Earnings Call Transcript - OESX Q4 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Orion Energy Full Year 2020 Fourth Quarter Conference Call. At this time, all participant lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the call over to Bill Jones. Sir, you may begin.

Bill Jones, CEO

Thank you and good morning. Orion’s CEO Mike Altschaefl will open today's call with an update on current events, an overview of the Company, some highlights, and a review of the Company's business strategy. Orion’s CFO, Bill Hull, will then review some additional financial items. And we will open the call to 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 Thursday, June 4, 2020. Remarks that follow and 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 will generally 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 other matters, those described in the Company's press release issued this morning and in its filing with the Securities and Exchange Commission. Except as described in these filings, the Company disclaims any obligation to update forward-looking statements. And with that, let me turn the call over to Mike.

Mike Altschaefl, CEO

Thanks, Bill. Good morning, everyone. And thank you for joining today's call to review a truly transformational year for our Company. First, I want to thank the entire Orion team for their hard work and dedication over the past 15 months, first, helping us to achieve record results for fiscal 2020, and then working together in recent months, as we continue to navigate the COVID-19 pandemic. I will begin today's call by providing an overview of how Orion has been managing through the COVID-19 pandemic. Our primary concern has been and will continue to be the safety and well-being of our people, our customers, and our suppliers. Orion has implemented numerous safety precautions and protocols to address the related risks. These measures continue to change and evolve as more information becomes available. We have been adversely impacted by the actions taken by various government entities to control the spread of COVID-19, beginning in March. Like most companies, our near-term business prospects have been substantially impacted by actions being taken across North America to control the spread of the global COVID-19 pandemic. Since we were designated an essential business, our U.S.-based manufacturing operations were allowed to remain open. We also took steps beginning early in our fourth quarter to firm up our supply chain. These actions were successful, allowing us to meet our promise to our customers to deliver product on a timely basis. Nonetheless, we experienced the curtailment of activity in the last few weeks of our fiscal year. Existing and new potential customers are delaying, postponing, or changing projects for a variety of reasons, including travel restrictions and mandated work stoppages, Capital Expenditure spending freezes, financial constraints, strategy updates, and in some cases where business activity has escalated to avoid possible disruptions. As a result, approximately $5 million of previously anticipated fiscal 2020 product and service revenues were put on hold, as was the launch of multiple other projects, including those with new national accounts, most of which are now expected to result in revenue in fiscal 2021 and fiscal 2022. We also took proactive steps to reduce our overhead and operating costs. These cost reductions resulted in one-time charges totaling approximately $400,000 in Q4 of fiscal 2020 and were substantially implemented by the start of our fiscal 2021. Turning to our business progress in fiscal 2020, I am extremely proud of what our Company was able to accomplish by focusing on our key areas of strength and competitive advantages and how well our strategy is resonating with customers. Orion’s fiscal 2020 revenue grew 129% to just over $150 million. And we were successful in expanding our gross margin to 24.6% from 22.1% last year. At the same time, through continued expense management and discipline, we were able to leverage our costs, resulting in significant improvements in profitability, cash flow, and our year-end financial position. We achieved record profitability in fiscal 2020 with full year net income of $12.5 million or $0.40 per diluted share compared to a net loss of $6.7 million or $0.23 per share in fiscal 2019, an improvement of over $19 million. As anticipated, our fiscal 2020 results demonstrate the financial leverage of our business as we build scale. Our fiscal 2020 performance was largely driven by strength in our national accounts business, and in particular the contribution from an ongoing turnkey design, build, install, LED lighting system and controls project for a major national account. This project underscores one of our major areas of business focus, fully leveraging the integrated set of capabilities that Orion has developed to execute large, national scope projects, capabilities that are unique in our industry. Specifically, our turnkey solutions include an in-depth ongoing dialogue regarding customer needs and objectives, individual lighting and energy audits at each customer site, custom engineering and product design to achieve specific customer goals with rapid order production via U.S.-based manufacturing, on-time delivery, complete installation management of lighting systems and controls, and overall project management. Customers with extensive national operations appreciate the value and efficiency of centralizing their LED lighting retrofit process with one point of contact. They also value Orion's proven commitment to the highest levels of customer service, including on-time delivery, high-quality components, industry-leading energy efficiency, as well as our ability to incorporate a wide range of technology, not only for lighting controls, but also IoT data systems, which together provide a very strong and compelling product offering and attractive Return on Investment. Our success in fiscal 2020 with our major national account customer demonstrates our ability to provide turnkey project services of a significant scale on a national basis. In January, we announced that we were awarded approximately $18 to $20 million of additional business that we originally anticipated to