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Executives

Mike Harris – Vice President, Investor Relations

Neal Verfuerth – Chief Executive Officer

Scott Jensen – Chief Financial Officer

Analysts

Glenn Wortman – Sidoti & Company

Brian Kremer – Roth Capital

Eric Glover – Canaccord

Scott Reynolds – Stifel Nicolaus

Michael Legg – Merriman Capital

Orion Energy Systems, Inc. (OESX) Q2 2011 Earnings Call October 26, 2010 5:00 PM ET

Operator

Good afternoon and thank you for standing by. Welcome to Orion Energy Systems Second Quarter 2011 Earnings Conference Call. Your lines have been placed in a listen-only mode until question-and-answer segment of today’s call. This call is being recorded. If you have any objections you may disconnect at this time.

I will now turn the call over to Mike Harris, Vice President of Investor Relations. Please begin, sir.

Mike Harris

Thank you, Operator. Good afternoon, everyone. And thank you for joining us for the Orion Energy Systems second quarter fiscal 2011 conference call. Once again my name is Mike Harris, I recently joined Orion as the Vice President of Investor Relations. With me on the call today are Neal Verfuerth, Chief Executive Officer; and Scott Jensen, Chief Financial Officer.

Please note that earnings press release issued today include the section that briefly discusses annual supplemental information document that was posted to the company’s website. This supplemental information provides additional details and analysis on the company’s financial performance for the second quarter and year-to-date results. We believe providing this additional information should lead to a more comprehensive understanding of Orion’s performance during the second quarter and year-to-date fiscal 2011.

Due to the introduction of this additional supplemental information, Neal and Scott’s commentary during the call this afternoon will be more abbreviated relative to previous calls. Both of them will focus their discussion on topics and matters that we believe are more strategic, value added and most incremental to analysts, investors and other interested parties.

I will now read the safe harbor statement. Our remarks that follow including answers to your questions include statements that we believe could be forward-looking statements 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. Those risks include among others, matters that we have described in our press release issued this afternoon and in our filings with the Securities and Exchange Commission. Except as described in these filings, we disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call if at all.

Now, I’d like to turn the call over to Neal Verfuerth, Chief Executive Officer of Orion Energy Systems. Neal?

Neal Verfuerth

Thank you, Mike. Good afternoon, everybody. Certainly, I’m happy to be on this call today since we have announced our record contracted revenues for this second quarter fiscal year 2011, I’d like to also welcome Mike Harris aboard as our new VP of Investor Relations as he just stated.

Also as Mike stated, we’re going to spend more time, Scott and I, but specifically me talking about where we are going as a company and just what the overall strategy that’s going to help us to get there and meet the goals that we have been talking about as an organization’s wing, way back before the IPO took place several years ago.

First and the foremost, we’re going to continue our development and building upon the portfolio of products that we have that will help our customers go from where they are today, many of them largely inefficient to taking them ultimately off the electric grid.

We have our portfolio of products set, are proprietary many of them and using our ability to master the thermal and optical properties of the product, we can continue deliver high performance lighting that is more efficient, delivering more light for less energy input than anything else on the market today as we continue to approve our technology out in (inaudible) in customer’s facilities. We have numerous patents protecting this technology both design and utility patterns.

We have been working and continue to refine our manufacturing operations. We have a vertically integrated plant here at Manitowoc, Wisconsin that allows us to provide our customers a promise of a two week delivery and we can do that and still compete with any other plant anywhere in the world as it relates to the overall cost of goods sold and so we will able to ship here from Manitowoc and get product from our customers within three days shipping from any point in the U.S. from here Manitowoc.

We continue to develop our infrastructure internally, IT, customer service and our technical bench, so that as our sales ramp up we can support these sales and not have to be concerned about compromising the customer experience of Orion and furnishing our brand that we worked so hard to achieve this prominent place in our space.

Last but not least with all these things in place, we are putting a lot of emphasis on getting what I call feet on the street, getting more people out there trained up that go out and represent Orion product line and follow our prescribed system and how to sell the product.

In the last eight months, we’ve actually run through about 16 new sales people that are now on the streets talking about Orion telling our story and most importantly telling the story exactly the way we want it told from the time the initially call takes place all the way through the sales process to the ultimate close. And then after that we’ve even got prescribed as it relates to how to build upon that success with our Environmental Stewardship Awards and referral programs, et cetera.

While we are working with the feet on the street we are also starting to better leverage utility company relationships, the dollars for demand side management are starting to once again flow in really unprecedented levels.

