Put the LIME in the Coconut

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by Debra Fiakas CFA

MATS.pngYou put the lime in the coconut and call the doctor woke him up,
I said Doctor! Is there nothing I can take,
I said Doctor! To relieve this bellyache…

-Baha Men

It is best to avoid corporate drama that involves unexpected resignations and unscheduled week-end board meetings.  At least that is my view.  However, the company soap operas can be entertaining, so I decided to tune into the Lime Energy, Inc. (LIME:  Nasdaq) saga .  Based in North Carolina, Lime provides a menu of energy-saving solutions to utilities and large-facility owners.  Lime’s product and service menu includes energy efficient lighting upgrades, efficient mechanical and electrical retrofits, water conservation, building weatherization and other solutions that are aimed at reducing energy bills.

Lime has been relatively successful  –  at least its revenue growth suggests it has been capturing market share.  Reported sales were $120.1 million in the year 2011, an impressive increase over $95.7 million in 2010 and $70.8 million in 2010.  The problem: revenue is now in question.  Last week the company filed a notice with the SEC that an internal investigation determined some revenue reported in the last two years were improperly recorded.  Some revenue was non-existent and other revenue was recorded too early.

The stock dropped by 50% in the days following the announcement and the shareholder lawsuits and law firm investigations were still piling up a week later.  It is a reasonable reaction  –  reduce exposure to loss when financial reports are fraudulent.

Six weeks earlier the chairman of Lime Energy’s board of directors1 had resigned, ostensibly due to health reason.  Coupled with the revenue issue, the resignation added a bit of intrigue to the story and a hint of more wrongdoing.  So even though the amount of bogus and inaccurate revenue amounts to $15 million or less  –  that is no more than 7% of total revenue in the two-year period  –  the corrected share price reflects a far more significant problem.    

It is a matter of trust.  Lime management should all be under suspicion, especially the chief financial officer1 who has a bird’s eye view on contracts, orders, billings and collections.  The energy alternative market place is supposed to be filled with the good guys who are fighting to save the world from global warming.  Instead we find liars who misrepresent sales.  That it is only a 7% fudge makes no difference.

LIME will remain in the Efficiency Group of our Mothers of Invention Index.  The revenue question will get cleared up.  Corrected financial statements will be filed.  Perhaps there will even be changes in the management team.  Then in all probability we will call the stock oversold and investors will have a chance to pick up a good company at a cheap price.  The equity market is a wonderful place!

1EDITOR’S NOTE: For a reason to think the damage may be limited, see Tom Konrad’s article on Lime Energy insiders’ stock trades.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.


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