Good day, ladies and gentlemen, and welcome to the Orion Energy's Fiscal 2020 Second Quarter Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded.I would now like to turn the call over to David Collins. Sir, you may begin.

Thank you, and good morning. Orion's CEO, Mike Altschaefl, will open today's call with some highlights, followed by a discussion of the company's business strategy and a review of Orion's financial goals for the full fiscal year. Orion's CFO, Bill Hull, will then review some additional financial items, and then we will open the call to your questions.An archived replay of this call will be available later today in the Investor Relations section of Orion's corporate website. This call is taking place on Wednesday, November 6, 2019. Remarks that follow and answers to questions, including 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 anticipated. Such risks include, among others, matters that the company has described in its press release issued this morning and in its filings with the Securities and Exchange Commission. Except as described in these filings, the company disclaims any obligation to update forward-looking statements.With that, I'll turn the call over to Mike.

Thanks, David. Good morning and thank you for joining our call today. First, I would like to thank the entire Orion team for their contributions to getting our business where it is today. Orion delivered another quarter of record results in Q2. I'm very happy and very proud that the Orion organization has accomplished by focusing the business around our key areas of differentiation and competitive advantage.In the first half of fiscal 2020, we achieved revenue growth of over 200% to over $90 million with a gross margin of over 25%. Notably, despite the pace of growth in the first half, we held operating expenses in line and yielded significant improvements in profitability and cash flow. First half fiscal 2020 net income rose to $10.7 million or $0.35 per share versus a loss of $5.1 million or $0.18 per share last year, achieving a turnaround in net income of $15.8 million for the 6 months. Our results demonstrate the financial leverage in our business model, enabling incremental revenue to having an even greater impact on our bottom line.As you may know, our results are being driven by strength in our national accounts channel principally due to a contract for over $100 million in turnkey LED lighting and controls retrofit activity for one of our customers during fiscal 2020. This contract is clearly notable for its size, but even more for the potential it creates for us to replicate our unique capability of design through manufacturing and on-site nationwide installation with other large national accounts. What we are able to offer is a proven, fully integrated solution that starts with on-site assessments, progresses to planning, custom design and manufacturing to delivery and installation of customized, state-of-the-art LED lighting solutions and controls, all in a 100% turnkey manner across North America with…

Thank you, Mike. Orion's second quarter revenue increased 266% to $48.3 million compared to $13.2 million in Q2 of 2019 primarily due to increased product sales and services related to turnkey LED lighting and controls installation for a major national account customer. Second quarter product revenue rose to $35.6 million, and services revenue increased to $12.8 million. For the first 6 months of fiscal 2020, revenue rose by $63.7 million to $90.7 million compared to the prior year period also due to the increase in turnkey national account activities.Second quarter gross margin improved to 26.5% compared to 19.3% in Q2 of 2019 and 24.3% in the first quarter of this year. Our second quarter gross margin benefited from higher revenue levels covering fixed costs. The second quarter gross margin improvement versus the first quarter was primarily due to improved services margins as well as the benefit of ongoing efforts to enhance manufacturing efficiencies.Operating expenses increased to $5.9 million in Q2 of 2020 compared with $4.8 million in Q2 of 2019 with the increase principally due to higher sales commissions as well as investments in sales and marketing. Reflecting higher revenue, higher gross profit and the leverage inherent in our fixed cost structure, Orion's second quarter net income rose to $6.7 million or $0.22 per diluted share versus a net loss of $2.4 million or $0.08 per share in the year ago quarter. For the first 6 months of fiscal 2020, net income improved to $10.7 million or $0.35 per diluted share versus a loss of $5.1 million or $0.18 per share in the comparable 2019 period.Likewise, Orion generated EBITDA of $11.9 million in the first 6 months compared to an EBITDA loss of $3.9 million in the prior year period, an improvement of $15.8 million.Year-to-date, Orion has generated $8.4 million of cash from operating activities versus a use of $1.1 million in the first 6 months of fiscal 2019, as higher net income was only partially offset by working capital needs to support increased business activity. Likewise, our balance sheet and capital metrics also improved in the second quarter and first half of fiscal 2020. At quarter end, we had $11.1 million in cash and cash equivalents, up from $8.7 million at our March 31, 2019 fiscal year-end. Also, net working capital increased to $19.7 million from $14 million, and shareholders' equity increased to $28.9 million versus $18 million at March 31, 2019. We were able to reduce borrowings under our revolving credit facility by approximately $5.4 million since year-end to $3.8 million. As of September 30, we had additional unused borrowing capacity of $11.2 million on our credit facility. We believe this borrowing capacity, combined with our cash resources and expected future cash flow, provides sufficient financial resources to fund our business going forward.And with that, let's open the call to questions. Operator?

