Good day, ladies and gentlemen, and welcome to the Orion Energy Systems Third Quarter Fiscal 2017 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today's conference, Keith Radeke. Please go ahead, sir.

Thank you and good morning everyone. And thank you for joining Orion Energy Systems' fiscal 2017 third quarter conference call. Participating in today's call are John Scribante, Orion's Chief Executive Officer; and Bill Hull, Orion's Chief Financial Officer. Following a review of Orion’s Safe Harbor statement John will open today’s call by providing comments related to Orion’s quarterly results and business outlook. Bill will then provide further detail regarding Orion’s third quarter financial results and then we will open the call to investor’s questions. An achieved replay of this call will be available later this evening in the investor relations section of Orion’s corporate website. This call is taking place on Wednesday February 8, 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 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 than anticipated. Those 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 these forward-looking statements. With that, I'll now turn the call over to John Scribante.

Good morning. Thank you everybody for joining us today. By now I hope everybody has seen our third quarter financial results, which reflects our teams continued execution over the past two years on repositioning Orion for growth, improved margins and a transition into the solid state lighting industry. Orion’s quarter three revenue rose 23% year-over-year to $20.6 million, driven by solid execution in sales from our enterprise accounts with additional contribution from our distribution channel. We met our target and achieved a gross margin of 30% in the third quarter, up 180 basis points from the year ago quarter and in line with our full year target. Margin was favourably impacted by our sales mix as well as our supply chain and product designs. We have additional margin leverage potential as we execute on our design and tooling initiatives over the next few years. And from a cash flow standpoint, we consume $368,000 [ph] in cash from operating activities during the quarter. We ended the quarter with strong balance sheet and networking capital of $31.3 million including $19.1 million in cash and $6.3 million in total debt. As we have discussed on previous conference calls, the second half of our fiscal year is typically stronger than the first half. Based on where we are today and being this close to the end of our fiscal year, we are narrowing our guidance to a revenue growth of 10% to 15% over fiscal 2016 while keeping gross margin guidance at or near 30% for the rest of the year. With that overview, I’d like to now discuss our products and sales initiatives. For the past two years we have focussed on developing best-in-class LED fixtures for the commercial, institutional and industrial market. With a particular focus on making the most energy efficient…

Thanks, John. Orion turned in solid quarter three financial results with revenue increasing 23% to $20.6 million versus last year’s quarter three of $16.8 million. Product revenue was 93% of sales and services was 7%. Our product revenue from enterprise accounts was 36% and our product revenue from ESCO and distribution partners was 64%. As we mentioned in previous earnings call, we also service enterprise accounts through distribution channel partners in many cases. During the third quarter, we shipped approximately 2400 customer orders including 43 transactions over $100,000.Our average deal size also increased as quarter three fiscal 2017 had an average size more than eating 8400, and that’s up 32% from quarter three fiscal 2016 average size of approximately 6400. Orion’s backlog rose 28% to $9.6 million versus $7.5 million in Q3, 2016, the decline versus our backlog of $14.6 million at the close of quarter two fiscal 2007. We do expect our backlog levels to fluctuate from quarter-to-quarter based on the timing of large customer orders and related shipments, however the general trend over times to reflect our revenue growth. Third quarter gross margin rose 180 basis points to approximately 30% versus 28% in quarter three 2016. The margin improvement primarily reflects continued manufacturing efficiencies and a more favorable product mix versus the same period last year. Also note that the third quarter represented the eighth consecutive quarter of quarterly year-over-year margin expansion for Orion. As indicated in our financial guidance, we expect gross margins to remain at or near 30% for the balance of fiscal 2017 and that’s up from a gross margin of 25% in the fourth quarter of fiscal 2016. We maintained tight controls on our spending during the third quarter resulting in an 8% reduction in general and administrative expense versus the prior year period. We are however continuing to invest in our sales and marketing activities as we build out the agency and distribution channel that John discussed earlier. We also continue to invest in our research and development efforts. Our quarter three net loss improved to $1.1 million or $0.04 per diluted share compared to a net loss of $2 million or $0.07 per diluted share in quarter three fiscal 2016. Non-cash expenses in the third quarter were $1 million consisting of depreciation, amortization and stock-based compensation. On a cash flow basis, we used cash of approximately $400,000 from operating activities during Q3 fiscal 2017 and ended the quarter with a strong cash balance of $19.1 million. As Orion continues to make progress on the profitability front, investors should be aware that Orion has $61.3 million in net operating loss carry forwards. This could potentially offset future taxable income and consequently could benefit free cash flow. And that concludes my prepared remarks. So I’ll turn it back over to the operator to begin the question-and-answer session. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of Steve Dyer from Craig-Hallum. Your line is now open.