complete during Q4 of fiscal 2020 and Q1 of fiscal 2021. This was expected to be approximately 130 locations. After completing approximately 30 locations through mid-March of fiscal 2020, the project was temporarily suspended by our customer due to the COVID-19 situation. Cumulatively, through March 31, 2020, we have completed approximately 880 locations and provided certain other products and services to this customer, resulting in total revenues of approximately $125.4 million. Total revenues during fiscal 2020 for this customer were approximately $111.8 million. In addition to the temporarily suspended 100 locations under contract, we estimate that our customer has approximately 500 additional locations remaining. We generally expect the remaining approximately 600 locations to be retrofitted during Q4 of fiscal 2021 and throughout fiscal 2022. We also expect to provide additional products and services to this customer. Next, I will provide an overview of our business and our strategic direction. Orion provides LED lighting systems and turnkey project implementation, including installation and commissioning of fixtures, controls and IoT systems, ongoing system maintenance and program management, helping customers to digitize their business and reduce their carbon footprint. Orion currently has three paths to the market. The first is the Orion engineered systems channel, where we focus on deepening our penetration of large national accounts with turnkey LED lighting and controls solutions, customized for each customer’s unique needs. With industrial LED lighting systems penetrating less than 25% of the total market, the opportunity is still many billions of dollars, thus providing a very ample runway for Orion's growth. Our confidence is born out in our success advancing opportunities, particularly in the areas of large national retailers, distribution centers, logistics companies, and public sector entities. For example, in February, we secured a $4.8 million project for warehouse and distribution facilities under new construction for a global online retailer. Having recently completed the initial scope, the project has been extended to additional facilities, increasing the current project size to over $6 million with significant long-term growth potential from this new customer relationship. We also expect to see additional operations with longstanding public sector customers, including the U.S. military, the Veterans Administration, and the U.S. Postal Service, and with new opportunities in the logistics sector, principally in support of e-commerce related facilities. Our second path to the market is the U.S. markets channel, which primarily sells to energy service companies, or ESCOs. Our ESCO channel achieved solid revenue growth in fiscal 2020 over the prior year, and we continue to believe this channel will provide significant long-term opportunities for us. The ESCO orientation toward delivering energy savings for the customers is well aligned with Orion's focus on energy efficiency and quality initiatives that reduce long-term cost of ownership. We saw the benefit of these relationships in our fiscal 2020 results. Our third path to the market is the Orion distribution services channel, which sells through manufacturer representative agencies and a network of broad line North American distributors. During fiscal 2020, we experienced some challenges in our agent-driven distribution channel, which had a revenue decline in fiscal 2020 versus the prior year. However, we are confident that this channel will be a source of growth. Last fall, we migrated to a hybrid approach to selling in this channel, where we work more directly with distributors and electrical contractors in partnership with our rep agencies, and it is showing much promise. Having competitively priced products that are available for timely shipment is also putting us in a strong competitive position. In addition, we are now gaining traction, bringing our technical expertise and turnkey services through this channel, again, working closely with our rep agencies. In fiscal 2021, we are launching a fourth path to the market, Orion maintenance services, where we will provide lighting and electrical maintenance and other services specifically targeted to large national customers, utilizing our turnkey, one point of contact approach. Underscoring our services capabilities is that $37.5 million or approximately 25% of our fiscal 2020 revenue was derived from services, thus far principally for installations completed within our design, build, install and retrofit programs. Our existing customers have experienced our ability to effectively manage projects, and we view this as a natural extension of our business, along with the opportunity to build significant recurring revenue streams. We have made some initial progress in providing lighting and electrical maintenance services to our national accounts. We have also hired a senior leader with significant recurring maintenance services experience to build our Orion maintenance services business. We will have more to say about this business in future quarters as activities develop. I will now turn to an overview of our strategic direction. Orion's strategic direction has five initiatives. First, we will focus on larger opportunities in all four of our market channels. Our turnkey project and program management capabilities are our most valuable differentiators in the marketplace. We have strong credentials and have the people, systems, and processes in place to be successful. In addition, there remains significant market opportunity. Second, we will build our new Orion maintenance services division. We have strong credentials in place. It provides us with the opportunity to build significant recurring revenue streams with the possibility of multiyear contracts. Third, we will expand our smart controls and IoT capabilities, enabling our path to digitization for our customers. We are well-positioned to own the entire system, including facility audits, system design, engineering, installation of lighting fixtures and controls, commissioning controls, integrating IoT technology, linking lighting, energy management, and operational controls into management dashboard systems and providing