Orion Energy Systems, Inc. (OESX) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Orion Energy’s First Quarter Fiscal 2018 Conference Call. At this time, all participants are in a listen-only model. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. As a reminder, today’s conference is being recorded. I would now like to turn the call over to Mr. Keith Radeke, Director of Finance. Sir, you may begin.

Good afternoon, everyone, and thank you for joining Orion Energy Systems first quarter fiscal 2018 conference call. Participating in today’s call are Orion’s CEO, Mike Altschaefl; and CFO, Bill Hull. Following a review of Orion’s Safe Harbor statement, Mike will open today’s call and review our continued focus on driving growth while implementing cost reductions to accelerate the company’s path to profitability. Bill will then briefly review Orion’s Q1 fiscal 2018 financial results, and then we will open the call to investor questions. An archived replay of this call will be available later today in the Investor Relations section of Orion’s corporate Web site. This call is taking place on Friday, August 4, 2017. 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 generally will include words such as believe, anticipate, expect, or words of similar import. Likewise, 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 than those anticipated. 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. With that, I'll now turn the call over to Mike.

Thanks, Keith. Good morning. Our Q1 of fiscal 2018 revenue was disappointing and lower than expected. However, we remain optimistic about revenue for the remainder of fiscal 2018 as well as long term. I’ll expand on this later in the call. Orion is in an excellent position to build upon our business foundation and technology leadership as a designer and producer of energy-efficient LED lighting solutions for commercial and industrial buildings. We are continuing to drive our growth aspirations while also focusing on rightsizing our cost structure to accelerate Orion’s path to profitability. We believe finding this balance is both prudent and essential for the long-term success of Orion and to increase value for all of our stakeholders. We are making good progress towards this goal. Orion’s focus on growth continues to be strong. We remain singularly dedicated to the LED lighting market and the enormous growth potential it offers to deploy higher quality and more energy efficient lighting systems to customers throughout North America. We provide lighting systems that deliver superior illumination and pay for themselves to reduced energy consumption, more efficient installation and little or no maintenance. We also see our growth benefiting from the evolution of the Internet of Things, or IoT, in our industry. Our strategy is to utilize our solid-state lighting systems platform to host a range of other functions that help drive efficiency and improved data for management decision making. Orion is well positioned to take advantage of the evolving IoT within both products and intellectual property. We have been seeing opportunities provided by IoT which enable automated functions that create added value and ROI for the customer. We have been selected on several such projects, including two of the world’s largest automotive manufacturers, who have recently committed to Orion for seven additional manufacturing facilities. Our strategy is to participate in this market potential through a combination of developing products and technology, utilizing our existing platforms, as well as developing new intellectual property and finding partners while keeping an eye on investment costs. We are pleased to announce that we have some new and exciting products that we are launching this month focused on three main objectives; increasing our competitive products footprint with the agent-driven distribution channel and entry level focused buyers, leveraging existing platforms and expanding options to increase our market opportunity and leveraging our experience in control and IoT solution adaptability through new modular plug-and-play solutions. Part of our new product launch includes a new modular sensor platform that expands our ability to adapt to a wider range of available control options from basic controls to advanced IoT solutions, all in a modular plug-and-play fashion. This technology and approach allows the customer to deploy sensor technology exactly where and when they want in their facility. Since the future of IoT hardware is unpredictable, customers using this technology are also able to change directions down the road in a plug-and-play fashion. Our go-to-market strategy in the LED lighting space is focused on our leadership and energy efficiency, combined with our smart design and nimble customization abilities. All of this is enwrapped in investing class service and channel through our North American-wide agent-driven distribution model that provides us with substantially greater customer reach than our previous primary reliance on our internal