Thanks, good morning.

Good morning, Steve.

Morning, Steve.

I was just wondering you know if you could talk a little bit about what you’ve seen post election, you know A, sort of what are you sort of hearing from customers, sentiment, ISM [ph] is going to bounce nicely the last few months. And then secondly, sort of vis-à-vis your competitors, do you feel like you know what some of the taxes less tariffs and etcetera that’s been talked about, are you guys, do you feel like you are better positioned just given your manufacturing base?

Yes, great. You know post election; I think people have reassessed some of their plans. I think it's still very favorable for the lighting industry in general. Any time manufacturing strengthens as indicated through ISM and other industrial production measures. That helps Orion. Now it still isn't necessarily, all capital is freeing up -- in a free flow yet, and probably it’s going to take a while for that to happen. But we’re very optimistic with the trends that we’re seeing in both the macroeconomic side, but also as you look at having a domestic U.S. manufacturing facility, I guess we’re in advantage in the event that there would be tariffs and other remedies that the administration puts on import. So, we've always felt that the right strategy for retrofit is a U.S. manufacturing. It actually made us a better company because we’ve had more pricing pressures and so we’ve had to get very good at the manufacturing and keeping our manufacturing cost down, building up our margins. So doing that in the U.S. environment still being competitive, still delivering 30% margin with the expectation that we can continue to grow that higher. I think that's just for doing it, doing it over the last couple years, many years has made us a better company. So, as others would struggle to figure out their strategy bringing it back they’re going have to learn that U.S. manufacturing. So, I think, yes, we feel very good. The macro stuff certainly has to settle down and get some clarity, but I think the indicators are that as long as manufacturing continues to strengthen and we get some decent tax policy in the United States, start building things back here our customers will benefit from that, and as they benefit they’ll spent their money and to move forward on efficiency projects.

Great. And then, I was just wondering if you give us a little color, last summer you announced a pretty sizable multiyear contract with the retailer. Just kind of wondering where we are with that or you starting to see evidence of that yet as that in the backlog, is that running through revenue, maybe just any anecdotal color since then?

So, it’s not in our backlog because we booked those as the capital gets allocated on a per site basis. And we did have a bit of a setback just due to floods in the Southeast and hurricane last fall and that did slow that project down a bit, because all that clients resources pretty much all fled due to the repair and stores and to getting stores back on line. So, we believe that we are back on track now. And that those will continue to flow through. That’s a multiyear project. It's good base business for us. You’re not going to see it in any one quarter. It just flows through pretty regularly and consistently over the next 24 months or so, 24, 30 months, but back on track and solid contributor.

Okay. Thank you, guys.

Thanks, Steve.

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

Hi. Good morning and thank you for taking my questions.

Good morning, Craig.

So, John, as we look down the runway first quarter -- first calendar quarter of 2017 I guess that’s your fourth fiscal quarter is unpredictable. So, in past years you’ve been both up and down in the March quarter. I realized what we’re only just starting six weeks in now for the quarter, can you give us an update on whether or not you expect to be sequentially up or sequentially down for the March period?

Well, even though you would think we’re halfway through quarter, it’s still a go get business and we still turn our orders very, very quickly. So I really can't comment on whether it’s going to be sequentially up or down. I think the -- as we continue to build out our channel and we’ve reset to back a little bit, this last quarter we made some changes in our channel. There is -- that revenue to predict it to a quarter end is very, very difficult. And as you know, we do have a history of large project orders that sometimes slip [ph] from quarter-to-quarter, So, even if my predictions did come true there’s still a reality of site access and labor issues at the end of the quarter that can slide projects from one to the other. So I just do not make any comment on that.

Understood, understood. So then if we could talk a little bit about the agency strategies, say you want to double your current list of agents from 25% to something in the 50 agency range. It's obviously been a very nice component of revenue about 8.6 million higher year-over-year. If we look on the absolute revenue growth it's obviously trailing if your channel is only resulting in moderately higher revenue. So can you describe for us anything that maybe is deemphasized and your logic for deemphasizing that if this is a cost to serve issue with prior channel commitments? And can you maybe describe whether you would expect to see a more additive contributions to your top line from doubling the agency base?

