Orion Energy Systems Inc (OESX) 2011 Q1 法說會逐字稿

Good afternoon and thank you for standing by. Welcome to Orion Energy Systems First Quarter 2011 Earnings Conference Call. (Operator Instructions) I will now turn the call over to Victoria Sivrais, [FD]. Victoria, you may begin.

Thank you, JJ, and thank you for joining us for Orion Energy Systems Fiscal 2011 First Quarter conference Call. With me on the call today are Neal Verfuerth, Chairman and CEO, and Scott Jensen, CFO. Please note a copy of the presentation used on today's call is available in the Investor Relations section of Orion's website at www.OrionES.com.

Before we begin, I will read the Safe Harbor statement. Our remarks that follow including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified as such because the context of such statements will include words such as "believe", "anticipate," "expect" or words of similar import.

Similarly, statements that describe future plans, objectives or goals, are also forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. These risks include, among others, matters that we have described in our press release issued this afternoon and in our filings with the Securities and Exchange Commission.

Except as described in these filings, we disclaim any obligation to update these forward-looking statements which may not be updated until our next quarterly conference call, if at all.

Now, I'd like to turn the call over to Neal.

Thank you Victoria. Welcome, everybody to the Orion Energy Systems Fiscal 2011 First Quarter Conference Call. As you saw in the press release we issued this afternoon, we are pleased to report first quarter contracted revenues or bookings of $18.8 million, up 22% from the $15.4 million in the prior year's period.

First quarter contracted revenues or bookings included $14.7 million in cash deals, and $4.1 million in finance deals, from OTA and PPA technology contracts.

Given that there's been some confusion in the past around the term "bookings," I wanted to spend a few minutes redefining the term going forward as contracted revenues. To be clear, these are deals that are under contract. The system, the design engineering work has been completed. The product has been built and/or purchased and are typically producing megawatts and/or kilowatts to our customers, and reoccurring revenue to Orion within 90 to 180 days.

Given the execution of our strategy to increase the adoption of our supply agreements, the OTA and PPA, we truly believe that contracted revenues are a key performance metric that more accurately reflects the traction we continue to make with our customers.

During the quarter, we recorded a GAAP loss of $0.05. Scott will get into more detail in that momentarily, but again, given the increasing number of deals being completed through our financing solutions, we believe that providing a non-GAAP reconciliation for EPS more properly reflects the financial impact of these contracts, particularly as it relates to the costs associated with the customer acquisitions.

Thus, in combination with the reported of our bookings, or contracted revenues, going forward, we will also provide you a non-GAAP EPS number which should give you a more meaningful, accurate way of evaluating our current and future business performance. As such during the quarter, we reported a non-GAAP loss per share of $0.02.

However, on an annual basis, given our solid performance during the quarter as well as the increased activity we are experiencing in various stages of our pipeline including some sizeable deals, we are confident that Orion's technology will continue to excel in the marketplace, outperforming competitors time and time again in spite of the continued uncertainty in the general macroeconomic environment.

As such, we're reaffirming our Fiscal 2011 guidance of contracted revenues of $100 million to $110 million, GAAP revenues in the range of $78 million to $84 million, GAAP EPS in the range of $0.02 to $0.10, and non-GAAP EPS in the range of $0.25 to $0.33 per share.

Our suite of products deliver permanent distributed load reduction and renewable generation, allowing our customers to take themselves off the grid by reducing the [waste of] facilities during peak time hours and then supplementing that with renewable generating assets, positioning Orion as the leading power technology enterprise.

Our priority going forward is to build upon the success we've seen to date in expanding our partner channel and getting more feet on the street that are trained in selling and servicing our technology the Orion way. We continue to believe that this channel would be key to our long term success as allows us to scale our business more economically and effectively on an end market basis.

Our growing product offering, which as of the second quarter now includes an LED lighting platform, a demand response solution and a new metering application with our InteLite Wireless Controls, all complements our existing products, the integrated lighting solution, exterior lighting product and portable tank offering. And, finally, the continued adoption of our innovative finance solution.

Before I go into detail around these key growth initiatives, let me highlight a few drivers of this quarter's performance.

