consumed or generated from changes in assets and liabilities. By splitting the cash used or provided by operating activities this way our management believes it is easier to understand how much of our operating cash flow is the result of the Company's current period cash earnings or loss and how much of our operating cash flow is due to changes in working capital. These two measures are calculated as follows (in thousands):

Three Months Ended March 31,                                   2013          2012

Net Loss                                                    $   (6,706 )  $   (4,188 )

Provision for bad debt                                               -            40
Share-based compensation                                           182           553
Depreciation and amortization                                      268           450
Amortization of deferred financing costs                            26            17
Amortization of original issue discount                             66             -
Issuance of stock in exchange for services received                  -            20
Loss on disposition of property and equipment                       13             -

Cash consumed by operating activities before changes in
assets and liabilities                                      $   (6,151 )  $   (3,108 )

Changes in assets and liabilities, net of business
acquisitions and dispositions:
Accounts receivable                                         $      575    $    9,918
Inventories                                                          -           (11 )
Costs and estimated earnings in excess of billings on
uncompleted contacts                                              (761 )        (750 )
Prepaid and other                                                   (5 )         183
Assets of discontinued operations                                1,252          (206 )
Accounts payable                                                 2,416        (6,810 )
Accrued expenses                                                   457        (1,607 )
Billings in excess of costs and estimated earnings on              388        (1,213 )
Other current liabilities                                         (227 )          (8 )
Liabilities of discontinued operations                             475          (784 )

Cash generated (consumed) from changes in assets and
liabilities                                                 $    4,570    $   (1,288 )


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The reconciliation to net cash used in operating activities as reported on our Consolidated Statement of Cash Flows is as follows (in thousands):

Three Months Ended March 31,                                   2013          2012

Cash consumed by operating activities before changes in
assets and liabilities                                      $   (6,151 )  $   (3,108 )

Cash generated (consumed) from changes in assets and
liabilities                                                      4,570        (1,288 )

Net cash used in operating activities                       $   (1,581 )  $   (4,396 )

The cash consumed by operating activities before changes in assets and liabilities increased $3.0 million, to $6.2 million, during the first quarter of 2013 as compared to consuming $3.1 million during the first quarter of 2012. This increase was result of the $1.3 million of expense incurred to restate our financial statements and respond to stockholder lawsuits and an increase in the cash loss from discontinued operations. After adjusting for the one-time costs associated with the restatement and lawsuits, the cash consumed by operating activities before changes in assets and liabilities increased by $1.8 million. We believe that the operating activities before changes in assets and liabilities will begin to generate cash during the second half of the year if our revenue increases as we expect it will.

Changes in assets and liabilities generated cash of approximately $4.6 million during the first quarter of 2013, compared to consuming $1.3 million during the first quarter of 2012. This improvement was primarily the result of an improvement in our working capital management during the period. We expect that the quarterly cash consumed by changes in assets and liabilities will increase from first quarter levels as business activity increases during the remainder of 2013.

Investing Activities

We generated $1.7 million of cash from investing activities during the first quarter of 2013, compared to using $233 thousand during the first quarter of 2012. During the first quarter of 2013, we sold the assets of our ESCO business, generating $1.9 million. This was partially offset by $187 thousand of property and equipment purchases, comprised mostly of software development costs related to continued investment of our IT platform for the utility business. During the first quarter of 2012 we used cash to purchase a new customer relationship management system, a human resources intranet and computers and furniture for new utility programs.

Financing Activities

During the first quarter of 2013 financing activities consumed cash of $47 thousand compared to generating $17 thousand during the year-earlier period. During the first quarter of 2013, we used $47 thousand for the scheduled principal payments on our debt, a decline of $16 thousand from the $63 thousand used for the same purpose during the first quarter of 2012. During the 2012 period we received $80 thousand from the sale of stock to our employees under our employee stock purchase plan.


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SOURCES OF LIQUIDITY

Our primary sources of liquidity are our available, unrestricted cash reserves.

Our ability to continue to expand the sales of our products and services will require the continued commitment of significant funds. The actual timing and amount of our future funding requirements will depend on many factors, including the amount, timing and profitability of future revenues, working capital requirements, the level and amount of product marketing and sales efforts, among other things.

We have raised a significant amount of capital since our formation through the issuance of shares of our common and preferred stock and notes, which has allowed us to continue to execute our business plan. Most of these funds have been consumed by operating activities, either to fund our losses or for working capital requirements.

We incurred a $31.8 million loss during 2012 and consumed $13.6 million of cash in operating activities during the 2012, as we dealt with the impact on the business of the announcement regarding our discovery of improper revenue recognition, the inability of our Asset Development business to secure the financing required to fund its projects and the start-up of five new utility programs. Late last year our management, in consultation with our Board of Directors, decided that we needed to shed businesses that we could not finance, narrow our focus to our most promising business and reduce overhead costs. Consistent with this strategy, we shut down the asset development business, sold the ESCO business and made significant reductions in remaining headcount.

Approximately 88% of our 2013 revenue is expected to be generated by our utility business, which has been our fastest growing business for the past three years. It is also a business in which we believe we are the market leader, in a market we believe has good prospects for future growth. The other remaining businesses will either be integrated into the utility business, if integration makes strategic sense, sold or operated until we have met all our obligations under our contracts and then shut down. We most likely will not resolve the future of these other businesses until sometime in 2014. Fortunately, they are each fairly autonomous and not expected to be a drain on cash.

We have experienced a marked improvement in cash flow as we have begun to implement this strategy. We expect continued improvements as new utility programs start to achieve profitability and restatement related costs decline. We believe that as a result of these changes, there is a chance we will achieve profitability on a consolidated basis before the end of 2013, though it is likely we will report a loss for full year 2013. We continue to closely monitor our cash position and are prepared to attempt to raise additional capital if it . . .

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