As an example, I had a meeting recently with some folks from Exillon Energy. This is the consulting company that’s managing the program for Exillon and what we’re seeing from the 2008 to 2010 as an example, those three years, their goals for megawatt hours were 920,100 and they had a budget of $247 million we’re seeing now for years ‘11 through ‘13, a $675 million budget and a $3 million plus goal. So we have got a 3X increase in goals and 2.5 increased in the dollars flowing to these programs.

So Orion is very well positioned now with these additional feet on the street to capitalize on these outside dollars that help to fund this programs and get customers to hold the trigger, make the decision to go ahead with one of our systems.

As relates to financial goals for the fiscal year, the balance of the fiscal year actually, we’ve got some goals out there that are going to help our financial performance significantly. First and foremost, we have got a planned 30% inventory reduction between now and the end of our fiscal year of March 31.

We are very comfortable right now that the shortage in electronic components that have existed for the last 18 months or so that’s really just played havoc in the overall supply chain is starting to ease up, so we’re very comfortable right now that we can start to delete these inventories that we’ve had, that were really strategic in nature, so we weren’t in a position to run out of balance or run out of controls and again, not be able to make that commitment, that promise to our customers to deliver within the two weeks time period that we’re accustomed to.

We’ve got already identified cost reductions SGA and COGS that we believe very comfortably we can get another $2 million there in savings and cost reductions. So it’s -- the plan is working exactly as we had laid it out, again as I -- prior to the IPO, a little bit of set back of course to the economy, but targeting these goals that we’ve have and we are preparing to set to reaffirm guidance for the year that we stated at the beginning of the year.

And what we’re seeing out there now and talking to customers is things are definitely loosening up and I think just what’s represented in our contracted revenue is just best testimony as to what we’re seeing out on the street today. Things are starting to move again in the favorable direction.

So, with that, I’ll turn it over to Scott.

Scott Jensen

Thank you, Neal. As Neal mentioned, we are reaffirming guidance for fiscal 2011 of contracted revenues between $100 and $110 million, GAAP revenues of $78 to $84 million, non-GAAP earnings per share of $0.25 to $0.33 and GAAP earnings per share of $0.02 to $0.10.

Let me spend a few moments discussing how we achieved our GAAP topline guidance for the back-half of this year. As reported for the first half of fiscal 2011, our GAAP revenues were $28.4 million and we enter our fiscal third quarter with a record GAAP cash backlog right now of $13.7 million. So we’re very encouraged again evidenced as to Neal’s comments about improved environment, customers placing purchase orders and the success that Orion is encountering.

Additionally, earlier this year when we talked about an investment in solar inventory based upon a purchase price opportunity, orders for solar cash deals were received in early October totaling $3 million. If you look at our supplemental information, you will see that our expected revenues from completed OTA and PPA contract will deliver another $2 million in the back half of fiscal 2011. And within our national account base, we’ve identified an additional $4 million of business from customers who have made commitments within calendar 2010.

The sum of all of these adds up to a total of $51 million that we’ve identified right now as orders that we have either in-house or high probability of receiving. To deliver on the midpoint of our GAAP guidance range then of $81 million, we need an additional $30 million. That hasn’t taken into account any of the impact as Neal spoke about earlier increasing feet on the street in our partner channels and $30 million spread out over the back half of this year we feel very comfortable that we can deliver on that.

Traditionally, October order flow has been very solid, we’ve been very pleased with the start of this quarter in terms of new contracted revenues and we’re encouraged by dialogues that we are having with customers who are planning for calendar 2011 budget. So we feel very confident in our ability to hit our GAAP guidance.

On the earnings side Neal mentioned the cost reduction plans that we’re putting into place. This will allow us to be able to deliver on our bottom line guidance as well.

I’ll touch briefly on a few financial highlights for the second quarter. Details of our financials were provided in today’s earnings release along with the supplemental information that might provide -- referred provided on our website, but let me touch briefly on a few key items.

For the second quarter, our wholesale channels contributed 53% of our total revenue in the quarter. The second consecutive quarter we achieved greater than a 50% contribution. For year-to-date which also add a 53% contribution. So we’re encouraged by the traction and success that we are seeing and being able to scale our partners across the country.

Our gross margin for the second quarter was 36.2%, over 350 basis point improvement from the prior year second quarter. This is testament to our manufacturing cost reduction efforts from last year where we’ve continued to sustain mid-30 gross margins, despite a relatively low equipment utilization. We’re doing this by managing our production efficiencies, our premium costs for over time and just improved throughput through our manufacturing facility.

