Orion Energy Systems, Inc. (OESX) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Orion Energy Systems Fourth Quarter Fiscal 2016 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 Fiscal 2016 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 to 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 Additionally, for anyone who is not able to listen to today's entire call, an archived version of this call will be available later this evening.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'll turn the call over to John. John?

Good afternoon, everybody. Today, we're 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 fiscal 2017. But 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 has led to having to push our call back to today. So for the fiscal '16 fourth quarter, we reported total revenues of $18.6 million and gross margins of $24.9 million (sic) [ 24.9% ]. We reported a net loss of $10.9 million or $0.39 per share. However, absent impairment charges of $6 million and a recognition of a loss contingency on associated expense of $1.8 million, which totaled $7.8 million, our loss would've 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 (sic) [ 23.7% ], and a net loss of $0.73 per share. And again, excluding 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. And in 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 fiscal '15. While revenues were slightly lower than last year, we made great progress improving our business model, especially margins. In fiscal 2016, we generated 71% of our total lighting product revenue from LED product sales compared to 48% in fiscal '15. 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 fiscal 2017, we are expecting to see these bottom line improvements materialize. To recap the year in terms of our 3 strategic priorities that we established last year for fiscal '16, 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 4 LED sales as high as 76%. This reflects 49% growth over fiscal '15, heavily fueled by our October launch and our new high bay high-performing, high-margin products. 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 have 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're 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. And 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. And 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 of 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, U.S. Postal Service, Department of Defense and the VA hospital network. We see strength in this sector and believe 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 manufacturing 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 product's top performance, ease of installation, customer experience, 5-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 fiscal '16 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 gen 2 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 4 months. And as we announced in recent news release, we are able to redesign a luminaire from concept to prototype in just 6 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 customer's demand for things like Power over Ethernet, smart city, smart buildings and the Internet of Things. As we see -- 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're committed to producing state-of-the-art industry-leading products that will drive market share going forward. And 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 fiscal 2016 to 23.7% versus an adjusted 15.2% in fiscal '15. 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 us -- with this, earlier this quarter, we announced steps to position the business to further success -- 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. So we entered into a sales contract for our 260,000 square foot manufacturing facility in Manitowoc, expected to close on -- close the transaction on June 30 of this year. As part of this transaction, we received a multiyear 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, and this not only gives us more flexibility on the downside but also more opportunities to scale more profitably on the upside. In fiscal 2017, we will benefit with lower freight cost 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, fiscal '16 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 built a stronger sales organization that has significantly broadened our addressable market. And we've delivered 5 consecutive quarters of significant year-over-year margin expansion and 3 quarters of sequential revenue growth. And we are within reach of reporting positive earnings and cash flow. So with that, I'll turn it over to Bill for a more detailed review 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%, and 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 a 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 fiscal 2015. While up sequentially, service revenue was down 73% year-over-year to $0.6 million in the fourth quarter of fiscal 2016 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 fiscal 2016, reflecting a 950 basis point improvement over the 15.4% gross margin reported in the fourth quarter of fiscal 2015. Gross margin was down sequentially from a recent high of 28.1% in the third quarter as we previously disclosed it would be, and that's largely as a result of mix. Absent certain lower margin forward business, the gross margin would have been about 26%. Notably, our LDR margin climbed to the highest level we've 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 a 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 3 months ended March 31, 2016, or 83% of revenue. These operating expenses included a noncash goodwill impairment charge of $4.4 million, a noncash impairment loss on the building asset being held for sale of $1.6 million and a recognition of a loss contingency and associated expenses of $1.8 million. Absent these $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, were a 3 -- for the 3 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 noncash and other items mentioned previously, our net loss would have been $3.1 million or $0.11 in the fourth quarter of fiscal 2016 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 fiscal 2016, 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 fiscal 2016 were $64 million, a 2.8% decrease compared to $65.9 million in the prior fiscal year. LED sales were up 48% in fiscal 2016 to $45.7 million compared to $30.8 million in fiscal 2015. LED sales comprised 71% of fiscal 2016 lighting product sales compared to 48% of lighting product sales in fiscal 2015. Gross margin was 23.7% for fiscal 2016 compared to negative 1.6% in the prior year, which included the impact of noncash impairment charges of approximately $12.1 million. The gross margin, excluding these charges, in fiscal 2015 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 fiscal 2015. Absent the $7.8 million in expenses discussed above, total operating expenses for fiscal 2016 would have been $28.1 million, a decrease of $2.7 million or 9% compared to fiscal 2015. As a percentage of revenue, operating expenses for fiscal 2016 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 fiscal 2015. We reported a net loss for fiscal 2016 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 fiscal 2016 $7.8 million of expenses previously discussed, any impairment charges taken in fiscal 2015, our net loss would have been $12.3 million or $0.45 per share in fiscal 2016, and $19.9 million or 89% -- $0.89 per share in fiscal 2015. Now turning to our backlog. Total backlog was $5.6 million for the fourth quarter of fiscal 2016, down from both the fourth quarter of fiscal 2015 backlog of $7.1 million and sequentially from the third quarter of fiscal 2016 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 fiscal 2016 at $0.1 million, which compares to a use of cash of $2.2 million during our prior year comparable period. The improvement was attributable to our intense focus on working capital management as well as improvement in our EBITDA. For fiscal year 2016, we used $3.4 million in cash flow from operations compared to $12.8 million in fiscal 2015, which is a $9.4 million improvement. With that, let me turn the call back to John.