In the first quarter, we retrofitted nearly 37 million square feet, 258 facilities, bringing our total coverage to 923 million square feet across 5,870 facilities throughout North America. Today, we delivered on our promise, saving our customers a total of $935 million in energy costs while reducing their consumption by 12.1 billion kilowatt hours, as well as reducing their carbon dioxide emissions by 8.1 million tons since 2001.

Top line performance in the quarter was driven by increasing order volume as we ramped up our wholesale and partner-driven side of the business. In the first quarter, our partner network contributed 53% of our revenues. We continue to dedicate resources to building our wholesale network, providing our partners with the tools that are necessary to drive growth within their businesses.

On the national accounts side, we continue to make significant strides completing cycle projects for new and existing customers. During the first quarter, we added more than seven new national accounts from companies that maintain leading market positions across a wide range of industries, which represent a significant opportunity for future business. The new customer wins and continued traction with existing customers in the first quarter continue to demonstrate our market leadership as an energy expert, and further validates the compelling value proposition of the Orion solutions by saving customers significant dollars in energy costs and helping them achieve their sustainability goals.

Moving to growth initiatives, let me first touch on our expanding partner channel and how we're aligning the business to take advantage of the significant opportunity ahead for Orion. As you can see on Slide 6, we made significant progress in building our geographic footprint. As of today, we have elite partners strategically aligned and located across the country. Each partner is adding people within their networks that are trained in selling and servicing our technology the Orion way. In fact, our partners have doubled their feet on the street in just the last 12 months.

This channel will continue to bring significant value and enable us to build scale more economically and efficiently going forward. In addition, margins from this channel are in line with our retail channel, if not more favorable. We fully expect the total number of new partners to continue to grow over time, and are focused on enhancing the effectiveness of them through training programs at Orion University and teaching them to sell and integrate the technology the Orion way.

Second, with regard to growing our product portfolio, we continue to capitalize on the opportunity for our exterior lighting product, to expand into businesses that traditionally would not deploy our High Base technology indoors but have substantial savings opportunities in their parking lot areas. Moreover, we nearly doubled the number of installed outdoor fixtures in the first quarter. Our outdoor lighting solution, while still a small part of our overall revenues, represents an immense opportunity for Orion with an estimate 20 million outdated HID parking lot lights in North America.

As an example of our superior technology in this space, one of our large existing national accounts recently conducted a bake-off in the exterior product category, which included LED competitors and induction lighting. Not only did they praise our products, but recommended them for future implementation to all facilities managers throughout their footprint.

In addition to the exterior lighting technology market, we have the potential to capitalize on enormous opportunities as we build out our renewable product offering which includes our photovoltaic or PV technology, and our partnership with [Cylindra]. We saw three substantial new products get underway during the quarter -- a [rootable] technology offering is a logical extension of our core business, positioning us as a complete energy management company, and enables us to meet the demands of our customers.

I want to quickly highlight a few of our newest offerings that deliver permanent distributed load reductions under Orion's suite of services and products. Recently we announced a deal with PJM Interconnection, a regional transmission organization that coordinates the movement of wholesale power to deliver dispatchable demand response into the PJM system, which includes the Midwest and the Eastern United States. While this will only be a small portion of our overall business in the near term, our long term plan has always been to enter in demand response business over time. A primary competitive advantage that we take to the market with this offering is the fact that we did not have the significant customer acquisition costs as many of our competitors do, given our existing large install base, and our penetration into more than 5800 commercial industrial facilities across North America uniquely positions us as a trusted resource to supply the revenue and energy savings that deploying DR can deliver to our customers.

We've also been utilizing our InteLite controls to enable customers to better monitor their energy uses throughout the manufacturing process, creating better management tools and profiles of their energy consumption during peak and off peak hours down to each individual piece of equipment. As an example, we've had discussions with large industrial conglomerates in which energy spend was one of their top three expenses. They not only want to reduce that spend, they're also looking to meter this, because you can't manage what you can't measure.

So, giving the ability to actually measure the amount of energy used, kilowatt hours specifically, and put that into the cost of the component or overall finished good, is a powerful tool given the amount of money these companies are spending on energy.