[Operator Instructions]. Our first question comes from Craig Irwin of Roth Capital Partners.

Congratulations on the strong execution with your retail partner. I guess, I'm saying it's Home Depot, right? That was a very strong quarter.

Thank you, Craig. Good morning.

Thanks, Craig.

So you were pretty careful and cautious in the way you handled the language in your prepared remarks about other contracts. Now you do have a history of working with big names like Coca-Cola, Anheuser-Busch, Ralph Lauren. I can toss out more, right? But can you maybe narrow down for us what the opportunity is with the elephants in the grass right now? There are always, obviously, chunky projects out there that could be landed. But do you have anything that you think could be booked that would be more than a $20 million project before the end of the calendar year?

Craig, thanks for the question. We probably won't get as specific as you're looking for in the answer to that. We were -- wanted our remarks to be in line with how we're looking at the year currently. We continue to feel very optimistic about the future, both the rest of fiscal 2020 as well as going into fiscal 2021. And as mentioned, we have done several things to improve our opportunities and improve our potential to keep growing in the future.What we do find with some of our customers, particularly national accounts, is that they tend to make capital decisions later in the calendar year, particularly if they're a calendar year company. And therefore, we expect to get more information over the next 6 weeks of what some of our larger customers will be doing during perhaps their calendar '20 as well as what impacts our fiscal '21.So as those opportunities become well-known and get into contractual relationships or letters of intent, we may make disclosures related to those. But what I can say is we feel optimistic with some of the discussions we are having not only with our existing customers but some of the new opportunities that we are generating in national accounts as well as large ESCO relationships as well as through the channel.

So my follow-up question is this Home Depot project you've been working on. It's a huge win and did a lot to restore the credibility of Orion after a multiyear lull between some of these very large contracts that were executed many years ago. Can you maybe comment whether or not you're finding yourself in a smaller group of competitors with these large potential customers? Are you finding that you make it further along in the process? Has the, I guess, unnamed customer really helped referenceability to improve your capture and maybe position you to do a little bit better than the lighting market over the next number of quarters?

Yes. No, great question. I'd say, yes, generally to your question, but let me be a little more specific. First of all, we have had a history of doing fairly significant projects over many years, often quite outsized for the size of company that we are at. So we are used to landing elephant-type accounts and being able to manage them successfully. We certainly think that winning this one large opportunity has provided additional exposure in the lighting industry with respect to our capabilities.What we do find to be rather unique is the fact that we do have these construction services capabilities, these turnkey capabilities to manage a project all the way from auditing the facilities that a customer has to designing a fixture that customized to what their needs are, to manufacturing that product, handling the logistics of the installation, then managing the turnkey aspects in the field, all the way through to commissioning the controls so that the controls are tying in and becoming effective for them.From our knowledge, Craig, we don't think there are any other significant manufacturers that have all of that under one roof for a customer. So what we believe is giving us expanded opportunities is our customers who see the advantage of having a single point of accountability to take them all the way through the process and sometimes go from 3, 4, 5 suppliers down to one on a major nationwide LED and controls installation project.And that's where we think we are unique, and that's why we think we are able to compete against some of our larger competitors. And given our size, we believe we can have opportunities for projects that will give us substantial growth as a company as we continue to move forward.

Our next question comes from Eric Stine of Craig-Hallum.

It's Aaron Spychalla on for Eric. Congrats on the quarter. Maybe first for me, can you just kind of talk a little bit more on the agent channel, just where you are in the process of kind of maturing and getting those agents up to speed? And then you talked a little bit about the new products. But just maybe a little more detail on when those are going to launch and kind of traction you can see there.