sales teams alone. Turning back to our Q1 of fiscal 2018 results, our revenue performance was lower than anticipated with total revenue declining 19.7% from Q1 of fiscal 2017 to $12.6 million. However, there were some bright spots that support both our near-term and long-term optimism as well as the growth goals we articulated last quarter. Our agent-driven distribution channel was a bright spot in Q1 as it delivered revenue growth as expected. As of the end of Q1 of fiscal 2018, we have 48 agency relationships with approximately 700 agents selling our products and services. Our agent-driven distribution model was first launched in August of 2015. In November of 2016, we recognized that some significant changes to our agent base were required in order to optimize the quality and performance of this effort. We revamped our entire base replacing nearly 75% of our original agencies while doubling the size to 42 agencies by the end of fiscal 2017. During Q1 of fiscal 2018, we expanded to 48 agencies while also implementing a range of programs and training sessions intended to support the success of our agent-driven distribution model with Orion’s line. We expect to have and maintain a base of approximately 50 sales agencies by the end of Q2 of fiscal 2018. This agent-driven distribution channel is already highly productive as approximately 47% of our product revenue came from this channel in Q1 of fiscal 2018, up from 43% for full year fiscal 2017, the first full year of our strategy. To support our strategy, we recently announced the hiring of veteran lighting sales manager Kevin Grayson as Senior Vice President for Channel Sales. Kevin brings over 20 years of lighting industry sales management with several industry leading manufacturers and manufacturers’ rep agencies. He has particular experience managing an agent-driven distribution model and will be responsible for overseeing this channel for Orion. He’s an excellent addition to our dynamic team. Orion now reaches approximately 95% of the U.S. and Canada as well as parts of the Caribbean and Latin America via partnerships with some of the largest sales agencies in North America, firms doing between $20 million and $200 million in annual lighting business. Our direct sales effort is focused on national accounts. We did advance a few larger marquee customer projects in Q1 of fiscal 2018. Some of these multi-quarter opportunities did not complete prior to the close of Q1 of fiscal 2018. We remain confident that a few of these large projects will close and contribute materially to Orion’s performance over the balance of fiscal 2018. But what is hard to measure I do feel there was some level of natural management team distraction related to the management realignment and cost-cutting initiatives that may have played some role in tampering our Q1 of fiscal 2018 revenue performance. While Q1 of fiscal 2018 was disappointing, our team is clearly focused on continued growth opportunities. We are on target to achieve the previously announced annual operating expense savings in the range of $3.5 million to $4 million from fiscal 2017 levels. The majority of the cost savings were implemented in Q1 of fiscal 2018 and will be substantially implemented by the end of Q2 of fiscal 2018. Our renewed focus on revenue growth execution combined with the rightsizing of Orion’s cost structure will accelerate Orion’s path to profitability. Importantly, our cost initiatives were top to bottom and included Orion’s executive team and outside directors who have reduced their total annual compensation by approximately 35% compared to full year fiscal 2017 levels. Turning to our fiscal 2018 goals. Despite the soft start to the year and Q1 of fiscal 2018, we believe our full year revenue goal of 10% to 15% growth over fiscal 2017 levels remains achievable. As we stated previously, we have set a gross margin goal of 30% and a breakeven EBITDA goal, excluding non-recurring items, both of which we believe are achievable by Q4 of fiscal 2018. Because of our size and the variety of factors that impact our industry and business, I do want to clarify that these are goals or targets for the business not financial guidance but we believe they are appropriate given what we know today. In summary, though our Q1 of fiscal 2018 revenue performance was lower than we had anticipated, we do not view it as indicative of our future potential as we reposition the business. In addition, the industry commentary supports our view of the marketplace and the long-term potential it holds. We continue to believe that Orion is on the right track to leverage our reputation, proven track record and broad base of customers, including 40% of all Fortune 500 companies to drive growth in LED lighting sales. This solid position coupled with emphasis on cost management in an accelerating timetable for reaching breakeven EBITDA are intended to deliver results and create value for all Orion stakeholders. With that, I will turn the call over to Bill to provide more detail on our Q1 of fiscal 2018 results.