Sure. So, we do expect additive, so when we moved our business to an agency driven distribution model, we converted a lot of revenue, so you take our base business of ESCOs and electrical contractors that had been purchasing directly from Orion, and even national account business because we get a set list of enterprise accounts that we continue to allow to buy direct from Orion at their customers demands, but everything else we start moving through an agent. And so, in the short period of time as we’re ramping up what you're saying is more of a conversion of revenue from our traditional customers into the agents, distributors with the intense then on having the distributors and agents adding to that mix. So, migrating from our ESCO and contractor business pushing that through distributor really doesn't add a whole lot to the value, but then that agent distributor has now a base they build from and we are starting to see that growth developed in a fair amount of our agents. As I’d briefly mentioned in quarter three, we made some adjustments. We had some nonperforming. We had some that want the right mix and fit. And so we made adjustments to those that we believe now will have a greater impact. And then doubling that again is really what you’ll start to see more growth, because value starting to build up base and adding more salespeople in the mix, salespeople that are focused on renovation and retrofit are primarily on the retrofit side and project business. So they are out hunting for retrofit projects much like our ESCO customers did, much like our national account people do. It’s not an agent -- an agent that selling new construction is right now for Orion that's not our best place. So finding those retrofit agents took us little while, but we believe that we now identified them and move into the 50 mark by the end of the fiscal year is going to add revenues. And it also I think brings in, we’re starting to bring in some what we would call enterprise accounts that are coming from the agents, new business that we didn't know about that were helping manage even though it still is for fill [ph] through the channel, they’re reliant on our turnkey capabilities, a Orion is unique in having this turnkey capabilities on our enterprise side. We’re seeing now agents and distributors coming to us with large projects and say look, we want to sell the product through our distribution channel, but we want to hire Orion to do the turkey construction work because they don’t have the capabilities to do that. So I think we’re really starting to find our stride and find a good mix of agents that were put in place now. And as we enter into the next fiscal year I think we got to dialed [ph] in.

Great, so just a point of clarification, right. So one of the real strengths of Orion versus both your small and very large competitors has been the quick lead times that your capacity has afforded you over the last couple of years. Can you maybe just discuss if there is an inventory stocking requirement at your agents and obviously the benefits there are lower airfreight costs and even shorter lead times than what you’ve been achieving to-date. And is this something maybe that could continue to benefit the inventory held on the balance sheet?

So, good question. So as we look at our capital allocation we’re always looking to use other people's balance sheets to leverage. As we outsourced our fabrication, our metal fabrication, that strategy prevents us from having to invest our capital in machine and equipment tooling. So that's been a tremendous success. Taking that to the distribution side also has some value. But I think we’re doing it little differently. We’re not putting the burden on the agents or the distributors because quite frankly as my inventory manager refers to it is we’re managing essentially fresh fish. You’ve got inventory that is turn quick because it will get obsolete, you got issues you got to worry about there and the agents don't want to take on that burden nor the distributors. So, what we do is we’re managing the inventory and we’re actually – we’ve got get some initiatives this year to even further manage that, but we opened up a third-party logistics facility in Augusta Georgia to serve our growing southeast business and we’ll continue to do that if we find pockets maybe out West, maybe in the Northeast that allow us to ship full truckload freight into the market and then distribute the last mile on the more expensive LTL freight. So, we’re leveraging our transportation in a way that doesn't put the burden on the distributor or agents, but still cuts out costs and deals with the issue that you had and in terms of freight cost, and still maintains those quick lead times. Net effect, its improving the lead times and providing more of a white glove service to that end user.

Great, thank you for that. My last question really is about earnings breakeven, the past earnings breakeven. I know it's very difficult to really project the revenue, but can you remind us what the annualized revenue run rate Orion would need to achieve today to achieve breakeven and whether or not there are any specific puts and takes that we need to consider as we look forward to that hopefully over the course of the next year?

Yes. Hey, Craig, it’s Bill. So as I said before, so if you take a look at our business right now, we're talking about a 25 million per quarter run rate at a 30% gross margin hit breakeven. So a couple things to think about there and you can tell quarter to quarter things fluctuate a little bit. We were lower on our SG&A expenses this quarter. And if the margin goes up you have those things to play with. So, I think when we talk about going forward in the agency distributor model we’re going to put some more support for sales and marketing efforts in those lines. So that expense might go up. Margins are going to go up. So if you look at business right now, it's 100 million breakeven. As we go forward, that’s going to change slightly. Does that make sense to you?

That's completely clear. Thanks again for taking my questions.

Thanks, Craig.

Thank you. Our next question comes from the line of Amit Dayal from Rodman & Renshaw. Your line is now open.

Thank you. Good morning, John. Good morning, Bill.

Good morning.