Finally, let me briefly comment on our effective tax rate. If you take a look at our effective tax rate you’ll notice that it went up on a benefit level. The tax rate as it stands today is very similar to our fiscal 2009 year where we had similar pre-tax and earnings results with two key differences being that in fiscal 2011, we’ve currently been reserving for state tax credits where we do not believe we’ll be able to utilize them within the timeframe available to us and a slight increase in non-deductible expenses due to increased sales and marketing efforts.

Our inventory levels increased in the quarter by $3.7 million from the end of our fiscal 2011 first quarter. In the second quarter, as Neal mentioned we brought in an additional $2.7 million of electronic balanced inventories in response to concerns over critical supply shortages. We did this from a strategic initiative to make sure that we could support customer orders and the delivery promises and the energy savings promises that Neal referenced earlier.

Over the last 12 months we’ve made strategic investments in inventory of approximately $15 million, $7 million for the completion of our controls product rollout which was completed in August and as Neal mentioned, we expect this inventory to start moving out and providing free operating cash flow.

$2 million of that investment related to the solar inventory that I mentioned earlier where we have orders in-house and we’ll ship that product in the fiscal third quarter and $6 million and an increase in electronic balanced inventory again to protect supply side issues. We expect to see inventory levels start to be depleted in the back half of fiscal 2011 as Neal mentioned, again providing strong operating cash flow to our business.

Finally, let me touch on liquidity, we finished September with $13.3 million in cash and $1 million in short-term investments. In addition to this liquidity, we have $15 million of availability on our line of credit with no outstanding borrowings.

Moving into the back half of the year, we also expect to generate free cash flow from our working capital. In September, we were really excited about the closing of our first debt borrowing with the financial institution to fund completed OTA projects. This initial funding provided $2.4 million of cash at an interest rate of 7%. We believe the success of this initial deal validate our strategy and efforts that we can procure financing available at reasonable cost of capital allowing us to fund these OTA projects and continue to grow our customer finance programs.

Ongoing, we continue to have conversations of our larger capital deployments with large multinational banks and on a parallel path we continue to have discussions with smaller regional banks, which are able to allocate capital in smaller trenches similar to the success we had in September. We do believe that we’ll close on additional financing during fiscal 2011.

With that, I’d like to turn the call back over to the Operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question from Glenn Wortman of Sidoti & Company. Your line is open.

Glenn Wortman – Sidoti & Company

Yeah. Good evening, everyone.

Neal Verfuerth

Good evening, Glenn.

Scott Jensen

Good evening, Glenn.

Glenn Wortman – Sidoti & Company

Just kind of looking at the numbers there, your sales were down year-over-year on core lighting business. We hear from some of your competitors that the retrofit business is up pretty significantly versus the prior year. Can you just give us a sense of maybe the disparity performance on the core lighting business between you and your competitors?

Scott Jensen

You know, I wouldn’t really call the disparity, Glenn. If you look at our contracted revenues in the quarter, we had a record quarter and really it was timing issues for us. We received a large slug of orders at the end of September and we’ll shift those orders in our third fiscal quarter.

So we are very pleased with the level of contracted revenues that we had in the quarter and that, I guess the customer behavior that we’re seeing going into the back half of fiscal 2011 as evidenced by the reaffirmation of our guidance.

Glenn Wortman – Sidoti & Company

Okay. And then just looking at the contracted revenue I think a big chunk of that, probably somewhat about $8 million was from a cash -- from a solar power project, is that right?

Scott Jensen

Correct.

Glenn Wortman – Sidoti & Company

Okay. So you think that type of a project is a one-off, you think there is -- all these projects out there and what do you think, when you’d expect to realize the revenue from that particular order?

Neal Verfuerth

Definitely, Glenn this is Neal. There are definitely a lot more of those projects out there, that’s one of the benefits that Orion has in this space as it relates to renewable opportunities. Unlike many of the players out there, we have an existing installed base of some 6000 facilities that we’ve save these people, I think we just rounded a billion dollars on a accumulative savings basis.

We’ve made the promise and kept the promise to them, it’s for us to go back there and now talk about the renewables, it’s a easier discussion they have that it is with one of our competitors Greenfielding and the track record that if we have with them and an expertise, it really a core competency in doing projects like we’ve done from coast-to-coast. And what I would consider to be more difficult this side of the rough, the finished side of the rough and all the production and distribution activities are going on now for us to go and do a project and to refer somebody is really much easier for us to do and to scale than other people we see out there today.

