Good morning everyone and welcome to the Orion Energy Systems Fiscal 2024 First Quarter Conference Call. At this time, all participants are in a listen-only mode. After some prepared remarks, we will conduct a question-and-answer session. I would now like to turn the conference over to Bill Jones, Investor Relations to begin.

Thank you and good morning all. Mike Jenkins, Orion's CEO will begin today's conference call with a review of Orion's current business, strategy, and outlook. Per Brodin, Orion's CFO will then discuss the company's first quarter results, financial position, and guidance among other matters, and then we will take investor questions. Today's conference is being recorded and a replay will be posted to the Investor Relations section of Orion's website at orianlighting.com. Remarks that follow and answers to questions 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, project, or similar words. Additionally, any statements that describe future objectives and goals, plans, or outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to differ materially than currently expected. These risks include among other factors matters that the company has described in its press release issued this morning as well as in its filings with the SEC. 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 GAAP measures are also included in today's press release. Now, let me turn the call over to Mike Jenkins.

Thank you, Bill. Good morning and thank you all for joining us this morning. While Q1 was a more modest quarter as previously suggested, we remain very confident in our pipeline of opportunities for the balance of the fiscal year, which we believe position us well to deliver meaningful growth over fiscal 2023. Our confident outlook is supported by the expanded array of complementary products and services that we have put into place over the past two years to better meet our customers' evolving needs. Per will discuss our Q1 performance and guidance in more detail later in the call, while first I will provide a brief overview of how we have repositioned our business to meet our customer demands. As you may know building on our proven expertise in design and implementation of large national LED lighting retrofit projects, we expanded into lighting and electrical maintenance services and then last year, we entered the market for electrical vehicle charging solutions. Importantly, both of these initiatives were in response to customer inquiries regarding our ability to service needs in these areas. Orion Maintenance Services was launched in fiscal 2021 to support our largest client with reactive maintenance services for their lighting and light electrical needs. Given the scale and geographic scope of our clients' requirements, we quickly recognized the need to expand our service footprint and capabilities and we proceeded to acquire Stay-Lite Lighting in Q1 of fiscal 2023. Last week we announced the signing of a three-year agreement with our largest customer to provide preventative lighting maintenance to approximately 2,000 stores nationwide. This program started in February and has scaled over the last several months. Given the increasing complexity of lighting systems and controls, Internet of Things solutions, and other electrical systems, we view maintenance as a growth opportunity…

Thank you, Mike. Our Q1 2024 revenue was $17.6 million versus $17.9 million in Q1 2023, primarily reflecting the variability and timing of certain LED lighting projects, which was mostly offset by revenue from the addition of our EV business. Our gross margin was 18% in Q1 2024 compared to 19.8% in Q1 2023, with both periods experiencing under-absorption of fixed costs on lower revenues and the current year margin pressures experienced in the maintenance business that Mike discussed earlier. Gross margin on products increased to 26.4% in Q1 2024 from 23% in Q1 2023 due to a favorable product mix and better absorption of fixed costs in our assembly operation. However, our realized gross margin on services declined to a negative 11.2% versus a positive 10.3% in Q1 2023. The deterioration in services margin primarily relates to legacy multiyear maintenance services contracts from our acquisition of Stay-Lite Lighting combined with inflationary pressures on subcontractor costs. As Mike mentioned, we are actively addressing this situation implementing price increases on new contracts and significant existing contracts. Reflecting these steps in our maintenance business and a general expectation of growing sales volume, we expect our gross profit percentage rebound as we progressed through the year with some quarterly variation based on our business volume and revenue mix. Q1 2024 operating expenses were $9.6 million in line with Q4 2023 but up from $7.2 million in Q1 2023. The increase primarily reflects higher consolidated G&A expenses from the addition of Voltrek in Q3 2023 as well as the $1.1 million acquisition-related earn-out accrual in the period. Orion recorded a Q1 2024 net loss of $6.6 million, or $0.21 per share versus a Q1 2023 net loss of $2.8 million, or $0.09 per share primarily due to flow-through on reduced gross profit the additional…

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

Yes. Hi. This is Aaron Spychalla for Eric. Thanks for taking the questions, Mike and Per.

Hey, Aaron.

Hey, good to see you, Aaraon.

Good morning. Maybe first on the maintenance services, congrats on the contract there. Can you just -- anything else you can share on maybe size of that and opportunity with other customers just kind of the margin profile of kind of -- what we should expect there with that type of business? And then just broadly on the services margins. I know you're talking about improvement as we progress throughout the year given some of the initiatives you've done. Can you just maybe help with a finer point on that how that progresses through the year?