Absolutely. As people might be aware, if you are keeping track of the industry and what is happening with some of our competitors, that the agent side of the channel has been somewhat challenging. And as I've mentioned a few times, it could be a somewhat price-competitive area. But we still see the ability to compete in that area. We are newer to that channel. We jumped into it in 2016. We feel very positive about the agencies that we now have within the company that we are working with closely, and we continue to work and support them with training and sales support and leads and whatever we can do.We have made some changes in our sales approach during this quarter, as I mentioned in my prepared remarks. Those are various activities that we are taking that I think are going to allow us to be more successful, in particular, just helping to get a dialogue deeper and closer to the end user to help our agencies be successful.On the product side, I mentioned the one product which is really a great product that was launched recently, where on the back of the fixture is a very simple control feature that allows you to select 6 different lumen packages on 1 fixture. It's a great design. We're manufacturing it in the United States. And so a distributor can have that product or a contractor. It allows them to modify the lumen packages in a very broad stream with one particular fixture. So that we're very excited about that, and it's really just rolling out to our sales force. And we think it will be successful in that agency channel.We also -- I'm very excited about our product road map that we have over the next 6 months as we upgrade to next generation, some of our existing product and also bring a new product for our sales team to sell. So between making some changes in our sales approach and having a great product road map, I'm convinced that we will find a way to continue to be successful in that agent-driven distribution channel.

And then maybe second on the ESCO channel, can you just maybe size that opportunity for us? And just talk about your growth expectations for this year. And maybe how big that business can become over the next couple of years.

Sure. If -- one way to look at it is that the reporting segment for accounting reasons has most of that ESCO business in the group that we call U.S. markets or USM. So one would be able to look back at our prior Qs and Ks to see where we were in the past. A few years back, that business was at $30 million-plus in the ESCO segment, and it fell off somewhat when we transitioned to the agent-driven distribution model. We figured that out, realigned our resources and our strategies, and now we're seeing growth again in that ESCO market. And so we think that it has the potential to get at least back into those kind of ranges in the future.

Our next question comes from Amit Dayal of H.C. Wainwright.

Just trying to get some more color on the recurring revenue opportunities you're trying to create on the maintenance and electrical services side you highlighted. Is this more than an idea at this point? Could we see any contracts coming to play in relation to this business?

It is more than an idea at this point, as we have continued to build and expand our turnkey services on LED and lighting and control solutions. We recognize that we have this great group of electrical contractors across the country that we work closely with. And many companies have multiple facilities across the United States, and they need to have someone who can manage the day-to-day type maintenance activities that happen for both lighting systems as well as for electrical matters. So it is more than an idea. We are beginning to look at RFPs and respond to RFPs in this area and really can't predict when one of those things may come together. But we think it could possibly have some impact for us certainly in 2021 and perhaps sooner.

Understood. And the margin profile on a business line like this. Can you give us any sense of what would -- what do you guys are targeting or what do you -- are expecting from a margin perspective?

Yes. We've been able to continue to improve our margins on the service side of our business. I commented earlier that over 25% of our business this quarter was from the service side of our business, and those margins were good. So we don't see a big separation between our products and our services. And we believe with our systems and processes and management capabilities around services that we should be able to have healthy margins as we expand into maintenance, services and electrical services.The other thing we just think it provides for us is that certainly, we are somewhat of a project orientated business, although we do have certain customers that tend to have significant repeating business year-over-year. And so maybe I would call that repeating business versus recurring revenues. But the opportunity to grow our business with some recurring revenues will just give us more visibility and even things out for us going forward. And what we're finding is some of these maintenance contracts can be quite substantial, given the number of locations that particular companies might have.

Understood. And then just moving on to the IoT comments you made. Does the product road map include any IoT solutions? Or are you sort of going to be, like you said, agnostic and relying on outside providers for these features?

From a product road map standpoint, we really feel we have the solutions for our customers that are needed at this point in time. We have a very healthy group of different types of control solutions depending on the sophistication of controls that a company might need, from basic to smart controls and up to IoT controls. And so we feel we have the suite available. We are always looking to add to that suite as other control systems are developed and become desired by our customer base.Our real strategy has been to say we are primarily in the retrofit space, although we can compete very well in new construction. But in the retrofit space, often a customer may have an existing platform of some type of IoT solution or basic control solutions, and they obviously often want to keep that consistent. And so we have found that the fact that we have the engineering capability to take various control systems, tie them in through the power supply and have them integrated into our fixtures is very appealing versus having to work with a customer and convince them that their existing solution is not good and have them switch to somebody else.So to answer your basic question, we currently don't envision developing our own control solutions, which is to continue to work with various providers externally. Although it's not -- it's possible we might develop stronger relationships with some of them as we see them being better in the marketplace for our customer base.