ongoing service. We are positioning Orion for a leadership role in the substantial long-term growth we anticipate from the increased digitization of business via IoT systems. To accomplish this goal, we are combining our lighting and electrical systems knowledge and our service and installation capabilities to complement a growing array of technology-driven systems being developed to enhance efficiency, safety, and overall business performance. Orion’s IoT experience and expertise should provide increased value while further differentiating our Company as customers look to deploy IoT applications along with energy efficiency initiatives. In this role, we intend to remain technology agnostic and be qualified to work with many of the leading IoT solutions in the market. We believe this strategy is a competitive advantage as our customers can utilize different technologies at different locations where they may have a specific solution preference or where they simply seek an impartial introduction to possible new solutions. We have the opportunity to own the ceiling technology landscape. We can play a vital role in supporting our customers as they navigate the path to digitize the operational information of their companies. Fourth, we will expand our current successful new product development to focus on developing high-margin niche products. We recently launched our new Harris Star Line LED High Bay fixture, which is based on some tremendous work and innovation on the part of our engineering and design teams. This product is targeted at our largest market segment of industrial and other highway applications. The Star Line is very competitive in price while also delivering a substantial improvement in energy efficiency and other features versus competitive products. In addition, it is mainly manufactured in our U.S.-based operations. Given its performance and features, the Star Line has received very positive responses, and we think it could be a big winner for us. We're also excited about the potential of our new IP rated round Harris LED UFO High Bay fixture, which is a cost-effective and efficient fixture providing an excellent choice to customers that prefer a round high bay fixture. Due to the unfortunate COVID-19 situation, we are relaunching our LED retrofit fixtures, incorporating violet white light technology to combat bacteria, fungus, mold, and mildew, used for high traffic areas such as schools, healthcare, food service, and fitness facilities, as well as in other high-risk public spaces. Our fixtures combine Orion’s Britex, antimicrobial fixture coating with violet white light in the 400 to 430-nanometer wavelengths. This product is available today and we are experiencing significantly increased interest from the market. We are also beginning to work on incorporating ultraviolet light into some of our products. Certain UV light has been shown to kill bacteria and to inactivate viruses. In addition, we are working with a business partner to incorporate UV technology into an air movement product. While these initiatives will take some time, we see great potential. Given rising customer focus on environmental dangers, health risks, and the desire to provide safe work environments in the facilities, we think these solutions are well-positioned to meet what we believe will be strong market interest. Finally, another product category in our new product development roadmap is horticultural lighting. We expect the market potential for vertical farming and other horticultural lighting opportunities to grow significantly. The fifth and final initiative of our strategic direction results from our recent success in our current market conditions. In addition to organically expanding the nature and scope of our products and services offered to our customers, we are actively exploring potential business acquisitions, which would more quickly add expanded and different capabilities to our product and services offerings. We believe the current business climate in our industry could create attractive acquisition opportunities. Finally, I will touch on our financial performance from a high level. In fiscal 2020, even with the COVID-19 revenue impact discussed earlier, we achieved the lower end of our revenue goal of $150 million to $155 million along with EBITDA of $14.7 million or 9.7% of revenue, substantial improvements over the prior year. Our EBITDA margin was slightly below our 10% goal, largely due to the impact of COVID-19-related project delays that occurred starting in March. We estimate approximately $5 million in product and service revenue slated for the fourth quarter of fiscal 2020 was deferred and is now likely to be completed in the second half of fiscal 2020. We also incurred approximately $400,000 of one-time costs for overhead and operating cost reduction initiatives in the fourth quarter of fiscal 2020, as we made proactive expense reductions to adjust our operations for the expected business impact of the pandemic. Excluding these impacts, our revenues would have been at the high end or exceeded our revenue goal, and we would have achieved our EBITDA margin goal for fiscal 2020. Under normal circumstances, the timing of customer activity is subject to certain changes that can impact the quarter or year into which revenues fall. Until the economy fully reopens and our customers can return to a more normal state of operations, it will be even more difficult to provide visibility on our expected financial performance. Based on our recent customer discussions and our market intelligence, we currently anticipate that our revenue will build on a sequential basis through fiscal 2021 from a very challenging first quarter as customer activity moves toward more normalized levels over the course of the year. We also anticipate the likelihood of operating losses in the first and second quarters, but remain optimistic that our business will return to profitability in the third or fourth quarter. Much more importantly, we believe that Orion is very well positioned for fiscal 2022 financial results to be at least at the levels achieved in fiscal 2020. With that overview, let me turn the call over to Bill Hull for additional financial perspective on our fourth quarter and fiscal 2020 results.