As a market-leading technology, our advanced wireless metering allows our customers to effectively and efficiently track and monitor the total energy usage down to the final product. And finally, we launched our LED lighting platform designed to reduce energy consumption and cost and [freezer applications.] There has been an increasing interest in LED and after two years of R&D with collaboration or in collaboration with many of our LED component suppliers, our LED platform addresses the thermal and optical considerations that have challenged the widespread option of LED light sources. In fact, Orion's modular LED technology significantly outperformed best of breed industry peers at facilities using existing HID lighting.

Orion's LED lighting delivered more light while using less energy than the competitor's LED, and the HID lighting legacy product that was in the customer's facility. Ultimately operating at a higher rate of efficiency and result for our customers is better lighting and significantly reduced energy spend.

Lastly, let me touch on the momentum we see building for our innovative finance solution. More and more of our new and existing customers opt into our OTA and the PPA supply agreements, and to date the support of these agreements with the cash on our balance sheet. Recognizing that our financing solution is becoming the adoption of the option of choice for our customers, and will be a critical element in our business going forward, we've been pursuing several financing alternatives to provide funding of up to $100 million specifically to support our financing activities in the OTA and PPA contracts.

In addition, I think it's prudent to give a general overview and update of Orion Asset Management, which will begin to play a larger role in our financing products. A wholly-owned subsidiary of Orion Energy Systems, Orion Asset management works with utilities, grid operators, commercial industrial companies, to leverage financial, energy and environmental mechanisms.

Orion Asset Management provides program development consultation, ample market research for capacity sizing and load potential, educational programs for end users, customer acquisition strategies, and measurement verification. Orion Asset Management will continue to create effective customer financing products, has recently started to experience strong momentum to raise project financing.

Ultimately, Asset Management will have responsibility over financial products which includes OTA and PPA, and emissions monitorization of whatever form that may take. A compelling aspect for this is that unlike other people in this space, the emissions piece is a byproduct of what Orion Technology already delivers. Orion's future remains bright.

Our current pipeline is strong and robust. We have confidence in the significant opportunities that lay ahead for us. As I mentioned earlier, we have seen a strong uptake in the overall activity within our pipeline, from initial calls to customers to delivery of the ROI proposals and ultimately closing the sale. This increased activity is a reflection of our strategy to increase the number of feet on the street, as well as a more refined approach to managing the sales process across our channels with our new CRM tool.

We're excited for the opportunities that lay ahead for Orion. Going forward, we will continue to execute on our growth initiatives throughout Fiscal 2011, allowing the company to maintain and extend our market position while also providing no [early] returns for our shareholders.

With that, I'm going to turn over the call to Scott Jensen. Scott?

Thank you, Neal. Our reported revenues for the first quarter of Fiscal 2011 were $14.7 million compared to $12.6 for the first quarter of Fiscal 2010, representing an increase of 17%. This increase was driven by increased order volume in our partner and retail channels, on a slightly improving purchasing environment within the market. Our customers are re-engaging in discussions around energy savings opportunities. As they continue to shift their focus from evaluating the need for a facility to managing operating costs within those facilities.

As Neal mentioned, partner revenues for the quarter were 53% of our total revenue, up from 27% of total revenues in our most recent fourth quarter. The increase in contribution from our partner channel was driven by increased momentum gained in our partner expansion efforts, increased partner deal closings and improved market conditions.

Contracted revenues or bookings for the quarter were $18.8 million, including $2.2 million for Orion Throughput Agreements and $1.9 million for solar purchased power agreements. That compares to the $15.4 million in the prior first year quarter, which included $2.3 million for OTA contracts.

As a reminder on how we define contracted revenues, let me briefly review. Our reported contracted revenues have three components. First, our cash component is based upon customer purchase orders received in hand. Second our Orion Throughput Agreements are based upon the gross future revenue streams over the expected life of the agreement. We consider an OTA as contracted revenue upon the customer's execution of the contract agreement. In most cases, we expect that our OTA contracts will be generating monthly revenue within 90 days from the contract signing.

With regard to our solar power purchase agreements which are generally in excess of 10 years, we have defined PPA contracted revenues as the discounted value of revenues from energy generation over the life of the agreement, along with the discounted value of revenues anticipated for renewable energy credits for as long as the programs are currently defined to be in existence with the governing body. Again, our PPA contracts are contracts in hand, and our expectation is that they generally will begin to generate monthly revenue within 180 days from the contract signing.

