Orion Energy Systems Inc (OESX) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Orion Energy Systems fourth-quarter FY16 and year-end earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Victoria Sivrais, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining Orion Energy Systems fourth-quarter FY16 and year-end earnings conference call.

Participating in today's call will be John Scribante, our Chief Executive Officer, located in our Tech Center in Wisconsin, and Bill Hull, our Chief Financial Officer, calling in from our Chicago office. John will open today's call by providing comments related to our quarterly results and business outlook. Bill will then discuss our financial results for the fourth quarter and full year in greater detail. John will then make some closing remarks, and we will open it up for questions.

The Company has made an accompanying slide presentation available on its website at www.orionlighting.com in the investor relations section. Additionally, for anyone who is not able to listen to today's entire call, an archived version of this call will be available later this evening. Please visit the investor relations section of Orion's corporate website to access the replay.

Before John begins his commentary, I would like to review Orion's Safe Harbor statement. This call is taking place on June 2, 2016.

Remarks that follow, including answers to questions, include statements that the Company believes to be forward-looking 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. Those risks include, among others, matters that the Company has described in its press release issued this afternoon, and in its filings with the Securities and Exchange Commission. Except as described in these filings, the Company disclaims any obligation to update these forward-looking statements, which may not be updated until the Company's next quarterly conference call, if at all.

With that, I will turn the call over to John. John?

Good afternoon, everybody. Today we are very excited to share with you some of the great things that we achieved during the quarter, as well as the year, and our optimistic outlook for FY17.

Before I get started, we just wanted to take a few minutes to explain why we had the short delay in our earnings release. Our audit simply took a bit longer to complete than expected. As you can see by our results, we had some very complex transactions at the end of the year that required much more work than we would normally have experienced, which led to having to push our call back to today.

So, for the FY16 fourth quarter, we reported total revenues of $18.6 million and gross margins of $24.9 million. We reported a net loss of $10.9 million, or $0.39 per share. However, absent impairment charges of $6 million, and the recognition of a loss contingency and associated expense of $1.8 million, which totaled $7.8 million, our loss would have been $3.1 million or $0.11 per share.

For the fiscal year, we reported total revenues of $67.6 million, gross margins of $23.7 million, and a net loss of $0.73 per share. Again, excluding the items noted above, our net loss for the full fiscal year would have been $12.3 million or $0.45 per share.

Importantly, our fourth-quarter net cash from operating activities nearly reached breakeven at negative $100,000. Our fiscal year net cash from operating activities improved by $9.4 million to a use of $3.4 million from a use of $12.8 million in FY15.

While revenues were slightly lower than last year, we made great progress improving our business model, especially margins. In FY16, we generated 71% of our total lighting product revenue from LED product sales compared to 48% in FY15. We also increased our full-year gross margins by more than 850 basis points to 23.7% from an adjusted 15.2%, which means that we generated $5 million, or 46% more gross profit dollars on roughly the same revenue as compared to last fiscal year. So, now, as we grow our sales in FY17, we are expecting to see these bottom-line improvements materialize.

To recap the year in terms of our three strategic priorities that we established last year, for FY16, let me briefly highlight our achievements. First, our LED sales. During the year, LED sales represented 71% of our total lighting product revenue, with quarter-four LED sales as high as 76%. This reflects 49% growth over FY15, heavily fueled by our October launch and our new high-bay, high-performing, high-margin product.

In conjunction with our growth in LED-based products, we grew our revenues with distribution sales. With more presence in national and regional distribution, our pipeline has doubled since December, and demand generation activity is at an all-time high. Entering this new fiscal year, we've built out our agency sales network, and have new national distribution relationships and regional distribution agreements in place that will accelerate sales for the coming fiscal year. We are very excited to go into the year with a full pipeline, and having essentially completed our agent and distribution geographical coverage.

We see solid movement in the market today. And while CapEx is still tight, many customers are moving faster on their decisions. There are a few areas of particular strength.