Bill Hull, CFO

Thank you, Mike. Orion’s fourth quarter revenue increased 15% to $25.9 million compared to $22.4 million in Q4 of 2019. That's primarily due to increased product sales and services related to turnkey LED lighting and controls installations for a major national account customer. Product revenue rose 9% to $19.6 million and service revenue increased 39% to $6.3 million. Fourth quarter gross margin increased to 22.3% compared to 19.5% in Q4 2019, but was below our Q3 of 2020 gross margin of 24.2%. Q4 ‘20 gross margin was positively impacted by revenue mix and volume compared to Q4 2019, the decline versus our third quarter, mainly due to the margin impact of lower revenue relative to our fixed manufacturing costs. Operating expenses were $6.1 million in Q4 of ‘20 compared to $5.8 million in the third quarter and $5.1 million in the fourth quarter of 2019. The year-over-year increase reflects higher sales and marketing expenses, including increased commissions based on higher sales volume. Reflecting higher revenue, higher gross profit, and operating leverage, Orion’s fourth quarter net loss improved to $0.5 million or $0.02 per share versus a net loss of $900,000 or $0.03 per share in Q4 ‘19. For the full-year, Orion’s revenue rose 129% to $150.8 million compared to fiscal 2019, also primarily due to the increase in national account LED and retrofit activity. In fiscal 2020, net income improved to $12.5 million or $0.40 per diluted share versus a loss of $6.7 million or $0.23 per share in fiscal 2019. Orion generated EBITDA of $14.7 million in fiscal 2020, compared to an EBITDA loss of $4.3 million in fiscal 2019, an improvement of $19 million. Cash from operating activities increased to $20.3 million in fiscal 2020 versus a use of $5.1 million in fiscal 2019, principally due to the higher sales, increased gross margin and net income, as well as higher receivable collections. At fiscal year-end, Orion’s cash and cash equivalents were $28.8 million, up from $13.8 million at December 31, 2019, and $8.7 million at fiscal 2019 year-end. The improvement reflected strong cash flow from operations this year and our ability to draw on our $20 million credit facility. Net working capital increased to $27.8 million from $14 million in March 31, 2019, and shareholders’ equity also improved to $31 million at year-end versus $18 million the previous year. Total debt outstanding, primarily from borrowings under our revolving credit facility, was $10.1 million at March 31, 2020, versus $9.4 million at March 31, 2019. We believe our cash on hand and expected future cash receipts, combined with our borrowing capacity, provide a strong financial base for our Company in the current environment. Finally, I want to highlight the cash flow benefits we realized as a result of substantial net operating loss carryforwards that provide a shield from current operating income and cash flows from federal and state taxes. As a result, our fiscal 2020 pre-tax income of $12.6 million resulted in net income of $12.5 million. As of our fiscal year-end, we had net operating loss carry-forwards of approximately $75 million for federal tax purposes and $62 million for state tax purposes, which could represent several years of additional tax and cash flow benefits for the Company. And with that, let's open the call to questions.