During the first quarter of Fiscal 2011, we secured 26 new Orion throughput agreement megawatt supply contracts, representing gross income streams of $2.2 million. Revenue for these customer projects, once completed, will be recognized across the 24 to 60 month term of the agreements.

Service revenues accounted for 8.3% of our total revenues for the first quarter. We will continue to expect to see a decline in the ratio of service revenues to total revenues as the percentage of our partner product only sales increase.

Our blended gross margin for the first quarter was 35.7%, up from 27.7% in the comparable prior year period. Our gross profit dollars increased to $5.2 million for the first quarter of Fiscal 2011, compared to $3.5 million in the first quarter of Fiscal 2010. Our margin improvement was a result of the cost reduction initiatives implemented last year, which included headcount reductions and efficiency gains based upon the redesign of our production assembly practices.

G&A expenses for the first quarter were $2.9 million, or 20% of revenue, versus $3.2 million in the first quarter of Fiscal 2010 or 25% of revenues. Year-over-year decreases in G&A costs were a result of reduced compensation expenses due to headcount reductions and other discretionary spending decreases

Sales and marketing expenses for the first quarter of Fiscal 2011 were $3.6 million, or 24.4% of revenues, compared to $3.2 million or 25% of revenues in the prior year period.

As we have discussed on prior calls, we have continued to invest in revenue generating opportunities. The increase in expenses from the prior year was due to compensation costs resulting from head count additions and technical resources to support our controls and exterior product offerings, along with an increase in customer and channel marketing expenses which included sales collateral materials for our expanding partner network and participation in industry and customer trade events.

Our R&D expenses for the first quarter were $610,000 or 4.2% of revenues, up from $419,000 or 3.3% of revenues in the first quarter of Fiscal 2010. This increase in spending was due to head count additions in our product development and engineering group, and our continued investment in the development and refinement of new lighting product and renewable technologies.

Our loss from operations for the first quarter of Fiscal 2011 was $1.9 million, decreasing from loss from operations of $3.2 million in the prior year period. Our income tax benefit for the first quarter of Fiscal 2011 was $904,000 versus an income tax benefit of $393,000 in the prior year first quarter. Our annualized effective tax rate is estimated to be 46.2% based upon our current year projections for taxable income, the impact of permanent and temporary differences for tax purposes, which includes the impact of non-deductible stock option expense.

Our fully diluted loss per share for the first quarter of Fiscal 2011 was $0.05 on weighted average shares outstanding of 22.5 million shares. That compares to a fully diluted loss per share for the first quarter of Fiscal 2010 of $0.13 on a weighted average shares outstanding of 21.6 million shares.

As Neal highlighted, we believe that providing a non-GAAP reconciliation for earnings per share properly reflects the financial impact of Orion's OTA and PPA contracts, and the expectation for increasing finance contract volumes in future periods. Orion expenses all SG&A costs as incurred related to the customer sale and administrative costs of a financed contract, while deferring the revenue recognition from these contracts over the full life of the contract term including annual renewals. These up front costs reduce near term profitability as revenue and gross profit are recorded on a monthly basis under GAAP in future periods.

Non-GAAP earnings per share as presented restates the financial statement impact and the accretive earnings impact of discounting future operating contribution margin dollars from these financed contracts into the fiscal period where the contract was executed. We believe that providing investors with a non-GAAP earnings per share pro forma calculation in addition to our contracted revenue number will give you the most meaningful way of evaluating our current and future business performance. As indicated on slide 12 of the presentation, we've presented the pro forma impact of the discounted OTA and PPA contracted revenues from our first quarter of fiscal 2011. On a non-GAAP basis, these contracts would have provided an additional accretive $0.03 of earnings per share and reduced our loss per share from $0.05 to $0.02 per share during the quarter.

Looking at the full year for Fiscal 2011, and incorporating the midpoint of our annual guidance range and our expectation for 20% to 25% of our contracted revenues to come from financed contracts, on a non-GAAP basis the pro forma impact of the discounted earnings from these financed contracts provides an accretive $0.23 per share for Fiscal 2011 and provides a non-GAAP earnings range per share of $0.25 to $0.33 per share.