Thanks, Mike. As reported this morning, Q1 of fiscal 2018 revenue decreased to 12.6 million versus 15.6 million in our first quarter of the prior year, the 75% of the decline driven by fluorescent sales. While LED revenue also declined somewhat versus last year, LED as a percentage of our total product lighting sales reached 90% for the quarter continuing its upward trend. While our agent-driven distribution channel met our planned expectations during the period achieving revenue growth of 42% over the first quarter of last year, our national account sales effort was disappointing as several large scale projects failed to close in the period. These large projects are still very much alive and we are confident in their closing during fiscal 2018. This, along with the growing pipeline of new sales opportunities, gives us confidence that we should experience a bounce back in our revenue. Orion achieved solid margins across the majority of its product line. These margins were hampered, however, by lower volume and the inability to leverage our overhead costs. As a result, Orion’s gross margin declined to 21.6% in the first quarter of the current year from 25.8% in Q1 of fiscal 2017. Total operating expenses increased to 9.2 million in Q1 of fiscal 2018, including approximately 1.9 million in one-time severance and other cost reduction expenses. This compares to 7.3 million in Q1 of fiscal 2017. Excluding these non-recurring expenses, Q1 of fiscal '18 operating expenses would have been in line with Q1 of fiscal 2017. Total general and administrative expenses, which include 1.8 million in one-time severance and other cost reduction expenses, decreased to 5.3 million in Q1 of fiscal 2018 compared to 3.9 million in Q1 of fiscal 2017. Excluding the non-recurring expenses, Q1 of fiscal 2018 G&A expenses would have decreased by 9% versus the same period in the prior year. Orion reported a net loss of 6.6 million or $0.23 loss per share in the current quarter compared to a net loss of 2.9 million or $0.11 per share in Q1 of fiscal 2017. Orion used 5.8 million in cash from operating activities in Q1 of fiscal 2018 driven primarily from our net loss, including 1.3 million of cash payments for employee separations related to our reorganization across cost savings initiatives. Additionally, we paid down approximately 2.8 million of our revolving credit facility. Reflecting the impact of the 6.6 million net loss as well as our paying down 2.8 million on our long-term revolving credit facility, net working capital declined to 16.9 million in Q1 of fiscal 2018 from 25.5 million in Q4 of fiscal 2017. At Q1 of fiscal 2018, Orion had net long-term borrowings of 3.9 million compared to 6.6 million at year-end fiscal 2017. Operator, let’s open the call for questions. Thank you.

[Operator Instructions]. Our first question comes from the line of Amit Dayal with Rodman & Renshaw. Your line is open.

Thank you. Good morning, Mike, Bill.

Good morning, Amit.

Just talking about the new product launch that’s coming up and your marketing efforts around it, in that context, have marketing efforts so far in the fiscal year been somewhat contained while you await these new product launches?

No, I would say they have not been. Our sales force has been continuing to work diligently on our existing product that’s in the field, most of which has been very successful. And these products are – some of them are expansions of product lines that we have, some of them are new product lines that we have. We have certainly been able to have discussions with certain of our agencies to give them some heads up on the type of products we have developed, because we obtained their input in developing them. And I can tell you we’ve got some very favorable responses from them with respect to some of the new products, particularly some of the expanded high bay opportunities we have as well as some slim high bay linear product that we’re coming out with. So I don’t think it has slowed down our marketing efforts but I think it will add to is as we go forward in the next couple of weeks rolling out these new products.

Understood. Mike, you touched on new product launches that are coming up including a lot more IoT-related sort of technology. Is this coming from the customer side or are you sort of organically developing this and trying to see if there’s a pickup on these types of offerings in the market? And then in relation to these product launches, if you could break down how many new products and what verticals, if any, are being prioritized with these launches?