Sure. First I'll touch on the maintenance contract. So this was something that was underway as we referenced for many months actually at that part of the year. Clearly based on our level of performance with this customer, first on the reactive side of their business. We built the credibility and infrastructure to be able to take on the preventative piece of business, and we feel very fortunate to have secured that. Overall, that should be a low seven to mid-seven figures piece of business for us with very good reasonable profitability.

And I'd add Aaron on that, profitability I would -- if you think about some of our legacy overall margins we expect to perform -- is to perform above that level. So that just gives you some indication of that. And then, I think as you think about the balance of the year, we do have some projects in the pipeline that we expect to hit as we move through the year. Those -- in addition to the maintenance improvements will also help improve margin as we move forward.

Good. Thanks for that. And then, just maybe second on the EV charging business, you talk about the growing pipeline there. Can you maybe quantify at a high-level -- where that stands today and kind of where that's from? And then, just broadly, reception from customers as you look to expand that across the country?

Sure. A couple of things on the EV front, the pipeline continues to grow. Our pipeline today is about double what it was when we acquired Voltrek. We have over $3 million of cross-selling in our pipeline today which was one of our key initiatives, to support that business. And we see both significant Level 2 as well as the DC fast chargers Level 3 opportunities. So we're focused both on the Level 2, to support businesses with their employees, their customers as well as moving into some of their fleet operations with the DC fast chargers solutions, so, very encouraged with the pipeline that's building on the EV front.

All right. Thanks for taking my questions.

Aaron, I'll just add. If you think back to the conversation we had at year-end on the EV business and Mike's comment about the bus project that somewhat skewed the results in Q4. I'd say, our confidence level in what we can achieve in the EV business for the full fiscal year still remain strong and in line with the discussion we had back in June, thinking about their $6-plus million in the second half tempered a little bit for that bus project but being able to exceed that say on a run rate basis.

Yeah. That's good. Thanks for the color, Per. I appreciate it all. I'll hand it over.

Thank you. Our next question comes from the line of Alex Rygiel with B. Riley Securities. Your line is now open.

Thank you. Good morning, gentlemen.

Good morning Alex.

A couple of quick questions here, first G&A expense stepped up. Can you discuss this a little bit more? And is this the new sort of normal dollar level run rate that we should be modeling going forward?

I'd say, it's at a pretty normalized level understanding that, they're included in the amount is $1.1 million of earn-out we would expect that will continue but that's clearly unrelated to just the operations but based on the nature of the agreement it's recorded through G&A.

Helpful. And then, as it relates to Voltrek, can you just quantify the pipeline that they have today? And how that compares to maybe when you acquired them?

The pipeline is as I mentioned it's over double what it was. We're looking at a pipeline that's significantly growing. It's – today, it's going to be over $30 million and growing. So we're very confident that we'll be able to drive significant growth this year.

Just to clarify that is total opportunities, that is pipeline not what we disclose as backlog.

That's correct. Yeah.

Those are opportunities. You'll see in the 10-Q that our pipeline sits at $19 million total company -- I'm sorry, now I'm getting a backlog at the end of Q1 is $19 million.

That is helpful. And then regarding the $10 million LED retrofit in Europe was the -- was there an abnormal amount of sort of front-end expenses that may be weighed on you in the fiscal first quarter that will obviously sort of be more of a tailwind moving forward?

There's some of that. I'm not sure, I'd call it significant. But if you think about the project we had prep work that we did back in fiscal 2023. And if you saw in the 10-K there was approximately 200,000 recognized for that contract in Q4 of 2023 we have no revenue associated with that contract in Q1, although we did have activity doing the final prep work and getting people in place. And then as we disclosed in the release last week the true installation activity began in July. So the rest of that revenue will get recognized here between July and March of next year. And there -- there's always some inherent -- there's just always some inherent say costs that don't line up with associated revenue such as the auditing we do and some of the design work. So it's tough to put a true number on that, Alex.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Your line is now open.

Thank you. Good morning, guys. Yeah, the link wasn't working, so I was a little late to your prepared comments. So please forgive, if my questions touched on something that was in your script. But two areas of questions, first on the maintenance and service sub-segment about what portion of this sub-segment business is with fixed pricing that carry the risk of declining and in some instances it appears negative margin?

Well, a substantial piece of the overall maintenance business is contracted and therefore has defined rates for various types of things, whether they be preventative or reactive. We did mention in the call that, those contracted rates have been fixed in place. A lot of those with our acquisition from Staylight, and these typically are three-year incremental contracts. So some of those have been fixed for periods of three some longer, due to some of the inflationary pressures that we've seen primarily with subcontractors we have initiated price increases throughout the network to the contracts that require that to be profitable.

But on legacy -- yes, go on.

Just one clarification on that.

Sure.

Well, we are in negotiations, a midstream on amending those contracts, worst case on a couple, they expire next spring. So we're not locked in for long periods of time on the legacy Stay-Lite contracts anymore.