First, in retail -- we can ship fast, and our products are designed especially for quick installation during off hours when stores are closed. And as a result, we received a $2.4 million order recently from a global retailer, with the potential of much more to come from this customer, because we were the only company that could meet their specification and delivery requirements. Just recently we received orders for 54 locations of a new customer, a regional grocery chain, with several hundred more locations expected to come this year. We also continue to receive repeat orders for an existing big box retail store chain that we have discussed in previous calls.

Second, our federal government sector -- because our track record working with government agencies and compliance with the Buy American Act gives us a clear advantage, we continue to receive contracts for installations at agencies such as NASA, US Postal Service, Department of Defense, and the VA Hospital network. We see strength in the sector, and belief that it will have a material contribution to Orion's growth in this coming year.

Third, the automotive business -- Orion lists most every American-made auto company as its customer for their manufacture and distribution facilities, including Ford, General Motors, Chrysler and Tesla -- as well as Honda, Toyota and Volvo on the foreign side. We are a clear choice for auto manufacturers because of our performance, our significant installed base, and now the smart building technology available in all of our product lines.

The fourth segment we see strength is education and institution. Both of these markets are strong, and Orion's products provide unique attributes that make our products more viable than others. And now with security and asset tracking capabilities in our LDR lines, this market shows great growth potential.

And finally, industrial -- while the industrial sector continues to be challenging, we see projects starting to get funded now, and more opening up for later in the year. Industrial has been our legacy, and where Orion will see great growth in the near future.

As we've noted before, our products, top performance, ease of installation, customer experience, five-day ship times were the most commonly cited reasons given for why Orion was selected for these projects. This winning strategy is what makes Orion so potent in the marketplace.

Second strategic priority was innovation, which is the cornerstone of our corporate culture. As many of you know, we opened our innovation hub in Chicago during FY16, and have built a talented team to drive our product development efforts. During the fiscal year, we launched 32 LED families of products, encompassing more than 1,100 new SKUs, including the revolutionary Gen2 high-bay fixture line, which is the highest performing, most efficient high-bay portfolio in the market, delivering as much as 179 lumens per watt, which surpasses all other major brands by a wide margin.

Our method of rapid prototyping and rapid development allow us to go from concept to delivery in just four months. And as we announced in recent news release, we were able to redesign a luminaire from concept to prototype in just six working days, illustrating that our nimble and aggressive approach is a competitive advantage.

Over the past several months, we released a wide range of sensors and control options to meet our customers' demand for things like power over ethernet, smart city, smart buildings, and the Internet of Things, as these systems are gaining interest by our customers. Orion has a nice portfolio of smart city and smart building patents, and we are exploring options for commercializing and licensing these in the months ahead.

The technological advantages and commercial success of our products and services highlight the healthy returns that we are generating from our investment in innovation, and research and development, with many more exciting products to come. We are committed to producing state-of-the-art, industry-leading products that will drive market share going forward.

Finally, our third strategic priority -- driving margin improvement. We executed very well in this last year, as our gross margin expanded by nearly 850 basis points year over year in FY16 to 23.7% versus an adjusted 15.2% in FY15. This improvement reflects not only our efforts to drive sales in our higher-margin product categories, but also on the execution of cost rationalization and lean manufacturing initiatives that we implemented throughout the year.

Our capital allocation priorities remain squarely on funding those investments that deliver the strongest returns on invested capital. In keeping with this, earlier this quarter we announced steps to position the Business for further success by unlocking and monetizing the underlying asset value of some of our low-return real estate assets. As a Company poised for growth, we do not believe that we should allow our capital to be tied up in low-performing assets.

We entered into a sales contract for our 260,000 square foot manufacturing facility in Manitowoc, expected to close the transaction on June 30 of this year. As part of this transaction, we receive a multi-year lease for the space that we need, and a flexible structure for future business needs, while unlocking $2.5 million in cash to fund our growth. In addition, we leased out the third floor of our Manitowoc Technology Center office building earlier this year, which brings in annual cash to reduce our operating expense.

Our lean initiatives and strategic partnering with nearby fabrication companies have allowed us to consume much less manufacturing space. This not only gives us more flexibility on the downside, but also more opportunity to scale more profitably on the upside.