Sure. Let me cover the first part of that question. Our approach on some of the sensor applications I talked about and how they relate to IoT is that our view is that there are continuing to be developments of products out there related to the connected ceiling, the digital ceiling IoT area and we want to have our fixtures and our sensors available for our customers so that down the road they can go at different directions if they want to. So in some situations we’ve developed sensors that can be attached to our fixtures to provide the data collection point for our customers with respect to things like movement and other lighting applications and other data applications in their facilities. But at the same time they will likely be integrated with other third party software and perhaps hardware of accumulating the data that comes off of these sensors. And what we want to be able to do is to be nimble enough and have a plug-and-play fashion that has those third-party platform change or migrate that are customers can still use our fixtures with our sensors to communicate with these other applications. So we’re trying to keep ourselves as flexible as we can, partnering where we need to, being careful with our investment in the area and let it develop and have our fixtures and sensors fit into those categories. On the second part of your question, I won’t get real specific today. We’re going to be rolling these things out over the next couple of weeks and we’ll put more externally. But our rollout includes areas where first of all we have some new product in the high bay area as well as some product extensions in the high bay area. We also have some strip fixtures that will be coming to market as part of our product launches. We have others that involve some of our wall lighting product. And we also will be having some additional product related to LED tubes that we’ll be talking about also. So it’s rather broad, focused still heavily on commercial and industrial buildings and in total there’s about 12 primary products are being launched with some extensions related to some of those, Amit.

Understood. Thank you. Just one last question maybe for Bill. Cash dropped from 17 million to 8.5 million. Do you see these cash levels picking up as we go through the rest of the fiscal year?

Yes, Amit, we’re comfortable that with our current cash position along with our credit facility that we’re in a good position to follow through with our plan. I think we’re okay.

Okay, got it. That’s all I had, guys. Thank you so much.

Thank you.

Our next question comes from the line of Craig Irwin with ROTH Capital Partners. Your line is open.

Hi. Good morning.

Good morning, Craig.

First thing I wanted to ask is backlog. I don’t think I heard that in your prepared remarks.

Yes. Craig, our backlog is 6.5 million at the end of this quarter. That’s down a little bit from the end of the year which was at 7.3 million.

Okay, so that were pushed into 2Q and beyond. Can you maybe share with us the approximate size of these projects or what they represent in backlog right now?

Craig, I can give you a little bit of detail on that. And some of it relates back to the comments we had about two large U.S. manufacturing automotive makers where we had these seven additional facilities that have been indicated that we’re going to move forward with. And related to those seven facilities for those two automotive companies, we expect that we will have revenue in the range of $10 million within fiscal 2018 related just to those two opportunities. And some of those were part of what flowed from Q1 into Q2. Part of what happens in some of these large situations is that the orders get placed with us on a facility-by-facility basis and sometimes even in sub-segments for facilities. So at times we don’t simply get a contract or a PO for a large amount. They come in sizable chunks for each of those. And so that’s why it wasn’t even in the backlog because we do not have firm POs or contracts which is what we would need in order to place into our backlog. At the same time when they come in, often they are being shipped out in a very short period of time, sometimes under 10 days. Secondly, related to those specific contracts we would expect perhaps a like amount falling into fiscal 2019 from those seven facilities. In addition to that, we’ve had some very nice progress on some larger projects in the area of retail, in the area of grocery and in the area of transportation. So it’s those projects along with our developing agent base that has provided us with confidence of the remainder of fiscal 2018.

Great. Thank you for that. So I wanted to ask if you have any metrics on your agency strategy as far as percentage of revenue in the quarter from agents signed in the last year or basic breakdown of how this channel is performing on a financial basis as far as the ability to close jobs and help you drive revenue in a more cost effective manner?

Sure, yes. A couple of metrics that we look at on this is first, what percentage of our revenue is coming through our agent-driven distribution channel. And for Q1 of fiscal '18, 47% of our revenues came through that agent channel and that compares to 43% for the full fiscal 2017. So it has continued to grow as we moved forward. Secondly, another metric that I look at is when – if you analyze our 48 current agents that we had at the end of Q1 fiscal 2018, 16 of those agencies were onboard with us for over 12 months and the remainder – which is one-third and the remaining 32 had been with us anywhere from weeks to up to 12 months. And often it takes those agents some period of time to get up to speed on our product lines to have our sales people and marketing people go through our materials with them. So there is a timeline it takes them to get up to speed. So we also expect that those agents will keep growing with those as we go through the fiscal year. As commented in the materials, the written press release and our comments earlier, from a plan standpoint, our agents delivered the revenue that we expected for Q1 of '18 and those include some growth aspirations going forward. So we are with the metrics of how we budget for agents coming onboard, the number of agents that we have, their length of time, we feel we’re on track with that channel. Finally, I would say we have also developed certain products in this new product launch that we think are more suited towards that agent channel in having things that are more oriented towards the contractor market and to distribution which is where we expect our agents to have some impact for us.