And as evidenced with the fact that we’ve only been in the business in official capacity that is renewal business with our engineered systems group for about a year, even of course, we’re researching solar for several years before that, but we’re really new to it and I say, we’re already rising to national prominence as it relates to modern megawatts we’ve under contract already.

Glenn Wortman – Sidoti & Company

Do you expect to realize the revenue from that particular project in the third quarter?

Scott Jensen

I wouldn’t anticipate we will recognize all of the revenue from that in the third quarter, Glenn. Certainly we expect to ship the product. Solar installations and PV jobs, we typically expect that the revenue cycle on those jobs approximate 180 days, so six months. But we do expect by the end of the fiscal year that we’ll recognize that revenue but it won’t all be in the fiscal third quarter.

Neal Verfuerth

There’s a lot of moving parts to these jobs and again that’s part of the core competency admission that those engineering workers, load calculations were just a lot of things that has to, Glenn, this is a major -- we are essentially installing a power plant in the customers rough. So we take a very methodical approach to this rather than just slapping the stuff up in the roof and hoping for the best.

What we are seeing to-date on all of our solar projects, we’re actually running as much as 10% ahead of what our throughput calculations were, prior to the start of the install just based on the quality of job that our team in Plymouth are deploying out there in our customers roughs. And now we see customers like Anheuser-Busch as an example signing out for the next phase with us. Again, no better evidenced as to what kind of work we do and the systems that we deliver than having a customer place another repeat order.

Glenn Wortman – Sidoti & Company

And how should we think about margins on these power projects relative -- solar power projects relative to your lighting business?

Scott Jensen

Well, certainly on the lighting business side, when you know we’re able to deliver higher margins, given our IP and our manufacturing input. We’re working on improving solar margins. We’ve got projects ongoing right now, related to installation that we’ve been testing and developing right here in Manitowoc with our own solar rooftops project. And I believe that we have the opportunity to start to approximate some of our lighting revenues but they will be less.

Neal Verfuerth

However, the overall contribution, Glenn, the dollar amounts are significantly larger. We don’t -- in my 25 years, I don’t remember seeing an $8 million lighting job and the amount of opportunity out there for the solar is significant and it doesn’t have -- it will place a burden on in our manufacturing operations to be able to get those kind of topline revenues and contribute towards the overall company revenues.

And it’s one of those things that are -- there’s a large group of people out there that want to invest in renewals after they have made their buildings efficient. And they are going to buy solar from somebody, we just assume it is going to be from Orion. So we continue to be their energy partner not only for the efficiency, but also on renewal side of things.

Glenn Wortman – Sidoti & Company

And just a last question, so it has been clearly that business is getting sure, but speaking of that thing sequentially, you also anticipate a significant improvement in lighting revenue moving from 2Q to 3Q, is that fair?

Neal Verfuerth

I think that’s fair given our backlog, even outside of the solar order that’s in our backlog. We have a pretty heavy lighting backlog to for Orion. As Neal mentioned, when you make the promise of less than two weeks, your backlog is really never more than two weeks. So very unusual for us to carry in a record backlog and we’re -- based upon what we’re seeing in terms of October activity, we are very encouraged by expectations for Q3.

Glenn Wortman – Sidoti & Company

Okay. Thanks a lot for taking my questions

Scott Jensen

Our pleasure.

Neal Verfuerth

Thanks, Glenn.

Operator

Thank you, our next question is from Brian Kremer of Roth Capital. Your line is open.

Brian Kremer – Roth Capital

Hey guys

Neal Verfuerth

Hey Brian, how are you?

Brian Kremer – Roth Capital

Doing well, thanks. Okay. Going on the revenue line, obviously, there’s been a question already. It came in below I think where a lot of folks were thinking you obviously didn’t provide any guidance on a quarterly basis or maintaining the full year. So want to spend a little time on both looking at this quarter to understand that better and then the next two.

So kind of we heard you and I think Neal also talked about things look good out there, I mean obviously CapEx budgets are still little tight, your financing helps, but you seem upbeat, optimistic. Is it a case of the numbers came in lower than when you were looking and at the start of September and you were looking at your numbers. And obviously, there is a quickly turnover and orders were coming in early September and then all of a sudden they came in, in a rush in late September.