Our next question comes from Marc Wiesenberger of B. Riley.

My first question, I wanted to follow up on the large national accounts. Could you maybe provide us a status update on how the rollout has gone thus far, the customer satisfaction? And then additionally, if I'm correct, I believe you did some customization work for this client. So you've probably got some intellectual capital built up there. Do all of these factors make it increasingly unlikely that if this customer was to proceed with additional retrofits that you would likely not be displaced based on those factors?

Thanks for the question, Mark. Good morning. First of all, we feel confident that the execution of this project has gone extremely well. We certainly stay in very close contact with this customer. It is a massive rollout across the country. We have extensive systems in place that provide updates as to the status as well as measurements from a customer satisfaction standpoint, and it does all point to being very positive for us.On a higher level, I would just say the project continues to be on schedule, if not a bit ahead of schedule and on budget for the customer, and they're delivering at least the energy savings that were expected and, in some cases in some locations, exceeding the energy savings expectations. So we think all of those success factors so far should put us in a position of being considered favorably by this customer as they decide when to continue with the rest of their locations.Like I mentioned earlier, many larger -- many companies make their capital decisions later in the calendar year, particularly if that's near the year-end. And so we'd expect some additional information on that over the next 4 to 6 weeks from this customer. We're confident about it.To answer the second part of your question, this solution for them was a customized retrofit solution that retained some of their existing fixture in their locations but then had some very efficient -- developed efficient light modules that are then installed as well as embedded IoT controls in this solution. So our strategy would be to execute very, very well. And given that you have a satisfied customer with savings greater than what they expected at a pace faster than they expected with great feedback from a customer standpoint, that one would be in a great position going forward on that solution. We do have certain IP, intellectual property related to those fixtures that we have designed, which we think provides us with some protection.In addition, I would just expand to say that, that solution we developed for them is a solution that is retrofitting an existing fixture that, from our market research, indicates it is installed in many other companies' locations across North America. So we are taking those solutions that we have developed, and there were 3 different designs that work in this particular fixture, in targeting those companies that have significant locations across the country to discuss with them the retrofit benefits we could put to the table with these existing fixtures. So we see the ability to both expand to other customers with that fixture. And in addition, we have more opportunities beyond what we did initially for that customer in other areas of their business where we are seeing some traction also.

That was very helpful. If you could talk about maybe some of the pricing dynamics that you're seeing and what you're able to pass on to customers, if at all?

We feel confident with where we've been able to go from a pricing standpoint. In many cases, we found that the market has had to have more increases over the last 18 months, particularly due to tariff situations and supply chain issues. And because we believe we're more -- better positioned in that area, which I'll comment at in a minute, we have not had to have significant price increases and, if anything, have held our prices much longer than we believe some of our competitors have been able to do.In the -- in some of the sectors like national account business, it's a very long sale process, and you need to demonstrate value through a payback and rebate management and design of fixtures, et cetera. But we continue to believe we can compete well in that area, particularly when we are sourcing product and manufacturing in our facilities in the United States.Your comment kind of links a little bit to the tariff situation, which we are in a similar position we've been in the past where the impact to us has been modest. We do have some product that is impacted by tariffs, but the actions we've taken on that are a combination of: We have situations where the existing supplier has been able to move their production to non-tariff countries. We've had situations where we maybe changed the supplier to eliminate any significant impact from tariffs. We've had situations where our contractual relationships allow us to recover some of the tariffs have taken place. So it really has been a pretty modest impact so far on our company, in particular, from an electronics standpoint. Substantially, all of our power supplies and LED chips and modules are -- do come out of nontariff countries. And so that helps a great deal because that's a pretty significant part of the product cost.

Our next question comes from George Gaspar, a Private Investor.

Congratulations on a great quarter. Just a little bit more on the IoT, if you wouldn't mind. How many individual facilities have you applied the IoT to at this point in time? Can you give us a gauge on that?