Thank you for that. I also wanted to ask a follow-up question on the new products that you’re launching. At LIGHTFAIR, you showed a number of products that were not yet commercially sold that were anticipated to be generating revenue at some point this calendar year. Of the products you discussed earlier, what portions have already been shown to the market or maybe shown at LIGHTFAIR or other venues versus new products that have been underdevelopment that you’re bringing out to the daylight for today’s discussion?

I would say most of the products that we are going to be launching over the next couple of weeks are newer products that would have been in development at LIGHTFAIR but we’re not heavily presented at LIGHTFAIR. So most of them are going to be new to the market as we roll them out. And in fact, this weekend we have our – most of our agents here – at our facility rolling out those products to them to kickoff the launch of our marketing efforts for those new products.

Great. And the last question for me is a little bit more of a big picture question, right? So this quarter with the CEO transition and you taking the role [indiscernible] very special, a little bit of challenges, everybody expects some sort of bumps along the road. How should we think about revenue for the rest of the year? The company for a period of several years was giving full year revenue guidance and not always executing to plan, like a lot of companies. But how should we think about the revenue progress going into the second quarter and the shape of progress in the back half of the year? Is this something where the large customers that you’re implementing now give you enough visibility where you can see 10% growth or something in that range?

Great question. Certainly to restate, the company, the management team, the sales force are all deeply disappointed by the revenue we delivered for the company in the first quarter. I don’t think a significant amount of that is related to the fact that we made some management changes because these things often from a sales standpoint are in the works for a long period of time. I think it’s more related to getting our agents up to speed. It’s also related to some renewed efforts that we’re making on our direct sales force and international accounts. We obviously have a bit of a hole. We, as stated, continue to believe that we can achieve at least 10% revenue growth in fiscal 2018 that leaves a pretty big road for us going forward. We are highly confident that quarter two is going to be better than quarter one, but that still is a lot of – the mathematics for quarters three and four are pretty heavy. But we feel that we have a good chance of achieving the 10% growth minimum for fiscal 2018. And the reason for it is linked back again to some of these larger projects that are somewhat predictable, although unfortunately at times with some of the customers when they can get them in their facilities, when they have the time or the downtime in their plants to put them in can cause things to flow from a quarter to a quarter. But we’re really up in our ear and I’ve heard enough from some of these larger customers, particularly the automotive customers, that they have timeframes that seem to us that even if they split, we’re going to get them in, in fiscal 2018. Also as mentioned, we have some other developing opportunities that are of magnitude that we think will help us achieve our goal. In addition, we talk a lot about our agent side of the business. Our national account side of our business is also substantial. And I think for us we are refocusing some of our very experienced sales people who have previously worked in the national account area with our larger OEMs and we are able to redeploy some of those people now that our agent group is getting up to speed. And also the addition of Kevin Grayson is going to also help us redeploy some of those resources. So for those reasons, while obviously one can look at the mathematics on a quarter basis and say you have to have several pretty good quarters to get to where we are expecting to get to, at this point in time we remain optimistic and confident that we can do that.

Thank you. Our next question comes from the line of Al Shams with American Capital Partners. Your line is open.

Yes, gentlemen, good morning. I’m pretty new to the company so I don’t really know a great deal about the lighting business. But I know a lot about balance sheets, finance, et cetera, being a CPA. Okay, well, I’ll take you at your word and we’ve discussed a revenue growth going forward and you guys just said that you’ve got a high level of confidence that you should be able to meet those targets. Turning to the balance sheet, do we have sufficient capital resources to go forward?

Yes. This is Bill. As I said earlier, we’re comfortable with our cash position, our borrowing capacity and achieving our plan. So we think we’re in good shape to achieve that plan.

Okay. And you have any backup other than the line of credit?