In FY17, we will benefit with lower freight costs, as we are opening a distribution center in Augusta, Georgia. This decision will reduce Orion's cost for serving our growing list of southeast customers by as much as 50%, and our last-mile delivery expense meaningfully by locating the inventory closer to the region of use.

So, in summary, FY16 was a year of great progress, as we performed well against our strategic priorities. These fundamental cornerstones are the prerequisites for profitable growth this coming year. We continue to launch state-of-the-art breakthrough products, our LED sales penetration is at record levels, we have built a stronger sales organization that has significantly broadened our addressable market, and we have delivered five consecutive quarters of significant year-over-year margin expansion and three quarters of sequential revenue growth. And we're within reach of reporting positive earnings and cash flow.

With that, I will turn it over to Bill for a more detailed view of the finances.

Thanks, John.

As John noted earlier, LED revenue as a percentage of lighting product sales during the fourth quarter grew to 76%. LED sales grew $3.1 million or 30% to a record $13.5 million. This compares to LED sales of $10.4 million or 61% of total lighting product revenue in the comparable period last year.

Our total revenue declined slightly year over year to $18.6 million. However, lighting product revenue grew 3% year over year to $17.7 million, which compares to $17.3 million in the fourth quarter of FY15. While up sequentially, service revenue was down 73% year over year to $0.6 million in the fourth quarter of FY16, compared to $2 million, and this is due to unusually high service revenue in the year-ago period.

Total gross margin was 24.9% for the fourth quarter of FY16, reflecting a 950 basis point improvement over the 15.4% gross margin reported in the fourth quarter of FY15. Gross margin was down sequentially from a recent high of 28.1% in the third quarter, as we previously disclosed it would be. That is largely as a result of mix. Absent certain lower-margin [Ford] business, gross margin would have been about 26%.

Notably, our LDR margin climbed to the highest level we have realized since product launch in 2014, and well above our projections laid out in February 2015. Our high-bay LED margin surged to a new record high as well.

The year-over-year improvement resulted in a 55% improvement in gross profit dollars, or $4.6 million compared to $3 million in the prior-year period, reflecting $1.6 million more gross profit dollars on slightly less revenue. This reflects both the shift in our mix toward higher-margin LED high-bay products, as well as the margin expansion initiatives we have implemented over the past several quarters.

Total operating expenses were $15.4 million for the three months ended March 31, 2016, or 83% of revenue. These operating expenses included a non-cash goodwill impairment charge of $4.4 million, a non-cash impairment loss on a building asset being held for sale of $1.6 million, and the recognition of a loss contingency and associated expenses of $1.8 million.

Absent the $7.8 million in expenses, our operating expenses would have been $7.6 million, comparable with the prior period. As a percentage of revenue, operating expenses, excluding the above items, for the three months ended March 31, 2016, would have been 41%, consistent with the comparable period last year.

We reported a net loss of $10.9 million, or $0.39 per share, in the fourth quarter of 2016, compared to a net loss of $4.7 million or $0.19 in the prior-year period. Absent the $7.8 million of non-cash and other items mentioned previously, our net loss would have been $3.1 million or $0.11 in the fourth quarter of FY16, compared to a loss per share of $0.19 in the prior year period.

Now, turning to the financial results for the full year, total revenue was $67.6 million for FY16, a decrease of $4.6 million or 6.3% from $72.2 million in the prior fiscal year. This is largely due to the impact from the softening macroeconomic environment in the back half.

Total lighting product sales for FY16 were $64 million, a 2.8% decrease compared to $65.9 million in the prior fiscal year. LED sales were up 48% in FY16 to $45.7 million compared to $30.8 million in FY15. LED sales comprised 71% of FY16 lighting product sales, compared to 48% of lighting product sales in FY15.

Gross margin was 23.7% for FY16, compared to negative 1.6% in the prior year, which included the impact of non-cash impairment charges of approximately $12.1 million. The gross margin excluding these charges in FY15 was 15.2%. The 850-basis-point improvement over the adjusted 2015 gross margin stemmed from our ongoing product reduction program and lean manufacturing initiatives.