Just a follow up on these sales channel questions. Is there any agent that is accounting for a larger portion of sales right now?

No. It's pretty distributed. We do have – I guess if you look at – if you take a year to-date over the last nine months, it’s been very evenly distributed on the ones that are producing. And as I’d mentioned in Q3 we had some lower producer agents that we have cycled out and now are replacing with some new ones. So from that perspective, yes, some are producing more than others, but we don't have a single one that is contributing a disproportionate hire than others.

Understood. And in your commentary I think Bill may have mentioned, you guys are looking at 1000 – Fortune 1000 companies through the direct sales force and should we be viewing that you guys are dealing with the Fortune 1000 opportunities internally and then harvesting the other potential customers to the agencies?

Well, the way that -- so Orion has always had an ability to go out and capture end-user direct, large national account business and we've never given that, but what we have done is we've engaged the channel so that we support the channel through those endeavors. So, we’ll have vertical sales managers that call on trucking, transportation trucking. We have vertical that calls on automotive. We have vertical that calls on government. We have one on retail. We have one on cold storage. So, they're going out and driving demands with these end-users in their verticals. And then they will fulfil that business through the agency, through the traditional channel. We have a very -- you can count them on two hands, a very small list of enterprise direct accounts, but that doesn't stop us from continue to market and generate demand and then we just fulfil that through the channel.

Understood. What are the plans for the legacy business, now, we are in sort of a steady state of over 80% of revenue is coming from LED sales. Is the legacy business dragging margins potentially? I mean how do we deal with the shift that has now come to fruition basically for you?

Sure. Our legacy fluorescent has actually the margins are maintained at the levels at or above where we’ve been in the past. So, it really doesn't have any dilutive effect on our margin at all. And what we've been able to do is we've been able to build universal assembly lines across all of our entire platform including florescent, so that no matter what order comes down to the shop floor they are able to run that product on the same assembly lines with the same team, the same people and whether their pushing a florescent product down that line or an LED product they still produce as if it was all the same. So, we don't see any need to shut that down. We don't see any reason financially or operationally to close that down, as long as we continue to still get orders for it its very good business for us. And in some regards on some of our lower-end product the tooling for the florescent lighting and the tooling for the LED lighting many of the parts and components to build those fixtures are identical. So, we've even been able to manage our inventories across those lines as well.

And just maybe one final question on the product development side, we introduce the 200 lumen per watt product last year, I mean for calendar 2017 what should we be looking for in terms of new products?

Well, we’re going to continue to build out our performance line of products because we believe that having the high lumens per watt it forces a decision at a job site, at a customer site, it forces their decision to consider Orion when they -- we’re smaller company than lot of the bigger ones. We don't have the same channel strength as a lot of the others. But having that performance advantage forces a decision that the customer to decide, do they want high return on investment. The other thing is that the Orion advantages that we talked about a little bit in the commentary around jobsite management and lower cost for installers, all of that innovation we believe gives us pricing power in the marketplace. Now with that said, we also realize that the lumen per watt performance is just the ticket in. And having our smart controls and technologies it's a small piece of the market today but it's becoming a talking point that is becoming more and more important in the market. Customers are starting to realize value that connected lighting system can bring. We've mentioned some of our large automotive customers have adopted our smart building technology to solve business problems, material handling problems and other things. So, you will start to see – well, you'll see a continuance of the performance leadership from Orion and you will see more of these connected ceiling, smart building technologies start to flow.

Got it.

And I guess I’ll comment one other thing on it. You will start to see an expanded product line as well. We continue to build out additional retrofit products horizontally on our product line. So, you’ll see a more industrial products come out, more commercial products to just broaden the product line as well.

Okay. Thank you.

Thanks, Amit.

Thank you. [Operator Instructions]. Our next question comes from the line of George Gaspar from Private Investor. Please go ahead.

Yes. Good morning, everyone.

Good morning, George.

Good morning.

Just to follow-up on the sales, cost structure, S&M. Based on 20.6 million that you ran and your S&M was 3.5 plus million and that’s a 17% range overall. Now, if you look at the LED part of that, excuse me, from the previous year it was running 14.3% on S&M relatively speaking some place in there. So now you got this increase coming about in S&M cost as you're moving more into the agency action area. And I figured it be about 19.4 million, the increase in S&M costs for the quarter on your sales increase to 3.8 million, are you going to continue to experience S&M factor on increasing sales that would create an S&M costs that would be in the 20% range?