Operator, Operator

Thank you. The first question comes from Marc Wiesenberger with B. Riley FBR. Your line is now open.

Marc Wiesenberger, Analyst

Good morning. Thank you for taking my question. Can you talk about your exposure throughout the U.S.? Remind us maybe kind of where the primary activity is taking place and kind of the different trends you're seeing across the country?

Mike Altschaefl, CEO

Sure. There certainly are differences across the country, obviously with how different states or local communities are reacting and taking actions and putting procedures and restrictions in place. We're really very broadly impacted across the United States because of our activities with national accounts. And so, it's been different in different areas of the country. A lot of it is really beginning to open back up, which is optimistic. And so, we had certain situations where there may have been some short-term closures or perhaps a facility we were working in had a COVID-19 situation, which closed it temporarily. So, I'd say, generally, things are opening back up, Marc. But we do operate across North America. And so, there is impact, both a little bit in Canada and Mexico, but mostly within the United States.

Marc Wiesenberger, Analyst

Got it. With a number of schools and government facilities empty as a result of COVID, have you seen any increased demand to retrofit these types of facilities? And maybe, are there any factors that are preventing you from executing on those types of projects?

Mike Altschaefl, CEO

We have noticed some limited activity as facilities are now available, which has allowed us to undertake additional retrofit work on previously approved projects, potentially moving timelines forward. We have not encountered any issues in supplying products, and our installation teams have been active where opportunities arose. While it hasn't been overwhelmingly significant, there have been some instances where we were able to proceed.

Marc Wiesenberger, Analyst

Understood, thank you. And just one more for me. Can you talk about the type of investments that are going to be needed to build the Orion service and maintenance division? And how much of this will be taken care of kind of in-house vertically integrated, and how much are you looking to partner with outside providers?

Mike Altschaefl, CEO

Sure. We're still working through our final business plan, as we launch this new division. And we currently believe that the investments needed in this are very achievable and financeable from the standpoint of the financial strength that we're sitting at right now. It's a fair amount of people additions as business volume grows, and as things develop, some additional capital. But we don't see this being overly material for us. From an execution standpoint, it really would probably be a mixed approach that for maintenance companies, sometimes you might self-perform, sometimes we might use some of the great partners that we’ve had in the past that manage installations for us on a nationwide basis. So we'll probably be doing some of both, but over time would most likely be migrating towards more and more performance on our own markets as the business grows. The good part is we've always done some of this work with existing national accounts. It's not a big part of our services business right now, but we know how to do it, have done it, and can either do some self-performance or leverage our supply chain.

Operator, Operator

And our next question comes from the line of Craig Irwin with Roth Capital Partners. Your line is now open.

Craig Irwin, Analyst

I really appreciated the significant amount of detail you gave us on your first major customer that we avoid naming, I guess. But the store detail and the revenue split, and the fact that they basically put a pause on installs was all very helpful to understand the mechanics in the quarter. I was pleasantly surprised to see that the remaining 500 stores that had not been previously contracted, that you didn't already have scope awarded for, but you’re very confident that this will get done over the next number of quarters. Can you maybe describe for us what gives you that confidence? You're going to do these as the customer communicated this directly, and will the revenue per store be very similar to what the 880 have been so far?