Thank you, Bill. Look, we're 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 '16 in the face of a challenging macroeconomic backdrop. We're in a great position to drive growth in fiscal '17. 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 fiscal 2017, 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. So with that in mind, we'd like to offer the following guidance for fiscal 2017: 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. So with that, we thank you for your continued support, and we're happy to take your questions.

[Operator Instructions] Our first question comes from Steve Dyer with Craig-Hallum Capital.

Just initially want to dig in a little bit on the revenue guidance, $80 million. I know your backlog is down year-over-year and quarter-over-quarter maybe. What gives you sort of the confidence that that's an achievable number as you start the year?

Sure. So as you know, backlog -- I mean, this is a turns business, so backlog, other than some longer-term contracts, that's a smaller portion to total revenue, our backlog turns pretty quick. So the confidence comes in the momentum that we're seeing in our pipeline build, the success that we're seeing in the pivot into the agency sales channel that we made 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 6 months. I think that, along with some continued strength that we're seeing in some of the markets that I listed earlier in the call and having just a more solid sales leadership and management throughout the organization. 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 a 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, what have you. So 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 '17 to be similar where kind of the first 3 quarters are on a similar level and then March is a little bit better? Or anything different this year?

Yes, so I think it's 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 it's predominantly almost all of our sales LED. We still have some residual customers that are buying the fluorescent. Having a different market, historically, we were industrial and now we've got 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. My -- the way I would answer your question is that the historical seasonality that you've 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 4. So that normal -- that historical December seasonal bump, we're just not expecting that going forward. We're seeing much more of a gradual build throughout the year. Now also keep in mind that 12 months is a long time and there are shifts in our quarter, and you might see 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 tick up each quarter throughout the year, and then how should we think about operating expenses? Even excluding the kind of the one-timers, that number was a little bit more elevated this quarter. What's the kind of good run rate to use on an OpEx, whether it's as a percentage of revenue or just as an absolute number?

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

Yes, you're right. We're looking at $80 million. That's what we're forecasting. And gross margins, they get to 30% by the end of the year or earlier. And $7.5 million, roughly a quarter, could be a little bit less than that, I'm giving a more conservative number, and yes.

[Operator Instructions] Our next question comes from Craig Irwin with Roth Capital Partners.

Can you talk a little bit about the expected contribution from your reseller customers to your expected revenue growth in '17? And if you could maybe give us the '16 number for the overall percentage of revenue that 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? I mean, if you could frame out for us where this is going to support growth in '17.

Okay. Yes, your question around reseller. So our reseller business is really transferred into our distribution channel, so are you referring to our -- the distributors or are you referring to our...

Yes, distributors. I mean, the company's called them different things over the years, right?

Yes. The ESCO business, we really don't take that business direct anymore, and everything is now a distribution, a broad-line electrical distributor. So it's 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 that historically, about 30% of our revenues have been through our enterprise national account business. And today, that -- and those are Orion W-2 employees, the people that service sales people 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 are now -- we've exited that channel for the most part on a direct basis. We are now relying on our sales agents that are independent contractors, if 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 have last year without any additional headcount cost because that's all done through independent sales channels. And then, all of that business is routed through electrical distributors. So 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, but just routed through distribution.