As of June 30th, we had 22.6 million common shares outstanding. In addition, we have warrants and options totaling 3.8 million shares outstanding.

Turning to the balance sheet, we finished the quarter with $17.2 million in cash and equivalents and short-term investments on hand compared to $24.4 million at March 31, 2010. We continue to maintain our investments and short term highly -liquid vehicles to provide for maximum liquidity. In June, we completed a new, $15 million credit facility with JPMorgan Chase Bank, which provides additional liquidity as the borrowing base collateral is secured by working capital assets, namely accounts receivable and inventory.

Related to our cash flows, cash used for operating activities was $4.6 million during the quarter, driven primarily by our net loss and our investment in inventory. Our inventories grew as we neared the completion of our initial buildout of our wireless product offering. These electronic components, which are manufactured overseas, have delivery lead times in excess of 18 months. Additionally, we were able to benefit from a pricing opportunity on a $1.5 million solar inventory purchase with the expectation that the customer orders will be received in our Fiscal 2011 second quarter.

We remain committed to continuing to invest in the growth of our financed equipment programs. In the first quarter, we used $1.7 million of cash to produce and install our energy management technologies and renewable technologies within our customer base.

Turning to our outlook for the full year, Fiscal 2011, we are reaffirming our previously-stated Fiscal 2011 guidance. As a reminder, our reason for moving to annual guidance was driven by two primary factors. First, as we have always noted, we view our business from a long-term perspective, and annual guidance is more reflective of that perspective. Second, with the improving economic environment, we believe that visibility has improved somewhat, giving us more confidence to provide an annual outlook.

Additionally, given the increase in contribution that we have witnessed from our OTA and PPA supply agreements, we believe that contracted revenue bookings are more reflective of how we view our performance. For Fiscal year 2011, we continue to anticipate total contracted revenues to be between $100 million and $110 million, and for the year we anticipate our finance fields to contribute to total contracted revenues in the range of 20% to 25%. As a result, we expect revenues for Fiscal Year 2011 to be in the range of $78 million to $84 million.

As we have stated in the past, given that our customer base has historically been focused on the commercial and industrial sector, our results tend to mimic CapEx budgeting, which leads to an increase in committed projects toward the end of the calendar year. As a result, as we move through our fiscal year 2011, we expect to see the greatest contribution to our bookings coming in our fiscal second and third quarters.

Earnings per share for Fiscal 2011 are estimated to be between $0.02 and $0.10 per diluted share, with the achievability of this range being highly dependent upon the percentage of revenue realized from OTA and PPA supply agreements.

On a non-GAAP basis, earnings per share for fiscal 2011 are estimated o be between $0.25 and $0.33 per diluted share.

With that, I would like to turn the call over to the operator for questions.

Thank you. (Operator Instructions) Our first question comes from Glenn Wortman, you may proceed.

Good evening, everyone.

Hey, Glenn.

Hey, Glenn.

Okay, a couple questions. First, on the cash position, I saw that that decreased $7 million. Where do you see that cash balance going as we move throughout the fiscal year?

That's a good question, Glenn. It certainly will be highly dependent upon the continued expected increase in our financed solutions and offerings to our customers, and as Neal mentioned, a key driver for our desire to go out and raise some debt capital to support that program. Our spend on inventory has stabilized as we near the completion of our initial purchases around our wireless product offering and the very lengthening lead times right now for any electronic components coming out of Asia. So, we're feeling more optimistic on our operating cash flow changes, and paying very close attention to being able to support our growth within the financed product sales.

Okay. I was just looking at the gross margin, it seems to jump around a lot. It showed significant sequential improvement this quarter on lower sales. Can you just help us understand that results and how should we think about that?

Yeah. I think as, as you recall on a quarterly basis, if you look back to mid last year for first, second and third quarters, as a result of the cost reduction projects and opportunities that we put into place to really help reduce head count and stabilize some of the premium costs that we've referred to in the past, which when you have a short lead time, delivery really could impact your business to get product to the customer upon your promise.

We're encouraged, Glenn, by the results. Again, on lower revenue product volumes than we were in excess of 36% product margin, and we believe that we have got the staffing levels and the process efficiency improvements in place to support that level of gross margin, and then improve upon it as revenue, volumes creased.