I don't have an exact number, George. Let me try to answer it this way for you. I would say we currently have IoT solutions in probably at least 1,000 locations. And now -- IoT solutions can be a pretty broad concept, from very basic controls and more sophisticated controls. But perhaps maybe secondarily, I'd say during this current fiscal year, we probably will be installing hundreds of thousands of fixtures that have IoT controls on them. So it's a very substantial number of fixtures that we have produced with embedded IoT controls that are now out in the field.In addition, one of the additional capabilities we added to our team this current year is that one of the more challenging parts of IoT systems is that the final 10 feet of getting it commissioned, meaning getting it all turned on, working and feeding the information properly into the overlying software package that is providing the information to the customer. And we have taken on more and more of that activity as our volume has increased, so that we are able to do the commissioning ourselves with our people in the field, which is, I believe, a big advantage because it is an area where often IoT companies we have found don't always do the best job. They may have fantastic software, but that actual aspect of being in the field, knowing how to get it fully installed and operational is not always as easy as it may seem upfront.So our additional volume of IoT controls in this -- our current year large project has IoT controls on most of the fixtures being installed has greatly increased the volume of these we have in the field as well as our capabilities with respect to IoT controls.

Okay. And then a little bit further on this. In terms of your application of IoT to the lighting system, is there any -- have you done any patent filings in terms of the mechanics of -- on the install of that equipment? Not necessarily making the componentry, but have you looked at that at all?

We do not have any recent filings with respect to the installation or application of the controls. Our company does have existing intellectual property with respect to smart controls that goes back some years, and we continue to evaluate that IP to determine if there are ways to monetize that and protect that IP.

[Operator Instructions]. We have a follow-up question from Marc Wiesenberger of B. Riley.

I believe the DesignLights Consortium recently put out a revised draft of performance standards for commercial LED lighting. Can you talk about what impact the new standards would have on your competitive position in the market, if at all?

Yes. We are fully aware of the new draft that's come out. I believe comments are due from companies in the industry shortly, which we will provide some. We feel good about our position currently with respect to those new standards. And as we develop our product road map, we keep those in mind to make sure that we will have the appropriate ratings on our fixtures to deal with that. So we feel confident about our engineering and design capabilities and the ability to keep an eye on those things, those possible revisions to the DLC requirements to make sure that we meet them. And for perhaps some on the call, that DLC sets certain requirements for fixtures to be eligible for rebates from utilities across North America. So it's important for your fixtures to meet those requirements to allow your customers to achieve rebates, which certainly improve the ROIs. So we feel confident about our position.

Our next question comes from George Gaspar, a private investor.

Just an additional on the IoT. And the mechanics of what's coming forward here on 5G. And the indication that on street install, there's going to have to be some kind of componentry every 1,000 feet. And it brings to mind to me when 5G would come -- be directed into a building that you have your lighting systems installed and IoT connected, it would seem that the speed of 5G would allow you even more capacity, opportunity to expand this effort. Is that a possibility from your perspective?

Well, I certainly think 5G is going to have an impact on the industry and an impact on the ability for IoT systems to collect data and manage data. Where we really see the advantage, George, currently is that one of the -- just the base challenges of IoT systems, particularly inside the building, is that you need to have power for these controls. You have to have a sensor that is picking up the information. And the beauty of the lighting fixture is that it's there. It's installed. It has power to it, and it has available power to power the sensor to capture the information. Once it's captured, it can then be transmitted through wirelessly to routers that pick up the information and feed it back to some type of management system or energy manager system that is put in place. And so the reason these controls are often tied into the lighting system is that it's a very natural place to house the sensors for these IoT solutions. 5G will provide another layer of capability and speed with respect to capturing the information for companies. So yes, I'm sure it will have some impact.

That concludes the Q&A session. I will now turn the call over to Mike Altschaefl for any closing remarks.

Thank you, Maine. In closing, I would like to again thank the entire Orion team for their hard work and dedication in achieving this strong performance in our business. I would also like to thank our shareholders who have supported us over the years, including those of you on today's call.In our effort to increase awareness of the Orion investment story, we will be presenting at the Craig-Hallum Alpha Select Conference on Tuesday, November 12 in New York and at the LD Micro Main Event on Wednesday, December 11 in Los Angeles. We are also planning Midwest investor meetings during Q3 of fiscal 2020 targeting Chicago, Minneapolis and Milwaukee. Please contact our Investor Relations team to schedule a meeting or a call. Their contact information is on today's release.Thank you again for joining us today. We look forward to updating you on our business progress on our Q3 call. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.