Well, I think the – I wouldn’t say backup plans but I would say first of all the first order of business to be blunt is to continue to generate revenues to create the cash flow that you need. Number two is focusing on the balance sheet; we continue and will continue and have in the past carefully manage our balance sheet and our working capital to provide working capital as needed. So we have some opportunities there particularly in our inventory area to be as smart as we possibly can to plan in that area. And then beyond that, we’ll do what is prudent to look at other alternatives if it’s needed. But at this point we feel those areas will provide the opportunity for us. And finally as we have announced, we have gone to the market to look if we could perhaps do a sale-leaseback of our office building in Manitowoc which we think is a prudent move from a business standpoint to lease versus owned, and that also could provide capital if that would take place during the year.

Okay.

But we’re mostly focused on working capital and then revenue to generate cash.

Okay. What kind of capital would a sale-leaseback generate, 4 million or 5 million or something like that?

At least.

Probably in that range.

Okay. I compliment you on sharing the pain, taking – are these salary cuts or deferrals?

Both.

Okay.

They were cuts, they were reductions.

Okay. I hope you’re not looking at doing a reverse split?

We have had no discussions internally doing a reverse split.

Okay. I know there has been one insider who sold a lot of stock I hear recently and there’s been some insider buying by others. You think there’s a good chance we’ll see a pickup insider buys once you’re beyond the quiet period and a window opens?

I guess I can’t comment on what individuals might do individually from a buying standpoint. Your comment with respect to insiders selling, what we can comment is that what is filed with respect to Form 4s is public information. And so we are aware that a prior CEO has sold approximately 500,000 shares into the market beginning in the middle of June and through yesterday. So that’s public information.

Yes, that’s a tremendous amount of stock in a short period of time for a little company like this. Other than good products and good service, what kind of great incentive do you have for the dealers to sell your products?

Well, from a dealer standpoint and really the agents who we’re working with, there are often different commission arrangements based on either size of deals or types of products or what level of involvement they may have had. So one, it can be handled through the commission incentives for the various agents that we have in the marketplace. Secondly, we provide significant end user sales support. A lot of this product is that we handle and historically for our company it was an end user sale for us. So fortunately our sales force and our marketing team is very experienced of dealing with the end users or often in the agent channel, they are working through contractors or through specifications or architectural firms, so we can help them with on-the-ground sales support at the end user level or at the distributor level to help them understand our product and understand the differentiation of our product with some of our competition. So I would say sales and marketing support, it’s information support but also financially we can try to drive behavior through our commissions of what product and what areas we’re trying to drive. And we are very nimble that we can go after very large projects with our agents because we can decisions quickly in some of those areas.

Thank you. Our next question comes from the line of McCrea Dunton with JMP Securities. Your line is open.

Hi, guys. Thanks for taking the questions.

Yes. Good morning.

Good morning. So just a follow up on the question on revenue outlook. Outside of those large orders that are moving around, are there other market changes that are occurring to create this further variability?

Well, I think going forward the information that I have seen and read in the industry; it seems that things are looking positive from a market standpoint. We are seeing larger OEMs and in some of these areas of other industries making the move towards LED and transitioning from either legacy lighting or fluorescent lighting to it. So first I would say from a market standpoint, we see things being somewhat positive out there of what is happening in the business environment for us. Secondly, we continue to have a very substantial legacy fluorescent lighting customer base with nearly 40% of the Fortune 500 in that and those companies at some point will be making transitions to LED. And so we’re trying to make sure we have products that either help them migrate in that manner through perhaps tubes or through replacing their fixtures. So I think overall what we’re hearing from our sales force right now and what we’re hearing from agents that we see the opportunity that will help and bolsters our expectations of higher revenues as we go forward for the rest of the fiscal year.

Thanks. So I know that last quarter you had mentioned you had seen a little bit less price erosion than there had been. Is that trend still holding or is that increasing? Just a little bit of color on the pricing would be great.

