Good morning and welcome to the Orion Energy Systems Fiscal 2023 Third Quarter Conference Call. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Bill Jones, Investor Relations.

Thank you and good morning. Mike Jenkins, Orion's CEO, will open today's call to provide perspective on Orion's current business and outlook. Per Brodin, Orion's CFO, will review the company's Q3 and year-to-date results, financial position and other matters and then we'll take investor questions. A replay of the call will be posted to the Investor Relations section of Orion's website at orionlighting.com. Remarks that follow and answers to questions may include statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, expect or similar words. Additionally, any statements that describe future plans, objectives, goals and the business outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to be materially different than currently expected. Such risks include among others matters that the company has described in its press release issued this morning and its SEC filings. Except as described therein, the company disclaims any obligation to update forward-looking statements that are made as of today's date. Reconciliations of certain non-GAAP financial metrics to the corresponding GAAP measures are also provided in today's press release, and available in the Investor Relations section of the Orion's website. Now, I will turn the call over to Mike Jenkins. Mike?

Thank you, Bill. Good morning everyone and thank you all for joining our call today. As previewed in January, our third quarter results continued to reflect the impact of customer delays in the initiation of several large LED lighting projects. Specifically the previously announced $4 million plus project for our longtime automotive customers started more slowly than anticipated in Q3, but is now accelerating in Q4, and the start of a $9 million Department of Defense project shifted from third quarter of this year into first quarter of 2024. As mentioned previously, these projects are fully booked, and we look forward to their full activation and completion. We also saw some softness in our electrical contractor distribution channel, which seems largely due to the softening economic environment. We also experienced a modest decrease in contribution from our Energy Service Company or ESCO channel in the quarter. The ESCO softness is more related to project timing as longer term opportunities continue to gain traction in this channel which is focused on delivering both environmental and energy efficiency benefits to end customers. We have been working hard with our ESCO partners and have built a strong pipeline of opportunities that should drive significant positive growth in fiscal year 2024. Offsetting these factors was a better-than-expected contribution from our new EV charging solutions business and steady growth in our maintenance services business, largely due to the two acquisitions we completed over the past 12 months. We reiterate our fiscal 2023 revenue guidance for the balance of the year and reconfirmed our outlook for revenue growth of at least 30% in fiscal 2024. Our fiscal 2024 outlook reflects a growing array of significant retail logistics public sector and automotive projects in our LED lighting pipeline, as well as strong growth in our EV charging…

Thank you, Mike. Fiscal '23 third quarter revenue was $20.3 million versus $30.7 million in Q3 '22 and $17.6 million in Q2 '23. Through the first nine months of fiscal '23, revenue was $55.8 million versus $102.3 million in the prior year period. As previously discussed, the current year has been largely impacted by the wind down of the multiyear project with our largest customer, which had an $11 million impact on the third quarter. As Mike mentioned, excluding revenue from our largest customer and a large global online retailer, year-to-date revenue increased 9% over the comparable prior year period, reflecting our success in diversifying the growth drivers of our business. Our gross profit percentage decreased to 23.6% in Q3 '23 compared to 24.9% in Q3 '22 and 25.3% in Q2 '23. The decrease principally reflects lower absorption of overhead costs and reduced revenue and a higher mix of service revenue, which operates at lower margins. Gross margin for our EV business outperformed the overall average. Third quarter fiscal '23 operating expenses were $9.4 million versus $6.3 million in the year ago period. The increase was principally because of $1.9 million of acquisition costs, and higher general and administrative expenses associated with the inclusion of the Voltrek and Stay-Light businesses in our results this year. The acquisition costs incurred in Q3 include $1.5 million toward the accrual of the Voltrek earnout and transition costs -- transaction costs associated with the Voltrek deal closing. Orion reported a net loss of $24.1 million or $0.75 per share in Q3 '23, compared to net income of $1.1 million or $0.04 per share in Q3 '22, primarily due to our establishing a valuation allowance against the company's deferred tax assets. Orion recorded the valuation allowance, because we are now projecting a 36-month cumulative taxable…

[Operator Instructions] Our first question is coming from Eric Stine of Craig-Hallum.

So I think I'm going to focus on Voltrek here for my three. But, maybe first, could you just provide more color on the build out there, sales and service infrastructure? Maybe the timing and milestones we should look for? And when do you think you will have that in place and have the appropriate market reach that you're looking for?

Great question Eric, we're actively working on that now. So as we -- we are adding to the team as we speak. And in our budget for this coming year, we certainly plan to continue that and accelerate that. I would say that we look to be at a different level of capacity, probably somewhere around -- by certainly a second quarter of our fiscal year, and be fully active in cross-selling activities at that time.

And then maybe a follow-up. I mean, when you think about how Voltrek plays out. How do you see the end market breaking down? I know your first award, or at least the one that you have announced is an electric school bus pilot program but I also know that specifically some of your national account customers really were kind of pushing you to get into this area, are very interested in you getting in this area. So I mean, do you think this is more on the school bus side? Do you expect it to be more national accounts? Or how should that play out going forward?