And then just what's the difference between the PF, PP, and the OTA agreements?

Neal Verfuerth It's a branding issue. Just you know as we've had this program in place for many years, and what's the best way to package it. And it started out that way actually, as a customer kind of stated in one of our earlier contracts, this is kind of like a power plant, and it just seemed to add clarity and just simplify it and allow for customers to get their arms on the concept more readily by going through the throughput agreement.

And there's actually a little more tie-in with the PPA.

Okay. And just kind of focusing on these OTA and OVPP agreements, do you think these are sales that you otherwise would not get you think they're cannibalizing otherwise more conventional sales?

Absolutely not. I think it's allowing customers-- again, they're the same thing. It's allowing customers to forego the typical CapEx budgeting requirement, and you know, get the technology deployed and just take advantage of the cash flows that they provide. And the other thing that we like about it is I think it helps us retain the margins that we're looking for here, because the customer's not buying anything, and you know, even inclined to try to get you down in price, because again, they're not buying anything. The key here is getting the system installed as quickly as possible, and start realizing the cash flow.

Okay, thank you for your time.

Thank you.

Thank you, Glenn.

Thank you.

Our next question comes from Brian Kremer, you may proceed.

Can you hear me?

Hello, Brian.

Hey, Brian.

Hi, hi. Yeah, continue on the OTA I guess and the PPA, in previous calls you would normally comment on "if we hadn't sold these through those financing mechanism, this is how much revenue we would have recognized." I'm assuming that number is slightly different than the number that shows up now in bookings, contracted revenues, versus the bookings versus the contracted revenues with OVPP and PPA. Is that -- or --?

Yeah, Brian, let me answer that question. It is slightly different, call it, on the revenue side. What we've tried to really accommodate now is, be consistent with the bookings or contracted revenues definition, and account for that in terms of deal contract volume. But think about the impact of the OVPP and the OTA, on a non-GAAP basis. Again, back to all of the costs related to sell that product, administer the contract, or going through our P&L and our operating lines, as incurred, but the revenue being deferred over a longer time. We felt that the real benefit of a non-GAAP exercise to that, or the way to look at it, was to discount the revenue opportunities of the contribution margin, backwards.

Okay. And now, towards the end of the call, you talked about 26 new throughput representing $2.6 million in revenue, over the next 24 to 62 months. Is the $4.1 million that you provide in the non-GAAP versus the $2.6 million, is that existing throughput contracts?

It's all new contracts, so it's $2.2 million of throughput contracts closed, or contracts signed within the quarter, and $1.9 million of power purchase agreements signed within the quarter.

Okay.

And we've taken those revenues and discounted them back, again if you think about it, almost treating them as if they were a cash sale on a discounted basis.

Got it. Okay. And what -- this year you're forecasting 20% to 25% of sales or of this contracted revenues from the financing part of your business. If we look back and for us and investors trying to compare apples to apples, and I think it'd be you know, I think the reason you're moving this direction obviously is because a larger percentage is moving into financing. Which could skew potentially you know, that -- the top line a little bit. Year over year, where do you think that number's moved up from if we look at last year, Fiscal Year 2010, on a percentage basis? When we look in the 20% to 25% this year, granted, it's on a larger top line as well.

Right. So if you just looked at the first quarter, Brian, with the 4.1 on the 18.8 that's 20%, almost 22%. Last year on an annualized basis related to our contracted revenues or bookings number, we were below, a little below 15%, I believe. I don't have that right in front of me, but it's continuing to grow and we expect that based upon the behaviors we're seeing and the customer's very strong interest in that as a solution for them, and in lieu of no capital budgets existing for some of our customers, it's a great way to get our product technologies adopted into an initial facility and set the stage for rollouts and expansion of new technologies.

Okay. And now, obviously you've talked in the past about still trying to decide internally strategically how you deal with these. You sold some already. And I assume that might be part of the strategy going forward. Could you talk a little bit about that as well as what happens at the end of the life of this contract? I've forgotten now, does -- ownership, is it transferred?

Yes, I'll start. So your second question, Brian, the asset ownership transfers to the customer.