I would say it’s sort of the same. It certainly is competitive out there and we have some very large competitors who are going to work hard to keep business and at the lower end of the spectrum from a price standpoint, fixture price standpoint or quality standpoint, sometimes you have some foreign competition that we have to worry about. So I think that’s always going to be out there but I think our job is to make sure we differentiate our products, provide the service and quality that customers want, the nimbleness to turnaround projects very quickly. We feel one of the significant advantages we have and we are actually working on a couple of opportunities right now is our ability to flex our manufacturing process and our supply base to supply fixtures to customers on a very short lead-time basis. And why that is important is that we find that some of the very large OEM sales situations, the large automotive customer or retail, it often takes their company understandably a long time to go through the capital approval process. But once they get it done, they want to get their energy savings or they might have to hit windows of time when their plants are available for the installations. We have the ability to assemble and manufacture certain fixtures in a very rapid process in the U.S. And so we see opportunities where some of our very large competitors cannot meet delivery deadlines, we have equal or superior product and can get it there in time for their applications. So our ability to manufacture in the U.S., have the inventory to do that, the flexibility of manufacturing does provide us with one of our advantages to the competition.

Thank you. [Operator Instructions]. Our next question comes from the line of George Gasper [ph], a private investor. Your line is open.

Thank you. Good morning to you all.

Good morning, George.

First question would be on your agency outreach. How many of these agencies that you’ve lined up and agents are – do they operate for other LED companies also?

That’s a great question, George, and it’s part of why we retooled a little bit last year in the agent area. Most of our agents do in fact carry other LED fixture lines. And what we have found or what we learned early on in our strategy is that, that we’re better suited being in there with those agents for a couple of reasons. Number one, they often will be carrying one of the very large manufacturers of lighting fixtures and these agents need two or three alternatives to them due to application or due to timeless of getting them product or many of these agents are careful not to have too high of a percentage of their business be related to any one or two lighting manufacturer. So we have found we’re better off being with these agents that understand the industry, understand the channel, are connected with the distributors and can help us move product through that. So that’s the route that we’ve taken. And at this point, substantially all of our agencies would have other lighting products that they are carrying. In addition, while we have a relatively broad approach to our product line, we don’t have everything that is needed by certain end users. And so having that agent that carries multiple lines helps them bid on projects that have a very broad base of product needs.

Okay, good. Thank you for that answer. And just a little bit more on this marketing side. I know that you’ve been able to penetrate the automotive manufacturing side of the business and just a thought. In the makeup of the Fords, Chryslers that you have, they’re all flocking to China in a bigger way. There are several new models that they’re moving in to the China market and the China market is going to explode in the next year to two even from the 23 million cars a year that they’ve been producing. Is there any way that you could market internationally via the automotive companies that you deal with and try to expand into that China market at least, or elsewhere? Any thoughts on that.

It is a possibility. At this point, it would be hard for me to say what the likelihood of being successful on that is. We do have I believe a very strong reputation with at least two of the U.S. based manufacturing companies where we are speced [ph] for most of the facilities. So we’ll have those kind of discussions. But I also, to be realistic, think it might be difficult to be competitive with product that’s being produced in that area of the world for the Chinese plants. But it’s a great point and I’ll make sure I pass it on to our sales and marketing team to be thinking about.

Great, okay. And then on the R&D side, I assume it’s still totally in Chicago. What size staff do you have now and has that changed very much?

The staff has not changed very much and the staff is actually mixed. We actually have a staff that is based in our Jacksonville, Florida location and we have some staff in Chicago and we have some staff here in Manitowoc. And that team is still well in place and developing product for the company.

Thank you. And we have a follow-up question from the line of Al Shams with American Capital Partners. Your line is open.

Yes, gentlemen, one question I wanted to ask. Kevin Grayson has joined the team. Can you discuss what incentivized him to join Orion? And just what his eagerness is to be with Orion?