Yes, another good question. I would say all of the above. Voltrek has got great momentum right now, with a lot of municipal work, fleet work, which the bus project is an example really of both government as well as fleet. So we plan to expand that. And then as I referenced earlier, in terms of the cross-selling, that's really where we get the leverage and the synergy from our existing base of customers. And again, all of them really are considering at this point, their strategy for EV moving forward, because it is such a large mega trend in the U.S. right now.

And then I guess last one would just be, obviously you mentioned, the significant funding that's out there, just curious steps you're taking to make sure that you're involved. You're part of that funding, and I don't know if there are steps you're able to take, but if there are it’d be great to get some color.

Sure, sure. Well, I would say that's part of the infrastructure that we're further building out. I mean, Voltrek has been very strong and understands the processes well to access those types of funds. So certainly as we look to scale the business, we'll be adding resources in that area as well.

And maybe a little more color for you, Eric. That comment we made about the funding in Massachusetts was in the backyard of Voltrek. So they're very tied in to that piece of it. And then Federal basis, we're obviously continuing to look at that, as Mike said.

Our next question will be coming from Alex Rygiel of B. Riley.

A couple of quick questions here. Any way to quantify the EV charging station backlog or pipeline or sort of market/bidding opportunities that you see in the intermediate term?

Nothing specific at this point, I think maybe the best way to think about it, just for some context is, when we announced the Voltrek deal in October, we said we expected them to do about $3 million to $5 million of revenue in the second half of the year. On today's call, we said that they essentially exceeded our expectations in the third quarter, coming in at about $2.8 million of revenue. We expect them to continue to operate at that level and above so it will be exiting the year at a nice rate. And then given the infrastructure that we're adding, we expect to see significant growth above that in the coming year.

And then also as it relates to your ESCO business, any way that kind of frame the size of that business today and what the backlog or pipeline opportunities could look like over the intermediate term?

As I referenced in the call, we have been working very hard with our ESCO partners, and have a number of very large projects in the pipe. Those projects are in the seven to possibly eight figure range that will initiate in the first half of next year. In terms of total backlog or total pipe, we don't really share that. But I can tell you that the -- what we're seeing is a growing pipeline on a year-over-year basis with some very large projects.

[Operator Instructions] The next question is coming from Andrew Shapiro of Lawndale Capital.

Several questions, I'll ask my three and get back in line. Regarding your large customer, I think it's Home Depot when it goes unmentioned. A few. When of the decline from this customer anniversary and what are the prospects of a return of some of the business? Were these deferrals of needed improvements and conversions for them? Was it saturation and completion of the roadmap? Or was it lost market share to a competitor?

Andrew I'd say that we are pretty much at the point of having anniversary that project. The project was a discrete project with multiple components that involves the retrofit of their -- the majority of their retail outlets, the indoor lighting for those retail outlets. So we've accomplished that. And I think, as we've said on previous calls that there are additional projects that we continue to do for them. And we also are doing maintenance work for the company, for that customer. So we expect them to be a significant customer in the future. We think that -- and they've said that they may be in the $20 million range per year in the next several years. So that's a little bit of context to where they are. It's not that necessarily any work went away. It’s that it was a very defined program to retrofit the indoor lighting in their stores.

So it's kind of a saturation of the completion of the project. And you have an ongoing relationship and business.

Yes.

Okay. Second question, is on the revenue delays that you refer to. Can you provide a little more context or color on the delays in the DoD and automotive industry projects? Are they the same causes? It sounds like they might not be. And what are those causes or what are the big issues in each?

Sure. On the automotive front, it was really around project timing, we work with this automotive company, we work with a lot of their labor. And so it's a jointly scheduled. And those schedules, there were some conflicts in it on their side. And so that caused some delays. So it was not related to any macro factors outside of their own dynamics around their labor. On the DoD side, this is a very large, complicated project. We are part of a broader project on this for the Department of Defense, and that overall project has experienced some delays. So again, it's just the dynamics that are unique to that situation.

Subcontractor on a bigger project, yes.

That is correct. Yes.

Okay, I don't know if that's completed my three, I do have other questions. I'll back into the queue if you need me to.

Sure.

The next question is coming from Amit Dayal from H.C. Wainwright.

So with respect to Voltrek, now that you've run the business for few months, Mike, how should we think about the potential operating leverage? You did mention, you have some synergies and leverage opportunities on the customer side? But on the operating side, how should we think about operating leverage for that business?

Well, I think, clearly, this is an investment year for us. We're investing heavily in the business. We still think it'll be EBITDA positive business this year, and we think it's -- we're looking forward to rapidly scale. As we continue to look out in the horizon, we'll start getting more and more operating fixed cost leverage as we move forward and continue to grow the top-line.

And does the EV charging opportunity now exposing new opportunities in storage, et cetera as well? Or are you not sort of entering or not looking to enter that segment?

Well, we're not actively in that segment now, but it is definitely a tangential area and could be part of a broader solution. So it may -- it's something for us to look at as we move forward.

Just last one for me. Is there any inventory et cetera, that you guys are sitting on related to the DoD and auto project push outs?