Mike Altschaefl, CEO

Sure. Thanks, Craig. Great question. First of all, we thought it was appropriate, given that we recognized, like many companies, providing near-term financial visibility is very, very challenging. And so, what we wanted to do is provide people with as much information as we can have and longer-term vision and potential strategy and business operations to help all of our investors understand our business and the great optimism we see going forward. We see this temporary pause as a success. So, for that particular customer, what I can explain to you first, maybe in no particular order, we would expect the average location revenues to be about the same on those future 600 locations as they have been for the past locations. So, I think if you took into account estimates of where we think the revenue potential is. From a customer standpoint, as I said in my comments and in our press release, the 100 remaining from the announcement we did back in January, are contracted relationships that we expect to do at some point, we have a high level of confidence in the additional 500 locations. Our customer is not contractually obligated, but we believe the performance we have performed for them, the very significant energy savings they've achieved and the service levels we've provided give us a high level of confidence that when they choose to decide to move forward with additional retrofits of those last remaining locations, we have a very high probability of doing that business.

Craig Irwin, Analyst

Excellent. Thank you for that. So, another detail from your press release mentions your global internet retailer customer, where I guess you had about $7 million in orders to date. You specifically expect a meaningful revenue contribution going forward. How meaningful? What's your definition of meaningful? Can this be as big as the other anchor customer out there? You’re probably acutely aware. I'm talking about a customer that may be worth $150 million a year that I’d heard you had made very significant progress with. I mean, is this something that's similar to your lead customer now?

Mike Altschaefl, CEO

Let me talk about this customer a little bit. First, I don’t think it’s appropriate to assume that this new customer relationship will be as significant as the large customer relationship we discussed today. We should view it as an opportunity that is starting right now, and what we have announced has the potential to last for several more years. I don't want to suggest that it will be similar to the first one. What excites us is that, first, it is a new customer relationship; second, it involves new construction. As I mentioned today, these are new warehouse distribution centers being built for that global online retailer as their operations expand. While there are certainly many reasons to be concerned about the economy, when we examine our customer base, we see strong verticals and big box retailers that are navigating this situation well. We have always been and continue to be heavily involved in distribution centers, warehouse centers, and logistics companies, all of which are performing strongly during this time and are likely to continue doing so. The automotive sector remains strong for us, even though I didn’t address it much today, and we anticipate good prospects for that in our fiscal ’21 and beyond. Additionally, we are very optimistic about the public sector and expect to have positive developments in that area to share as things become clearer. Overall, we believe the verticals we operate in will perform well, even amidst the current challenges.

Craig Irwin, Analyst

So, just, if I can ask another question about this customer, you mentioned that you would be primarily serving their new construction. Would you expect to maybe be a share of the business there, right? I'm assuming that you're an approved supplier there, but sometimes there are similar fixtures being offered by others. Would it be kind of an all-or-nothing situation for each new facility, as far as your fixtures, or is it possible that your fixtures can represent a portion of the related high bays in a new distribution center or warehouse?

Mike Altschaefl, CEO

I'm not sure we completely have the answer to that yet. Craig, I believe that we are engaged in various projects for them, specifically handling all the highway-type lighting in those facilities, along with other elements in some of the offices. Considering the nature of their business and its global reach, we aren't claiming that we expect to be the exclusive supplier of lighting fixtures for that organization in the future. However, given the size of this global entity, having a portion of their business could be quite beneficial for us moving forward.

Craig Irwin, Analyst

Excellent. That's really good to hear. So, another elephant. So, talk to us a little bit about the other elephants in the grass. So, you've got some very high profile customers on board already. I think it's very well understood by people in the lighting market, maybe not the equity markets as well. But, you've got a couple of really attractive things that you could point to. Are you seeing many more of these elephants sort of migrating their direction, saying there has to be something special at Orion for banner customers to be doing business? I mean, what's going on on the big side?