Okay. And that's the longest duration of the, we'll call them embedded loss contracts?

Yes. Yes. Yes.

Okay. And based on their annual run rate and all that, if you're not successful in getting an improvement in rates, do you have a rough estimate of what the embedded loss might be?

It's really hard to judge at this point, Andrew. As we said, we're currently in negotiations to update those. We've had success on some fronts of getting those updated already. So we're optimistic that we'll get that done. So it's very difficult to put a number on what that might be overall. We don't see it as a significant number in connection to the whole business. And we have -- we are looking at some other ways to mitigate what that is based on how we use subcontractors. So our objective is to keep that any loss contracts at a minimum for the remainder of the period. And we said -- yes, sorry, just to add one more point to that. We did say in our prepared remarks that we thought this would generate some slight headwinds for this segment, but basically would not jeopardize our guidance of $100 million.

Well, that's on the revenue side. But obviously, though the customers are going to do whatever maintenance they can, knowing that there's a price increase coming at the expiration if they stick with us. So I'm just trying to understand what kind of loss might eat. Just like a contract.

Yes. We typically will not see an acceleration based on something like that because there is a very defined schedule and you don't want to disrupt those operations, so.

Okay. And again, just flushing this out, just a little bit more. When you're getting these rates adjusted to the extent your customers are working with you to be cooperative and do that. Is it to just get it up at a breakeven level, or is it -- I know your aim is, but is your -- are your customers and your relationships with it such that they're willing to give you some modest amount of margin for the remainder of the contract?

Yeah. Clearly, our goal across the board is to have profitability in all of our individual contracts. And so the actions that we're taking right now will drive profitability for these individual contracts.

Okay. And on the new one, what pricing or margin provision protections are in the large multiyear maintenance contract here with the nationwide retailer that you recently announced. These are the same kind of terms, or are there some better protections for us?

Yeah. We really don't get into the specifics of individual contracts, but we feel good about this three year contract that we will be solidly profitable during the -- for the duration.

Okay. I have follow-up questions on Voltrek, but I'll back out into the queue because I've tapped down so many questions on the maintenance and service area here.

Okay. Thanks.

Thank you. That concludes today's Q&A session. I will now turn the call over to Mr. Jenkins.

Operator. Sorry. I don't think Andrew realized there was no one else in the queue. So I think he was going to jump back in if you give him a minute.

Sure. And our follow-up question is from Andrew Shapiro with Lawndale Capital Management. Your line is now open.

Yeah. Hi, guys. When you said I could do it again, that's when your conference call service has this voice that interrupts and tells me that my hands raised. So I didn't hear you, but thank you for letting me back in. On Voltrek, what do you feel remains in incremental SG&A spend and time involved in order to build out the sales and service infrastructure required to extend Voltrek reach across the US?

Yeah. What we've said previously is we were looking to double the size of the organization, primarily in new sales roles and project management and execution capabilities. We're well on our way down that path. We're not completely there yet, but we're well on our way, I would say, probably at least halfway from where we were to where we need to be.

Okay. And in terms of the earnout, remind us what is the duration on the rest of the earnout and it's based on revenue or EBIT or cash flow generated?

It's a three year fiscal year earnout. So the first year was completed at the end of fiscal 2023. There's two years remaining their earn-out is based on EBITDA. And there is a -- there are discrete targets for each fiscal year with a cumulative ticker potential at the end of year three.

Okay. And you're able to -- since its EBITDA, you're able to allocate appropriately the incremental hires in costs that you're putting in place for the build-out? Yes?

That's correct. It's a fairly self-contained operation.

Okay. Great. And last, regarding just Investor Relations calendar, what's on the slate for your upcoming non-deal road shows or investor outreach activities over the rest of the year or the upcoming quarter?

We have a non-deal road show coming up that's virtual in about 10 days or so the 21st. And we have other conference in September and November. We can send you those details offline.

Yeah. But just which are the conferences for the benefit of the transcript here for others to be able to reach? Do you have that offhand?

One is Craig-Hallum and one is H.C. Wainwright. And I think, I won't name the non-deal road shows, since that's usually done fairly discreetly, but we can get you an invitation, if you would like to do that offline.

No. The calendar works out, that would be great. Thank you.

That concludes today's Q&A session. I will now turn the call over to Mr. Jenkins, for concluding remarks.

Thank you, operator, and thank you, everyone, for joining our call today. I look forward to updating investors in coming months and quarters, as we execute our growth plan in fiscal 2024. Additionally, we continue to pursue opportunities to meet with investors in person or virtually. For example, as we just discussed, we expect to attend the H.C. Wainwright Conference in New York in September. For more information on planned events, or if you would like to schedule a call with management, please contact our Investor Relations team, whose information is included on today's press release. Once again, thank you for attending.

Thank you. That concludes today's call. You may now disconnect.