And in terms of the revenue, I guess, I just also want to make sure the contracted revenue that’s just through the end of the quarter, also correct and then because I think she talked about also the weakening of October being fairly strong. So maybe if you could comment on those too and then some follow-ups.

Scott Jensen

Sure. So the contracted revenue number, that we disclosed and talked about today was through the end of the second fiscal quarter, nothing to do with new business in October, Brian. You know, it certainly is challenging to know exactly when a customer is going to place an order. So we would have loved to have had a lot of the activity that happened at the end of September, happen at the beginning of September, but I think more important overall we received the orders we had a record quarter for contracted revenue.

We’ve got a tremendous backlog right now of orders going into Q3. And we’re just really encouraged as Neal opened the conversation today. We’re encouraged by what we are starting to see in terms of customers and their engagement and the activity of our partners and our scaling feet on the street. And so we are very optimistic and encouraged by what we are seeing.

Brian Kremer – Roth Capital

Okay. Because if I look at the yearly change and how you guys now define contracted revenue year-over-year, it looks like it’s up about 8.9 million year-over-year and a big slug of that to 8 million, obviously looks like it’s coming from this large solar contract. So I don’t know what other solar contracts might have been in the year ago. So I guess to go back to the early question about lighting in any, I mean, it looks almost like it was relatively flat year-over-year maybe up slightly in terms of what you are seeing on the lighting side?

Neal Verfuerth

Brian, this is Neal. A couple of things just to, kind of, I guess, calibrate this conversation. The team that’s down at Orion Engineered Systems in Plymouth, Wisconsin is really we took out A-team guys to get in more of this advanced technology. Because not only we are talking about solar, but we are talking about our controls, our offerings and demand response et cetera.

So this is really the next wave for us and not only does it provide revenue, but it also helps us create and maintain at real sustainable differentiation in the market rather then just being a lighting company. We’ve been telling people for years we are an energy company. And this has really now proved positive that we truly are an energy company and that -- those solar sales helped to foster and to bring in other business as well for our core business.

So now it’s a matter of scaling the amount of people we have on the street, as I referred to the feet on the street. We had approximately from an outside sales standpoint, 15 people give or take as little as eight to 10 months ago and now we have more than 60. So we are taking our A-team people and that way, they are working on the advanced technology, but they are also assisting us and training and scaling up the amount of the people we have.

So that these people that we put out there are -- if that’s going to be as knowledgeable as what we have on our A-team. So we are just trying to replicate what we’ve done and been successful here with in Wisconsin throughout North America.

Brian Kremer – Roth Capital

Okay. And in terms of that, it sounds like these are all partners. Obviously, I guess there was a comment earlier that some of the cost, SG&A cost you expect to be coming down, I guess looking forward a little bit here or so. This obviously aren’t hiring a bunch of new sales folks. These are partners and rather than new internal sales?

Neal Verfuerth

Right. Even right now we make a mistake about it. There is still a pretty substantial investment in our part required to assist in giving more people out there to train. So it’s almost a double whammy. If you think about it Brian, we’ve got our people that we are taking off the street to help facilitate this training but yet, we are still seeing record contracted revenues and the leverage is going to come now and we can take these skill sets and transfer this knowledge from this quarter, but people we’ve had for long time amongst -- ultimately hundreds of people.

Brian Kremer – Roth Capital

Okay. And then on the next -- getting to your guidance for the full year, in terms of -- can you give us a sense of December quarter typically is your largest, I mean, last year there wasn’t a big difference between Q3 and Q4 relative to prior years or at least ‘09, it was -- ‘08 looking at -- ‘07 there was a big difference ‘08, ‘07 looked more like ‘09.

Can you give us a sense of your feeling in terms of -- does it look more like an ‘09 -- I’m sorry your fiscal year ‘10 whether it was relatively flat between your Q3 and Q4 versus your fiscal ‘10 where there is a larger jump or you might expect it to be when folks are trying to spend CapEx dollars before the end of the year or obviously, I know its early but do you have any sense at this point.

Neal Verfuerth

Brian, this is Neal again. The only sense that I would have we are looking at the traditional GAAP revenue is I was having a discussion with one of the large investment banks talking about our financing activities. And he corrected me when he stated there was some $240 trillion sitting in corporate treasury right now, just waiting forward to see what’s going to come in the future of the economy.