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

Okay. So 102 resellers are now buying their product through several dozen electrical distributors. And so we've routed that business through the distribution channel.

Okay, I get it. I get it. The philosophy and that's important and I guess, important for investors, of course. So my next question was just wanted to dissect the sequential progression in gross margin. So 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 poster[ph] inefficiencies that were impacting the margins in this quarter or if there were many -- any onetime items that maybe we should pay attention to in there?

Craig, it's Bill. No, so we -- I did talk about Ford, so we didn't have that last quarter. And Ford is a lower margin product and so that's part of the mix. But I think, in general, it was just product mix. There were no onetime items and costs that would really impact that. So it's forward 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 in 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. So product mix and really just kind of moving through old inventory. So for the most part, that inventory has been flushed out. So we're in good shape going forward.

Sounds good. So then to talk about the going forward, right, the future, there's a distinct appetite on the part of investors to see Orion reach sustainable profitability. It sounds like that's something you really wanted to reach towards but market conditions have you a little bit cautious on the time line. Can you maybe describe for us what you see is the key items for getting to profitability? I guess, in there, if you include a revenue run rate, a quarterly revenue run rate necessary to reach breakeven on an EBITDA basis.

I'll let Bill answer the run rate question, but I think the 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 -- so we moved into LED, which is -- it was very disruptive for the company from a margin perspective, and we were able to have significant growth in that and we see continued growth in that going forward. So we believe that getting to 30%, and then to our longer-term 35% target, is clearly a prerequisite for profitability. And the second is the revenue growth. I think having some modest growth this year, now that we've got 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 product. Having the 179 lumen per watt product and the 130 lumen per watt product on the LDR, that -- those things are -- it's just fuel for the salespeople to get out and just move more business. So those 3 priorities are what I'm focusing on. Bill can comment then on the run rate question.

Yes. Craig, a couple things I think about. So we've had some new product launches since October and they just take some time to get recognition out there. So we have some very powerful products. we have the -- we had LIGHTFAIR. We were at LIGHTFAIR 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. Now 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 were 76% in the fourth quarter LED of all our lighting products, so that's continuing to grow. And those margins on those products are getting better. We have control of cost, we're getting a better control of cost. So I'm not sure how the seasonality is going to 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're seeing it in orders. I think it's -- you're going to see that continue to move up. So I know those are all sort of qualitative-type things, but that's what we see in the business. And as far as where we are -- you were talking about breakeven and those types of things. We have the margins we're targeting and where we think we are and what our run rate looks like for operating expenses. So I think that could give you a good picture of what we think that is.

Okay. Last question, if I may. So when I talk to investors out there, people that have been following the story for a number of years. There's a frustration because there's an understanding that you have very quick turnarounds, right? 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 2 weeks, in most cases, for people that have product in their hands. So what's the potential for Orion to maybe make an acquisition where you could more fully utilize your current manufacturing capacity, bringing 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're actively pursuing? Or is this something that's more constrained by the current financial status and the broader economic environment right now?

Sure. The -- so I wouldn't say we're actively pursuing it. What I will say is that we're always exploring and looking at options, and things come across my desk from time to time. But I think in the end, we're squarely focused on the priorities that I laid out, and that is to drive revenue from the product that we have, build the best product that gives a great economic story to the customer and increase revenue and profits and margins. So 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 capacity -- my utilization to the capacity that I need. And so it's not -- last year, a year before, when you're running at 20% utilized, you're always asking the question, well, 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. So we really don't have the constraints anymore of having to size our business for the assets that we're anchored with, it's just the opposite. We can now grow flexibly and -- on a more scalable basis. But I'm -- we're always looking for more product for the salespeople, but now that we've 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'd start to lose focus on being the best at the areas that we're in. And part of our strategic plan is where we're just being very, very focused on our core business, which we really know, and we truly know high bay, and that's really where we're going to stay. Now 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, 2 companies, 2 good companies together, have a better story, broader mix and leverage the business, sure, we're always looking for that and we're always open to that. But from -- but not to solve a product strategy. It's more so we look at that to solve a profitability or EBITDA strategy, shareholder return strategy.