Absolutely. We had done a nationwide search for someone to help build out our management team with respect to sales and we’re fortunate enough to have Kevin come up through that process. In my meeting with Kevin, he saw tremendous opportunity with Orion. And his background is such that he has worked with some very large manufacturers. He has worked with agents in the lighting channel. He has owned and run his own agency business in the past. And he was at the point of his career looking for another challenge and so he saw the – I believe in my opinion he saw the potential what he could do. The fit that’s so well for us is that our route as a company has been more in the direct sales effort. Our fluorescent business was built largely on selling directly to end users and we know that process very well and we are continuing to learn and develop and execute on going through the agency channel. Having someone like Kevin who we believe has significant reputation in the industry as well as knowledge, he will help to move this forward more quickly in managing our regional sales managers and working closely with our agents. Thanks for that question.

Thank you. You have a follow-up question from the line of George Gasper, a private investor. Your line is open.

Thank you. The insider ownership at this point, can you throw out a figure that we could zero in on? And that’d be exclusive of the former CEO that there was a question-and-answer on before.

Yes. George, we were above 10% before. It’s actually in the process, so I think we still have around that area when you take a look at any of those other people within the organization and the Board of Directors.

Okay, all right. And then one comment. With all the developments here in the state of Wisconsin in the last several weeks, I would assume you guys are pointed in the direction of covering [indiscernible] make sure you get your share of in-stock?

Great question, George. I would say – I don’t know if it was a comment or a question but probably along with every other manufacturer in Wisconsin, we are highly focused on that and there could down the road be tremendous opportunity for lighting fixtures with all that might happen over the next five years. So thank you, George.

Thank you. Our next question comes from the line of Ben Weinstein of Korenvaes Management, LLC . Your line is open.

Hi, guys. I actually have a few questions this morning. One is, I wanted a clarification. You mentioned earlier in the call that the seven facilities to provide 10 million in revenue. And then it was unclear to me whether you’re referring to 5 million in revenue this fiscal year and 5 million revenue next fiscal year or 10 million revenue this fiscal year and 10 million in revenue next fiscal year?

Yes, I agree. I don’t think I was very clear on that. We expect there to be $10 million of revenue in fiscal 2018 and we expect there to be at least an additional $10 million of revenue beyond that mostly in 2019.

Got it. My next question was, if the contracts that got pushed out of this quarter would have closed in this quarter, how much additional revenue would you be expected to have had in this quarter?

Well, it was more than one contract and it’s difficult to say, but it would have been enough that – let s say put us more in line with where we were in the prior year.

Okay. And my next question was we chose this quarter to pay down some of our credit lines and I was trying to understand what is our borrowing capacity at this point in time on that credit line? I think it was $200,000 heading into this quarter. I wanted to know what it was at the end of this quarter. And then how much does the borrowing base go up and down in future quarters. Is there a chance we’re going to have to use some of our cash just to satisfy the further reductions in our borrowing base?

Yes, so the borrowing capacity was slightly over 4 million at the end of the June quarter. And it’s driven mostly by – it’s a typical way – so it’s basically driven by what assets you have in your collateral. So I would say as we go forward and move through our plan, we’ll see more availability come through.

Okay. Last question is so I just want to make sure, so for the 30% gross profit margin target, you’re not referring to that as an annual basis. You’re referring to, in particular quarters, you’re going to be close to hitting that 30% gross profit margin target. Is that correct?

Yes, very close. I guess the way I would say it that we think margins will grow in the second half of the year. We expect to be at 30% gross margins in Q4 and we then expect that to be a run rate that we would be at going forward at least.

Okay, great. Sorry, one last philosophical question just trying to understand how much cash in borrowing capacity do we need to have in order for you to feel that we’re at a comfortable level, or for the auditors to feel that we wouldn’t need a going concern clause?

Well, we don’t have a going concern clause, so they’re comfortable with where we are right now and so are we. I should say we are comfortable and they agree with our conclusion on that. But as the business ramps up, we have room to grow in our credit facility, I’ll give you that.

Thank you. I’m showing no further questions at this time. I would now like to turn the call back to Mike Altschaefl, Chief Executive Officer, for any closing remarks.

Thank you very much. I simply want to thank all of you for taking time to participate in the call today. We look forward to talking with you after the next quarter. We appreciate your patience and we will continue to work hard as a company, the management team, to deliver value to shareholders and the rest of the stakeholders. Thank you. Have a good weekend.

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.