Total operating expenses for 2016 were $35.9 million compared to $30.8 million in FY15. Absent the $7.8 million in expenses discussed above, total operating expenses for FY16 would have been $28.1 million, a decrease of $2.7 million or 9% compared to FY15. As a percentage of revenue, operating expenses for FY16 were 53.1%; however, excluding the $7.8 million we just previously discussed, operating expenses would have been 42%, which compares to 42.7% in FY15.

We reported a net loss for FY16 of $20.1 million or $0.73 per share, compared to a net loss of $32.1 million or $1.43 per share in the prior year. Absent the FY16 $7.8 million of expenses previously discussed, and the impairment charges taken in FY15, our net loss would have been $12.3 million or $0.45 per share in FY16 and $19.9 million or $0.89 per share in FY15.

Now, turning to our backlog, total backlog was $5.6 million for the fourth quarter of FY16, down from both the fourth quarter of FY15 backlog of $7.1 million and sequentially from the third quarter of FY16 of $7.5 million. The decrease was a result of the recognition of a large revenue stream from a large automotive manufacturer customer. Excluding these contracts, our total backlog increased by $1.5 million year over year and $1.1 million sequentially. This increase was driven by additional national account customers, including several new local and federal government agencies.

Now speaking to the balance sheet, we ended the quarter with $15.5 million in cash, which compares to $20 million as of March 31, 2015, and $17.5 million as of December 31, 2015. We were essentially at breakeven in cash used by operating activities during the fourth quarter of FY16 at $0.1 million, which compares to a use of cash of $2.2 million during the prior-year comparable period. The improvement was attributable to our intense focus on working capital management, as well as improvement in our EBITDA. For FY16, we used $3.4 million in cash flow from operations, compared to $12.8 million in FY15, which is a $9.4 million improvement.

With that, let me turn the call back to John.

Thank you, Bill.

We are very excited about the sales opportunities that we have ahead of us, and with the financial and operating results that the Orion team delivered in 2016 in the face of a challenging macroeconomic backdrop, we're in a great position to drive growth in FY17. Our market is really starting to open up, and selling activity increasing, and our pipeline is expanding, and we expect to see our progress continue as we move through the year.

In FY17, our priorities are simple: grow revenue, remain the leader in product performance, and make considerable progress towards our long-term goal of 35% gross margins. With that in mind, we would like to offer the following guidance for FY17.

First, we expect to generate $80 million in revenue, or better. Second, gross margin expansion throughout the year leading to just over 30% by the end of fiscal Q4. And third, we expect EPS and EBITDA to continue to trend positively.

So, to sum up, our long-term outlook remains very bright. We are gaining strength and making progress in every aspect of this Business, each and every quarter. We are committed to delivering improved financial performance and achieving operational excellence, and driving shareholder value for many years to come.

With that, we thank you for your continued support, and we are happy to take your questions.

(Operator Instructions)

Steve Dyer, Craig-Hallum Capital.

Good afternoon.

Good afternoon, Steve.

Hi there. Just initially, I want to dig in a little bit on the revenue guidance. You know $80 million, I know your backlog is down year over year and quarter over quarter -- what gives you the confidence that is an achievable number as you start the year?

Sure. You know, as you know, backlog -- this is a turns business. Backlog, other than some longer-term contracts, it's a smaller portion to total revenue. Our backlog turns pretty quick.

The confidence comes in the momentum that we're seeing in our pipeline build, the success we are seeing in the pivot into the agency sales channel that we made in the middle of last year. And the fact that our product, which our primary product -- high-bay product -- which was launched in October, has now been fully in the marketplace for more than six months. I think that, along with some continued strength that we are seeing and some other markets I listed earlier in the call, and having just a more solid sales leadership and management throughout the organization.

You know the product launch that we did in October was a significant launch. It was a material launch in the industry. It has woken up a lot of our customers, our resale customers as well as end-user customers, recognizing that now with the much higher performance, it has opened up a market that historically had not been there because the returns were much longer from a payback perspective, or what have you.