Our next question comes from George Gaspar, private investor.

A couple of questions. One, 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 number?

George, this is Bill. So we had the 2 impairment that make up the $6 million, so you're 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 a $1.6 million charge related to that. The other charge was related to, we had a triggering event of market cap of the company drop below the book value. So in accounting parlance, that required us to take a look and see if we had -- was sort of an indication of impairment, we had to do testing. Pretty complex rules to follow, but we went through that and determined that the full amount of goodwill we had on our book is $4.4 million was -- it didn't have any value. So that was the other charge, if you will. As far as -- we do have a Harris trade name and that's intact as well as the rest of our assets.

Okay. And as we look ahead into the current fiscal year, and -- what do you see here? I mean, an impairment requirement this year, assuming that you can get close to the -- your margin indications that you're all talking about. Are you pretty there -- much there now in terms of what you have to write off in terms of operation?

Yes. I think we don't see any impairments next year based on all the facts and circumstances that we have right now. In the events that happened, we took all the impairments that are required. So based on what we see, we don't have any more.

Okay. All right. And then I'd 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 the year. And can you talk about the progress that you're making on a relative scale versus what was taking place in Manitowoc and maybe elsewhere, if that's also something you want to point out? And as you're looking forward at this point in time from R&D, are there applications that we might hear something about from the company going forward on things to do additionally with high bay install that you haven't divulged up to now?

Sure. So Chicago -- so our innovation, research and development is really split, actually, in Chicago as well as Jacksonville. So we have some people in both. But 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 got to keep lines running. They got to keep product moving out the door and addressing 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 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. So it's not just engineers, there's procurement people, there's finance people, there's optics people. So it's a different strategy by separating it and really isolating it from the production has freed them up to really rapidly develop product. And as I indicated in the high bay space, I don't know if people realize this but 4 months from concept to delivery is unheard of in the industry. You're lucky if you can get many of our peers 12 months, 16 months. So that innovation cycle at Orion is really what's leading to our competitive advantage. And while I'm not going to divulge the things that we haven't divulged yet, what I will say is the strategy around R&D is to constantly 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've already got that replacement product tested and on the shelf waiting to be released. So 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. And in terms of future innovation yet in -- there seems to be a lot moving forward in terms of lighting systems having some communication applications. Do you see that as a possibility for Orion?

Yes. Actually, today, all of our -- virtually all of our products can be shipped out of Orion with a variety of different communication tools, whether it's radio frequency, whether it's Bluetooth, ZigBee, all -- we have all 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 the application tools as well to control and manage those systems. So 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, so that 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 cable. That's a great application for renovations and new construction, even though that's a smaller part of our business, the retrofit, that's a great partnership, and I think that they're the leader in switchgear, and partnering up with Orion, I think, was a good move for them. There are other control systems out there that we will seamlessly integrate with. So I think we're very well equipped certainly in the high bay and in the office and in the area site lighting sector to accommodate really anything that's out there.

Great. And just in closing from my perspective, John. Just watching the tremendous transition within Orion in the last couple of years, more recently, maybe more of 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 as near the margin, the gross margin opportunities that you're talking about, it would seem like Orion is very much undervalued and it wasn't easy changing over to this LED operation in the broad coverage that you're accomplishing now. So hopefully, you can push that technology and 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 just anchors in the ground and a lot of massive change. We were so integrated with fluorescent technology, tooling, manufacturing operation. It's different for others that are contract manufacturing their product overseas, in Asia or whatever where they can just switch contract manufacturers, have a different product on the shelf and convert from fluorescent LED overnight. There's a lot of companies that have done that. And so it's 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 a -- some manufacturing, not all them that way, but many of them have been. But with what we were saddled with and what we've accomplished, many people underestimate what it actually took. But I will say this and given our stock price, now is not the time to be betting against us.

I'm showing no further questions. I'd like to turn the call back to John Scribante for closing remarks.

Great. Well, thank you. And again, we're very excited about what we got ahead of us. And the past is in the past, our business is vastly different than it had been in the past. We have tooled, reengineered our business model and we are just very well positioned right now. Still got a few things to achieve here this year to get margins up and see momentum in sales, but like I said, now is not the time to bet against us because we believe that we're in very good shape to really take a stronghold in the market. So I look forward to talking to you in a couple of months, and 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.