There is some. I mentioned in my remarks, Amit, that there is some -- a fair amount of inventory for the DoD project, the way that project -- I'm sorry, the automotive project, that project is underway and the way that project works is that we actually recognize revenue associated with the service over time. But some of the product does not get recognized until later in the project. So there is over $1 million of inventory just on the books for that project that hasn't yet been recognized as revenue and cost of sales. So that's one piece of it. And then another piece I mentioned is, there is the Voltrek inventory that was added in the current year. You can see -- you will see in the 10-Q, where you'll see the opening balance sheet broken out for you in that footnote, the acquisition footnote that when we acquired Voltrek, they had about $880,000 of inventory. We don't separately disclose the 12/31 balance, but that'll give you at least some context of magnitude for inventory in that business. But there's not meaningful inventory on hand for the DoD project at this time.

We'll follow up questions coming from Andrew Shapiro of Lawndale.

So little follow up on that DoD questions. Your DoD project, is it one of your first as a subcontractor for the DoD? And is there a potential pipeline of additional projects to come based on whatever theme that is driving this DoD project?

Great question, Andrew. No, this is not our first project working for the DoD. And we are working with what we call a super ESCO who has the prime contract and then we are a sub. We have worked with this super ESCO on other DoD projects. There are some others that are in the pipe that we're working with other super ESCOs as well. So that's really one of our core models of working with the DoD, is working with ESCO partners.

And then -- go ahead I'm sorry, I didn't mean to cut you off.

Yes, I was just going to clarify. We do occasionally and have historically done some work direct. We do have the ability to work direct on government contracts. Some we do direct, some we do as a sub.

We have a GSA.

And some questions around the Voltrek acquisition and forecasts, supplementing what others have asked here. You have a bunch of costs that are in this quarter's results that you've called out to be part of the -- having acquired Voltrek. Of the cost that you have there that you called out, about how much or what's the range in dollar value of those expenses in the quarter that you would consider one-time related to the acquisition rather than an incremental ramp up that is our ongoing expenses?

I'd say the high-level way to think about the items we put in the acquisition related cost line are things that we don't believe, are part, are related to the ongoing operations of Voltrek. It's either part of closing the deal, which is the majority of the costs incurred away from the earnout accrual in this third quarter. So the parts, anything that relates to their ongoing operations would not be included in that line but would be related to closing the transaction, accruing the earnout or some integration costs which are not a big portion of that. And just to clarify one thing for the audience on the earnout, the $1.5 million we accrued in the third quarter, if their performance continues, at the level it is, we would expect to record an additional $1.5 million accrual in the fourth quarter of our fiscal year, and then the expectation would be that, that would be paid sometime mid to late summer.

So to be clear, then it sounds like the whole line item that you've broken out and called acquisition costs, those are all one timers?

I would say yes, with the caveat that some accountants would argue about the definition of one-time.

And then on the earnout, is the maximum earnout $3 million?

Within this current fiscal year, correct.

Okay. And how many additional years is there an earnout measurement and subsequent payments?

It's a three-year earnout. This would be year one and ending at the end of our fiscal year for the first year. So as I've indicated, I believe if we continue on the pace we're on, we believe that will be earned. Second year, is again the next fiscal year. And then there's a third year in what will be our fiscal '26 -- '25, I am sorry, fiscal '25.

And how much is the maximum to pay in each of the next two years?

There's three years current year, $3.5 million in the second year and $4 million in the third year. There's also a cumulative kicker at the end of the third year, under which you could earn an additional $4 million -- up to an additional $4 million.

Okay. And the test for paying these, is it based on revenues, EBITDA, EBIT, what's the metric?

It's an EBITDA metric.

And you're adding a bunch of people to build out the sales and service infrastructure required to extend Voltrek reach across the U.S. from its current focus in the Northeast, as your quote is. This people hire -- and is this primarily internal and fixed cost or outsourced and variable?

It's a combination of both, we execute the model through independent contractors in terms of site installation, but the internal resources are really on the project management side, the sourcing opportunities, and then the project management side of the business.

And are all of those costs then allocable towards the Voltrek side of the house and built into them the measurement of EBITDA?

That is correct.

And the other costs that are referenced or referred to here, are these like onetime investment costs or most of them ongoing and fixed costs?

I'm sorry. I didn't quite follow that question. Could you repeat that?

I think in your -- the text of your press release, and in your script, you refer to people and other costs. The other costs that are being incurred to build things out and the infrastructure out, are they onetime shots, maybe capitalized or are they ongoing costs?

Yes. This is predominantly adding staff and people to do the work that I just spoke about on the sourcing and the project management side. The infrastructures -- any infrastructure expense is relatively minimal.

That concludes today's Q&A session. At this time, I would like to turn the call back to Mike Jenkins for closing remarks.

Great. Thank you, operator. As many of you know today, marks my first time with this call as CEO. I certainly look forward to meeting and engaging with all of you and other stakeholders in the coming months and quarters as we execute our growth plan. If you have any questions or comments in the interim, or would like to schedule a call with management, please contact our IR team whose information is included on today's press release. Thank you all again for joining us today and we look forward to talking to you soon.

This concludes today's conference call. Thank you all for joining and enjoy the rest of your day.