The higher performance leads to shorter paybacks and more interest in doing projects. And I think just generally having our presence in the sales channel now in our newly -- on the channel side -- much more presence there, more depth, has allowed us to build pipeline.

Okay. And then as you look at the seasonality of the business this year, I think was a little bit different than previous years. Do you expect 2017 to be similar, where the first three quarters are in a similar level and then March is a little bit better -- or anything different this year?

Yes, so, I think is somewhat dangerous to look into our past to try and predict the future, because today we are a much different business than we ever had been. Now, with predominantly all of our sales LED, we still have some residual customers that are buying fluorescent. Having a different market, historically we were industrial, now we have a much broader market through retail and institution and government.

And then finally, just a sales channel that is more conducive to flow business or repeat small order consistent flow business as well as new construction, in addition to our industrial project business. The way I would answer your question is that the historical seasonality that you have seen in the past is not necessarily going to continue. And what I would expect is, other than a slight ratchet down in Q1, a consistent quarter over quarter sequential build throughout the year, ending with Q4 being the stronger of the four.

That normal -- that historical December seasonal bump, we're just not expecting that going forward. We're seeing much more gradual build throughout the year. Also keep in mind that 12 months is a long time and there are shifts in the quarter. You might see a little -- it won't be perfectly smooth throughout the year. But I expect a much more gradual build with a slight ratchet down in Q1.

Okay. Got it. And then as it relates to profitability, it sounds like you expect gross margin to kind of pick up each quarter throughout the year? And how should we think about operating expenses? Even excluding the one timers, that number was a little elevated this quarter. What is kind of a good run rate to use on an [outback] whether its as a percentage of revenue or just an absolute number?

This is Bill. I would think that about $7.5 million per quarter would be a good run rate. Plus or minus a little bit.

So that looks like you might not get quite EBITDA profitable this year, is that kind of what your model looks like?

Yes, I can't necessarily answer that question.

Well, you take the $80 million and you take your gross margin guidance, you take your operating margin guidance, things get better but it looks like you won't quite get there. I just want to make sure I'm thinking about things correctly.

Yes, you're right. We are looking at $80 million, that's what we are forecasting. And gross margins get to 30% by the end of the year growth there. And $7.5 million roughly a quarter, it could be a little less than that, I am giving you a conservative number. Yes.

Okay. All right. Thank you.

(Operator Instructions)

Craig Irwin, Roth Capital Partners.

Good evening and thank you for taking my question. Can you talk a little bit about the expected contribution from your reseller customers to your expected revenue growth in 2017? And if you could give us the 2016 number for the overall percentage of revenue they contributed?

And can you maybe talk broadly about what gives you confidence in this network, the strength of this network? You talked about that in your prepared remarks, but is this an increase in headcount that we should look at? Is this a more mature network that we should look at? If you could frame out for us where this is going to support growth in 2017?

Okay. Your question around resellers -- our reseller business is really transferred into our distribution channel. So are you referring to our -- the distributors or are you referring --

Yes, the distributors. The Company's called them different things over the years, right?

The ESCO business, we don't take that business direct anymore and everything now is a distribution, a broad line electrical distributor. There is a bit of a different customer base. I think the question with regards to where that's been historically -- I think you could look at it this way, and that is historically about 30% of our revenues have been through our enterprise national account business.

And today -- and those are Orion W-2 employees, the people that serve as salespeople in that channel -- and we expect that as a percent of revenue to remain pretty consistent going forward. The nature of that business, though, is more and more of those transactions are being routed through distributors, through electrical distributors. As opposed to that business being taken direct even though our salespeople are selling to those same customers.

On the channel side, which used to be our reseller network or ESCOs, we have now exited that channel for the most part on a direct basis. We are now relying on our sales agents that are independent contractors, there's not a headcount add by adding that. And if you tally that group up today, we have about 300 more people on the street selling or representing Orion products than we had last year.

Without any additional headcount cost because that is all done through independent sales channels. And then all of that business is routed through electrical distributors. Our distribution business may represent 85%, 80% of our sales going forward, even though many of that sale was generated through our enterprise or national account business, just routed through distribution.