Uh-hmm.

We're encouraged by the opportunity that once maybe, you know, once they've adopted the lighting technology through a retrofit and we reach the end of that first OTA contract, we now have the opportunity to go back and introduce wireless or outdoor or continue to almost extend that contract, with new technologies, and extend the term of the recurring revenue opportunity. And then your first question really from I think a strategic standpoint, you know, what are we thinking about in terms of near term and long term, as Neal mentioned we've engaged a party to go out and raise some money to help support these. Along the lines of really equipment finance, we would have that capital available to us, and we would deploy it on a project basis. And we think that that has a better earnings potential than selling these off at significant discounted rates. So, that would be our first choice, and our primary strategy right now, as we look at the opportunity. We still reserve the right to bundle these if we think it makes sense and the financials make sense.

Okay. And maybe the last one on this is, you obviously have a small number of these out right now, but as you go out over the next year or two, the number of pieces of equipment out there that you guys own under these programs, and you'll get to the end of life I guess, actually, it'll be a few more years out. Just a ways off, I'm just curious. Will you then, you know, I've seen this with other companies doing something similar. Will you take depreciation at that point? How does the depreciation work?

We're depreciating these assets over the life of the contract.

Equally?

Equally. We've capitalized, we've capitalized the asset on our books since we own it, and we are depreciating it over whatever the term of the contract is. So, if it's a 24 month contract, the depreciation is 24 months.

Okay. Okay. And then real quick, just to the -- this on the operating expenses, I know you said you've made some investments here. The -- well, G&A, it's bounced up. It bounced up last quarter, now it's back down. I mean, are these specific cuts, is it just one time items? How do we look at that going forward?

Yes, the fourth quarter as a point of reference, we had some significant one-time type charges in there related to the legal settlement and the accrual that we set aside for that, along with some severance costs. It has, we did it in the first quarter, have some staffing changes and some headcount reductions, and related to that, there was a small component of severance, about a half a penny of severance cost in the quarter.

I'm expecting, Brian, that that's going to settle it and come down a little bit from the first quarter results.

Okay. And then R&D obviously, it looks like that's not one where you'll -- you can see that kind of maintaining these levels? I don't expect you guys to be bringing that in too much from the sounds of things?

No, we actually went out and increased our staffing around R&D products, both the product development group and the engineering group, as a function of all of the new product offerings that we've got in place right now and the technology offerings that we have as it's expanded outside of energy efficiency and management solutions to renewable.

All right, great. Appreciate it.

Thanks, Brian.

Our next question comes from Jeff Osborne. You may proceed with your question.

Great, good evening. Most of my questions have been answered, just two quick ones. How should we be thinking about what type of interest rate you guys would be exposed to with the partners that you've hired on the debt side?

We're still -- we're targeting, Jeff, less than double digits.

Okay, and I just know -- I think for your GAAP account you had a 7.5% cost of capital. I wasn't sure if that would be kind of consistent with what you're seeing, or not.

Yes, it's in that range. It's in that range. We just want to make sure we know what our cost of capital embedded in the deal, and we want to protect profitability and make the best use of capital that would be coming in to help fund these.

I understand. And sort of along the same lines, it's just at the Board level, is there any type of limit in terms of exposure that the Company or the sales force is allowed to have to OVPP and PPA, that delta on contract revenue versus recording revenue, and how much capital you want to tie up? I guess what I'm asking is, is there a bit of a pause or a maximum limit that is in place until this financing is secured?

We have really the right to refuse on a one-off basis any deal for a wide variety of reasons. Obviously, the first almost required an approval, but also just to see that it makes sense, and we're very -- you know, proactive on the front end, just the business we're really soliciting that would fit into the profile for this. We've got a lot of lines in the water, Jeff, right now as it relates to raising capital. And we do, we still have the old traditional options and selling these deals out, as we've done in the past. But it's just the cost of selling these things out, given today's credit environment, it's expensive. So you know, that's always our fallback position.

I understand, thanks much.

Thank you, Jeff.

Thank you. I'm showing no further questions at this time.

Okay, thanks, operator.

You're welcome. Ladies and gentlemen, we thank you for participating in today's conference. This concludes the call, you may now disconnect. Have a good day.