The last year has been hard on Lime Energy (NASD:LIME Disclosure: I own this stock.) The company discovered problems with its internal reporting over a year ago, and the effort to restate the books and establish proper controls took much longer than anyone expected, in large part because the internal investigation uncovered additional problems as it proceeded.
While the company was in danger of delisting, creditors were reluctant to provide funding, and this led the company to sell its two most capital intensive businesses: its asset development business, and its ESCO business. The ESCO business required backing from surety partners with strong balance sheets willing to guarantee Lime’s work. The uncertainty around possible delisiting caused these partners to draw back, preventing Lime from executing on contracts it had won, and leading Lime to sell that business to PowerSecure (NASD:POWR).
Lime’s asset development business also required significant capital which was no longer available. Although Lime was able to identify opportunities, it was not able to execute on these opportunities without outside capital, and so Lime is winding this business down.
What is left is the company’s utility business, which provides turnkey energy efficiency programs to electric utilities, helping them reach small business customers. Such customers are often difficult for the utilities to reach, but many regulators nevertheless require that utilities offer energy efficiency programs to these customers.
Lime is the leader in this business, as measured by its success in exceeding contracted goals for energy savings. They recently won a national energy efficiency award from the Alliance to Save Energy (one of seven such awards for excellence in saving energy to companies and individuals.)
While Lime’s business is much smaller after a year of being starved of capital, that time forced management to take hard decisions. Those decision have created a much slimmed-down company focused on a capital-efficient niche where it has a true competitive advantage. We can also have a lot more confidence in Lime’s financial statements, now that much stronger controls are in place to ensure proper reporting.
Unfortunately, Lime is not yet quite ready to enter the heaven of profitability without one more trial.
Lime may need to raise more capital in another dilutive offering before it can fund its operations internally. While Lime’s utility business has had significant success in terms of recognition and acquiring new customers, there is a lag between the initiation of a new utility program and when it begins to generate cash for the company.
Lime used up $1.7 million of its liquidity in the first quarter. $1.3 million of which was for expenses related to the earnings restatements, but even so, the company was slowly eating through cash. $281 thousand was used in operations, and $47 thousand was paid out as interest.
This left $2.4 million in cash at the end of the first quarter. Significant accounting costs will have continued through the second quarter, but these will decline significantly now that the statements have been filed. Nevertheless, these costs are likely to use more than half of Lime’s remaining cash.
Will the utility business move to profitability quickly enough to avoid an additional fund raise. Management says “there is a chance we will achieve profitability on a consolidated basis” by the end of the year. There may be enough cash to get there, but the cushion is worryingly thin.
If Lime’s return to compliance with Nasdaq listing requirements allow it to fund its working capital requirements with bank debt, or cash flow from its business grows quickly, then the company should be able to achieve profitability without further diluting shareholders. The very real possibility that this won’t happen is why the stock fell from around $0.90 at the end of July to the low 60 cent range today.
If Lime is forced to raise funds by selling stock or convertible notes, expect the price to fall further. On the other hand, any sign that expenses are falling more quickly than anticipated, or that revenue is increasing should lead to a rally.
Lime Energy’s business is as slim as an ascetic after a year of fasting. The focus gained should serve the company well in the future, but the lack of fat leaves very little room for error in the coming months.
DISCLOSURE: Long LIME
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