Thank you for that. So then, to compare directly to the 102 external distributors or resellers, what you would like to call them, what would you say the count is on the number of customers rather than headcount today versus last year?

Okay, so, 102 resellers are now buying their products through several dozen electrical distributors and so we have routed that business through the distribution channel.

Okay, I get it. It's the velocity and that's important. And I guess important for investors. Of course.

My next question was, I just wanted to dissect the sequential progression in gross margins. If we look at your product gross profit, even though you had record LED revenue and obviously, the benefit of your ISON launch starting to taper in, we did see the margins dip sequentially 28.1% to 24.3%. Can you maybe describe whether or not there were specific launch posture inefficiencies that were impacting the margins in this quarter and if there were many -- any one-time items that maybe we should pay attention to in there?

Craig, this is Bill. I did talk about Ford, so we didn't have that last quarter. Ford, you know is a lower margin product. That is part of the mix. I think in general it was just product mix, there were no one-time items in costs that would really impact that. Ford, product mix --

And I think another thing is, there was also some transition of older product that moved through the quarter too, as we exhausted inventories. So, even though the new product is at a higher margin, we had some sales where we exhausted some older inventory to government agencies and some, on the LDR line. And so, the lower margin product that we still had in inventory, even though we had a newer higher margin product, we were able to use that product in some projects that had a spec that would allow for that.

Okay.

Product mix and moving through old inventory. For the most part that inventory has been flushed out. We are in good shape going forward.

Sounds good. So then to talk about the going forward, right -- the future. There is a distinct appetite on the part of investors to see Orion reach sustainable profitability.

It sounds like that is something you really want to reach towards but market conditions have you a little bit cautious on the timeline? Can you maybe describe for us what you see as the key items for getting to profitability? In there, if you could include a revenue run rate -- a quarterly revenue run rate necessary to reach break even on an EBITDA basis.

I will let Bill answer the run rate question. But I think priorities that I laid out that we're focused on this year are the things that are necessary. Increasing our gross margins, we've made -- we moved into LED, which was very disruptive for the Company from a larger perspective.

We were able to have significant growth in that and we see continued growth in that going forward. We believe that getting to 30% and then to our longer-term 35% target is clearly a prerequisite for profitability. And second is the revenue growth. I think you know, having some modest growth this year, now that we have the business model set up to where incremental dollars actually will drop bottom-line results, that -- our focus on executing sales is certainly there.

And then the third thing is the products. Having the 179 lumen per watt product and the 130 lumen per watt product on the LDR -- those things are just fuel for the salespeople to get out and move more business. Those three priorities are what I am focusing on. Bill can comment on the run rate question.

Craig, a couple of things I think about. We have had some new product launches since October. They take some time to get recognition out there. We have some very powerful products.

We had Light Fair, we were at Light Fair a month or so ago, and we had a booth and we had a lot of our new products in there. There was a lot of excitement about there. That obviously has to translate into revenues, but we had a lot of interest in our products.

And these are LED products, as you know, we're 76% in the fourth quarter, LED of all our lighting products. That is continuing to grow. Those margins on those products are getting better. We have controlled costs, we're getting better control of costs so, I'm not sure how seasonality will shake out this year, with some of the changes that are going on, but we're getting interest from customers as John talked about earlier.

We're seeing that happen, we are seeing it in orders. I think you're going to see that continue to move up. So I know those are all sort of qualitative type of things but that's what we see in the business.

And as far as where we are, you're talking about breakeven and those types of things; you have the margins we are targeting and where we think we are; and what our run rate looks like for operating expenses. I think that can give you a good picture of where we think that is.

Okay. Last question, if I may. When I talked to investors out there, people that have been following the story for a number of years, there is a frustration because there's an understanding that you have very quick turnarounds, the ability to deliver product rapidly to customers in the market while a number of your competitors have long lead times -- 16, 20, 30 weeks versus just two weeks in most cases for people to have product in their hands.