Mike Altschaefl, CEO

Sure. We feel confident and encouraged by the pipeline of activity that we are seeing across our business. And it's not only our larger national accounts but also some of our other bread and butter business from the activity that we're seeing. And the sales cycle always takes some time. And in some respects, this current environment in some situations has sped things up because people have had time to focus on some of these activities. In some cases, it might slow it down. So, I think what I would say is, not to be too repetitive, is that we do see some tremendous opportunity in the public sector side of things because those projects take a really long time to mature. And so, often they continue to move forward, even through difficult periods of time, maybe some delays, but as they keep going, they gain more and more momentum. So, we do think we will have some positive situations there. Also, as I stated in my comments, we had several other opportunities that were very close or ready to launch with some national scale operations that just were somewhat delayed or suspended. What I really would like to emphasize is that we have not had any significant cancellations of business. And so, that has been some encouragement in a difficult period that things have been delayed or postponed for a little period of time but we have not seen significant cancellations of projects. And so, we think as the country continues to open back up, it’s primarily kind of an access situation and perhaps companies being careful from a capital standpoint. But as those two things start to clear up, we feel confident that we will be able to announce and talk about some other significant wins for the Company.

Operator, Operator

Thank you. Our next question comes from the line of Eric Stine with Craig-Hallum. Your line is now open.

Eric Stine, Analyst

Good morning. So, wondering if we could just talk about the new sales hires. I know this was undertaken a couple quarters ago and I understand the COVID may make it a little difficult to tell. But how do you feel like that's progressed? I know your goal has been to feel like you're getting a full look at the opportunities out there. So, as best you can tell, in light of the current situation as you think longer-term, how do you think that's developing today?

Mike Altschaefl, CEO

I feel really good about how it's developing so far, Eric. We've brought up some talented people who are making progress. And you kind of hit the nail on the head, it gets a little bit difficult because some of that progress literally was starting to kind of hit and how it was postponed somewhat or delayed somewhat because of the COVID-19 situation. So, we do think we're getting a broader look at more opportunities. And particularly larger opportunities take quite a while to develop and they tend to be somewhat, I’m going to say, cyclical and that they're tied into company’s annual CapEx budgets. And so, it takes a little time for these relationships to fully develop. But we feel good about where we are at with not only our great and existing sales team, but also people that we added to help build that part of our business to give us more opportunities. So, we feel very good about it.

Eric Stine, Analyst

Turning to the maintenance and services side, it seems that your approach is influenced by customer feedback. I'm interested in your perspective on this and whether the impact of COVID might lead to long-term benefits for your business, particularly as customers look for a single point of contact or aim to minimize the number of individuals in their facilities when things return to normal.

Mike Altschaefl, CEO

That's a great question. I want to emphasize that our key strength is our ability to serve as a single point of contact, providing a comprehensive solution for larger projects. It's not just about the installation services; it's also about the program management and the systems needed to execute these projects effectively. If you were to speak with some of our biggest customers, I believe they would highlight that we simplify their lives. This ease of use is important, but it's also backed by our high-quality fixtures and thorough implementation process, including control commissioning. Recently, we've also started to provide maintenance services for some of our larger accounts, which we've not previously focused on but see as a natural growth area. We are knowledgeable about the electrical and lighting aspects, and as companies seek more capabilities and preventative maintenance, we believe we are well-positioned for growth in this sector. We're optimistic that this could lead to substantial revenues for us in the coming years.

Operator, Operator

Our next question comes from Amit Dayal with H.C. Wainwright. Your line is now open.

Amit Dayal, Analyst

With this large customer, the one you have 100 locations remaining with, do you have any maintenance contracts in place already or are you looking to get into that sort of agreement with them in the near term?

Mike Altschaefl, CEO

We do not currently have maintenance contracts in place with that customer. But it's a natural opportunity for us to provide these types of services, and we would expect to have conversations with that customer.

Amit Dayal, Analyst

Understood. With sort of the weakness expected over the next one or two quarters, what kind of impact on the gross margin front should we be looking at? I mean, do we think the levels we saw in the fourth quarter are sort of what we should expect to play out for the next few quarters and then see some improvements post that?