I’ll let Bill follow-up on this after I make just one comment, is we made a comment about increasing sales and marketing expense, but we see that really is a one time step increase to prepare for the additional burden of having 50 agents in the marketplace, so that's customer service, that some inside sales support, that a little bit of field -- extra field support. So there is a one time component to this, and then there is the ongoing just commissions that shouldn't increase other than proportionate to revenue increased because that would just be paid commissions on sales. So just we’re anticipating a one time job. We think we can pay for a lot of that through other efficiencies in the business both in G&A reductions and possibly other places. So, there’s a one time component and there's an ongoing. So I’ll let Bill perhaps a little bit further on that.

Thank you. I think, John got that, you know the best way to say it. So we need to build the infrastructure to support the agency network and some of that will be fixed cost. So, you talk about sales planners, customer service, we want to make sure we maintain that, take customer relationship and then you have the commissions which will be more of a variable type cost is that as we move to that model.

Okay. All right. And next question would be on the R&D side John if you could cover that. Can you describe your emphasis going forward on R&D objectives anything cooking in the systems for communications in the lighting system?

Yes. So, I think we cover little bit of that, but I’ll expand it a bit. So the High Bay, the industry or the remainder of the industrial line, Low Bay and other industrial products in the commercial, we feel that today other than some expansion in some new products that expand those product lines and we are going to stay focused in the areas that we traditionally have. In terms of building connected lighting systems, as you know we’ve been doing that since 2009 on the fluorescent side, we had cloud enabled technologies for their [Indiscernible] 2010 timeframe. And so, now it’s really just we took a couple of years while we got the rest of the business straightened out to let the market shake out, figure out where that was going and we believe now this coming year is the year that you’ll start to see us to rebuild our presence. The good news is that while there has been a lot of discussion in the market place there has not been a lot of adoption on that technology. You are starting to see that come this year, you are starting to see some steps that companies like our automotive companies, they are starting to see the value of that and I think having those case studies in the market place is going to start to accelerate this, some of the costs are coming down on the infrastructure side to achieve this so that it’s becoming more affordable. So Orion’s I think had a good timing point, because we got the base technology, we got the intellectual property, we have patents that cover a lot of the stuff that people want to do in this market place and now it’s building out that offering. And that’s really where a large part of our R&D focus is going forward atleast this next fiscal year is going to be in with a connected ceiling space. Again, we’ve got a lot to build upon, we’ve got an interim offering today that we are providing the customers, but we believe that we are going to have a much more sophisticated and robust system available later this year. So combined with continuous performance on lumen per watt, which is really drives the economics and finances and as long as we win in that battle we will always have a more -- greater financial returns on the connected ceiling, because of the base savings, that the lighting offers. So even if our connected controls cost the same as everybody else’s we are going to be at an advantage because the base fixture performance is generating more savings to fund those. So the customer will still win with Orion.

Okay, John I asked this question about every quarter, but could you just highlight your employment situation or focus on changes in say the past quarter and maybe into the current quarter that here in operation are now? Have you added people?

Yes we are in the manufacturing. We announced over a month or so ago that we’re adding 30 people in the manufacturing facility that we haven’t made all those moves yet, but we have started making those moves. We just, we feel that we need to continue to invest in our U.S. manufacturing and now is the time that the demand is picking up for us. In the Chicago office, we see some more ads in terms of sales support, and then in our Jacksonville office it’s been pretty stable with a few ads in the field support.

Okay. And then one last question if I may, just looking at customer exposure, I don’t know if you comment directly on if Amazon is a customer, they seem to be continuing to just break out all over the place and new facilities. And then secondly, in terms of power generation structure, Florida Power & Light is going to do $2 billion they approved going forward. In Florida, the Carolinas may be going west; two significant power generation systems will be included in that. Does your product apply; do you do business with the utility power generators at all?

Well you know the way that we do business is we engage the utilities as part of our projects. And so we will benefit from incentives that they provide and also access to facilities that they may be interested in providing more efficiency measures. So yes, whether it’s FPNL [ph] or any other utility, our regional sales managers are continuously working with those representatives to understand what’s happening in the marketplace and how we can help them fulfil their goals for either but for energy efficiency. And you know the utilities, you know as demand, as the economy builds and grows and you see more strength from a macro point of view puts more demand on the utilities to provide more efficiency incentives, so...

Okay. All right, thank you John [ph].

All right, thank you, George.

Thank you. And at this time I’m not showing any further questions on the phone lines. And I would like to turn the call back over to John Scribante for any closing remark.

Okay, well great. Well once again I thank everybody today taking the time to listen to our progress and for your continued support. So we look forward to speaking with you in a few months. Have a great week. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may also disconnect.