What is the potential for Orion to maybe make an acquisition where you can more fully utilize your current manufacturing capacity? Bring in a portfolio of products that would be a match for your existing customer base and benefit the financial profile of your manufacturing facility? And give your sales force a little bit more to work with and allow them to have a little bit more leverage? And is this something you are actively pursuing? Or is this something that is more constrained by the current financials status and the broader economic environment right now?

Sure. I wouldn't say we are actively pursuing it. What I will say is we are always exploring and looking at options and things come across my desk from time to time.

I think in the end we're squarely focused on the priorities I laid out and that is to drive revenue from product that we have, build the best product that gives a great economic story to the customer, and increase revenue and profits and margins. In terms of our manufacturing -- one of the reasons why we exited out of owning the manufacturing is that it gives us the ability now to flex up and flex down. So right now I don't have capacity utilization issue because I can match my utilization to the capacity that I need.

And so it's not -- last year or the year before when you're running at 20% utilized, you are always asking the question, how do I fill the plant? How do I get more out of it? How do I get a better return on the asset? This way we've converted that to cash to now invest in 20%, 30% return on investment projects instead of real estate.

We don't have the constraints anymore of having to size our business for the assets that we're anchored with. It is just the opposite. We can now grow flexibly and on a more scalable basis.

We are always looking for more product for the salespeople, but now that we have moved into the sales agency distribution channel, we really don't have the problem of mix anymore. Because the salespeople can now draw on the highest performing high bay, and then go get the highest performing bollard light or the highest performing architectural sconce from some other company; and that independent agent can now package together the best of the best and bring it to market. If Orion was to diversify, we would start to lose focus on being the best in the areas that we are in.

Part of our strategic plan is where we are being very focused on our core business, which we really know and we truly know high bay and that's really where we are going to stay. That doesn't say that if the right strategic partner came along, and there was a great story that we could blend a couple of companies, two good companies together, have a better story, broader mix and leverage the business -- sure, we are always looking for that and we're always open to that. But not to solve a product strategy. It is more so, we would look at that to solve profitability or EBITDA strategy. Shareholder return strategy.

Thank you again for taking my questions.

George Gaspar, Private Investor.

Yes, good afternoon. First, a couple of questions. One, on the impairment charges, could you detail a little bit what all was -- I assume that much of that was because of the sale of the facility in Manitowoc? Were there impairment charges taken for reducing the carrying value of Harris, for example in that overall numbers?

This is Bill, we had the two impairments that make up the $6 million. You are correct about the building. So as we classify that as an asset held for sale, based on the purchase agreement we signed, it was about $1.6 million charge related to that.

The other charge was related to a triggering event, market cap of the Company dropped below the book value, so in accounting parlance that required us to take a look and see if we had -- it was an indication of impairment and we had to do testing. Pretty complex rules to follow, but we went through that and determined that the whole amount of goodwill we had on our books, $4.4 million, did not have any value. That was the other charge if you will.

As far as, we do have a Harris trade name, that is intact. As well as the rest of our assets.

Okay, and as we look ahead into the current fiscal year, what do you see here on impairment requirements this year? Assuming that you can get close to the [year] margin indications that you are all talking about. Are you pretty much there now, in terms of what you have to write off in terms of operations?

Yes, we don't see any impairments next year based on all the facts and circumstances we have right now and the events that happened. We took all of the impairments that are required.

I see.

Based on what we see, we don't have any more.

Okay. All right. And then I would like to delve into R&D. You all have been shifted into the Chicago situation for your R&D impact, for I guess, the better part of at least a year.

Can you talk about the progress you are making on a relative to scale versus what was taking place in Manitowoc and maybe elsewhere, if that's also something you want to point out? And as you are looking forward at this point in time, from R&D, are there applications that we might hear something about from the Company going forward? Things to do additionally with high bay install that you have not divulged up to now?

Sure. Our innovation research and development is really split, actually in Chicago as well as Jacksonville. So we have some people in both. The critical element is that we separated it from Manitowoc because what was happening is we were mixing innovation with engineering -- the manufacturing engineering.