Mike Altschaefl, CEO

I think, on the gross margin side, let me kind of cover that at a higher level, but Bill will add a little bit more color to that, Amit. I think part of what we saw happen last year, which we indicated would happen, is that because we've chosen strategically to have significant U.S. based manufacturing operations, which allows us to do some great things for our customers with customized products on a very short delivery timeframe, that does create some fixed costs. So, during fiscal 2021, you could see that in certain quarters where our volumes went up significantly and much of that volume was manufacturing going through our facilities, you get that incremental impact. So, likewise, as we go in the next couple of quarters, we're likely going to see that impact and gross margin in the other direction, as you have the reality of a great skilled workforce and assembly facility that’s not going to be used up to its capacity. But we view that as short-term in nature. And as we go through that, we've scaled appropriately and these things will kind of come back around. But I'll let Bill maybe just add a little bit more to that answer for you, Amit.

Bill Hull, CFO

Yes. As we mentioned in the call, we took about a $400,000 charge based on some cutbacks we had to make. So, we did some deep cuts, and some of those came out of SG&A and some of those came out of, call it a cost of product or cost of goods sold. And this all happened during the pandemic in March. We had to react quickly to get our costs down. But so that'll help us out. However, the volume plays such a significant role, and if you look at the past periods where we have lower sales volumes and the impact that has on our gross margins. But also, as Mike said, we view that as temporary. And when we get back to the second half of the year or so, we see strength coming back.

Amit Dayal, Analyst

And as you mentioned, potentially entering the horticultural lighting space by the end of the next fiscal year, do you already have products or are you working on developing products for that market?

Mike Altschaefl, CEO

We are in the product development phase right now and have some products closed that were related more specifically to our customers' needs, but we expect to build off of that over the rest of the year and we'll have products available as we continue through fiscal 2021. We just think that frankly everyone gets maybe appropriately excited about what could be done from a cannabis side, but it's really much broader than cannabis. We just think there's going to be a future in horticultural, vertical farming, and other applications that again, it just seems like a natural extension to move into this product line. And we think it’s now getting mature enough as an industry, but still a lot of opportunity in the United States that it makes sense for us to enter that market.

Amit Dayal, Analyst

Just one last one for me. From an M&A perspective, are you looking for more distribution type of opportunities or technology and product type of opportunities?

Mike Altschaefl, CEO

The product side, from a distribution standpoint, is certainly important. And we feel really good about the product pipeline we have right now under product development, as I talked a little bit on the call, and we have the ability internally to develop really, really good products. But we also look globally for products that we think are going to meet the needs of our customers and are high quality and at the right competitive place for our customers. So, we're not myopic about it. We think about both U.S.-based manufacturing but also sourcing product on a global basis where it makes sense for us. The developed Star Line product we've talked about earlier, we're very optimistic about as well as our IP rated UFO High Bay. The one we didn’t talk about a lot on the questions is I do think the area of both the violet white light and the UV area is going to have some huge potential for this industry over the coming years. And we're well-positioned, we think, to participate in that. We've been active in the violet white light area for several years and have products ready to go. And the UV side has additional potential for different types of uses with customers. So we feel good about that. So, I think from a standpoint of looking at internally, we're probably well-positioned from a product standpoint.

Operator, Operator

Thank you. And this concludes today's question-and-answer session. I will now turn the call back to Mike Altschaefl for closing remarks.

Mike Altschaefl, CEO

Great. Thank you, Chris. Once again, I want to thank the Orion team for their hard work and dedication that yielded a tremendous performance for our business in fiscal 2020. I also would like to thank our shareholders who continue to support us. While it is unfortunate that the COVID-19 situation will be a temporary interruption to our success, I am confident your Company will regain momentum. During the current period of social distancing and travel constraints, we've not been able to visit face to face with our investors, but if you would like to ask questions or schedule a call with management, please contact our Investor Relations team whose contact information is on today's release. Thank you again for your time today. We look forward to updating investors on our fiscal 2021 Q1 call in August. Thank you everybody. Have a good day.

Operator, Operator

This concludes today's conference call. Thank you for attending today's presentation. You may now disconnect your lines.