And when that occurs, the manufacturing engineers, they have to keep lines running, they have to keep product moving out the door, addressing additional issues on the production floor. And it was stealing time away from the critical thinking and the critical innovation that needed to take place. So by separating that from the plant, we now have plant engineering, which all they do is handle the production lines.

And then the innovation research and development, which is which is split in Chicago and in Jacksonville, where we have a team of people that make up, really, a unit that entails a whole mix of skill sets and a mix of disciplines. It's not just engineers. There are procurement people. There are finance people. There are optics people. It is a different strategy by separating it and really isolating it from production, has freed them up to really rapidly develop product.

As I indicated in the high bay space, I don't know if people realize this, but four months from concept to delivery is unheard of in the industry. You're lucky if you can get from many of our peers 12 months, 16 months. That innovation cycle at Orion is really what's leading to our competitive advantage.

While I am not going to divulge things that we have not divulged yet, what I will say, is the strategy around R&D is to constantly to be obsoleting the product that we have on the marketplace. So that you can expect in the event that Orion would have a competitor get close to or surpass the performance that we have, that we have already got that replacement product tested and on the shelf waiting to be released. That strategy is one that is going to continue to allow us to maintain that premier spot in the high bay space.

Okay. All right. In terms of future innovation, there seems to be a lot moving forward in terms of lighting systems having some communications applications, do you see that as a possibility for Orion?

Actually today, virtually all of our products can be shipped out of Orion with a variety of different communication tools -- whether it is radio frequency, whether its Bluetooth, Zigbee -- we have all of the sensors and control systems capable for shipping that product to the needs of the customer. And in cases where there are common applications we also have all of the application tools as well to control and manage those systems. We've built an open network of controls and communication systems that now will interface with Lutron and other name brands that you would recognize.

We just have a very easy integration project, no matter what the customer need might be. That's a continuous development piece for Orion. We've got a partnership with Cisco Systems as their ecosystem partner for retrofit.

That allows Orion to power its light fixtures over ethernet network cables. That's a great application for renovations and new construction even though that's a smaller part of our business. For retrofit, it's a great partnership and I think they are the leader in switchgear and partnering up with Orion was a good move for them.

There are other control systems out there that we will seamlessly integrate with. I think we're very well-equipped and certainly in the high-bay and in the office and in the area of site lighting sector to accommodate really anything that is out there.

Good work and just in closing from my perspective, John, just watching the tremendous transition within Orion in the last couple of years, and more recently maybe more the last year, and the required financial changes that have come about, has obviously negatively impacted the stock performance greatly.

Yet, I think looking ahead, if you can reach anywhere near the gross margin opportunities that you're talking about, it would seem like Orion is very much undervalued and it was not easy changing over to this LED operation in the broad coverage that you are accomplishing now. Hopefully you can push that technology in your R&D forward and really take advantage of the marketplace and get this Company really back on track.

Yes. I would say, we had a Company that was in serious trouble. That had a lot of -- a lot of anchors in the ground and a lot of massive change. We were so integrated with fluorescent technology, tooling, manufacturing operations. It is different for others that are manufacturers -- contract manufacturing their product overseas in Asia or whatever where they can switch contract manufacturers have a different product on the shelf and convert from fluorescent to LED overnight.

There is a lot of companies that have done that. It is a bit of a false comparison to compare Orion and our transition to other lighting companies and their transition, when all they have to do is shift the manufacturing. Not all of them are that way but many of them have been.

But what with what we were saddled with, and what we have accomplished, many people underestimate what it actually took. But I will say this, given our stock price, now is not the time to be betting against us.

Right. All right. Thank you kindly.

I am showing no further questions. I would like to turn the call back to John Scribante for closing remarks.

Great, well thank you. Again, we are very excited about what we have ahead of us. The past is in the past, our business is vastly different than it had been in the past.

We have retooled, re-engineered our business model and we are just very well positioned right now. We still got a few things to achieve here this year to get margins up and see momentum in the sales. But like I said, now is not the time to bet against us because we believe that we are in very good shape to really take a strong hold in the market.

I look forward to talking with you in a couple of months. Have a good day. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.