So I think what you are describing over the last couple of years was that freeze on CapEx where you traditionally would have kind of encouraging of the budget at the end of the year. We were just sitting on the cash, so your guess is as good as any that’s why we are so encouraged because that situation still exist. This conversation, I had, was just a matter of weeks ago but yet we are still seeing growth -- we are seeing on the contractual revenue basis and that’s why we’ve been so adamant about the value of our financing model because we take that right out of the equation.

I am still amazed today, Brian, quite frankly how many customers that have done 2000 facilities or 3000 facilities with us. They’ll come through the facility here and say, oh my gosh! I’ve never seen so much money. I bet you can’t make these things fast enough and now remind them about the first couple of sales with them what it took. And then I will say to them why haven’t you done your other 18 facilities and that comes down to the same thing, well its got to go through the CapEx budgeting process.

Brian Kremer – Roth Capital

Okay. And the solar was it Solyndra? Is this $8 million project Solyndra someone else can you say?

Neal Verfuerth

It’s Solyndra.

Brian Kremer – Roth Capital

Okay.

Neal Verfuerth

They are still by far and away are our partner in this. We talked to other folks out there primarily, just to know what else is out there. So we are intelligent in the industry but Solyndra is by far and away, the best product we’ve seen in the market today. And we were talking about an asset that we are promising is going to produce energy for the next 25 years. It’s really important to us to be thinking in the longer time horizons than just what is the price per panel per watt, initial cost.

But even if it’s a cash sale, Brian, the last thing you want to get is the phone call from somebody your (inaudible). Well this thing is so dirty, it doesn’t produce or whatever or it’s causing lease amount of rough. We are looking at this as we believe it should be viewed as a -- the power plant, we’re putting on the rough. And then we are talking about power plants, you are thinking in much larger time horizons than even in the lighting retrofits.

Brian Kremer – Roth Capital

And how -- what’s the longest now that Solyndra projects been up and running that you guys have installed?

Neal Verfuerth

That would be our AB1 and that’s probably…

Brian Kremer – Roth Capital

A folk went on April

Neal Verfuerth

Yeah. April and what we’re actually seeing are the throughput of month-over-month basis, we are running above 10% ahead of what our projections were.

Brian Kremer – Roth Capital

Okay. That’s for my next question. So it’s performing as expected or better.

Neal Verfuerth

Yeah. And one other things about the Solyndra is the technology of cell has been around for a long, long time and then it comes down to installing on the roof and how do you seal off the moisture. And Solyndra just have a very robust design. We are also seeing with Solyndra as we suspected in our own test, a benefit in thermal performance as compared to flat panels.

The flat panels get pretty hot. So the thermal performance drops off.

Brian Kremer – Roth Capital

Okay. And switching gears real quick. I think are we seeing any greater traction on the InteLite in terms of any other controls, outdoor lighting anything or what kind of update can you give us there?

Neal Verfuerth

Yeah. The integrated system as we could talk about and I think last time you and I were together we were talking about this well essentially taking the compact module light fixture and combining it with our InteLite controls. And what I think is really a significant is the fact that we are just in the process of retrofitting one of our earliest adopters, a major retrofit just about 10,000 units across six or seven mega plants.

We are actually taking out the original Orion product -- ‘01 ‘02 vintage and still justifying to this customer who has a very relatively speaking low cost for energy using the OTA and we are showing them a positive cash flow. And we are also demonstrating the superior optical and thermal performance Orion has.

We are using our control system to create what we call a standby mode so the lights are running at only a 130 watts but yet getting more light than what the first generation of Orion product was delivering down to the floor. So not only as our market in the obvious hands replacing HIDs, but we have actually now validated the fact that we can go back to our earliest adapters that are now 10 years old and show them a new value preposition and cash flow, even the lowest rates imagine what we can do, this is a $0.06 or $0.07 rate, imagine we can do Brian in Europe that could (inaudible)

Brian Kremer – Roth Capital

Okay. Okay let me think a little bit the -- okay and the outdoor lighting, any traction anything there?

Neal Verfuerth

Yeah. You know, the first things we had overcome, of course, you are well plugged into the space is -- we are not promoting LED, the first thing. But it is interesting the LED as it relates to the outdoor, in fact, I said in on a meeting, a presentation with one of our partners a couple of weeks ago to a company of round about 100 sea stores and the focus on energy people, they are not going to rebating LEDs any longer.

So we had overcome this whole phenomenon LED, but now that we have done that and we’ve seeded the clouds, we were up to somewhat north of 5000 units in climbing and we were riding a awful lot of proposals out there for the outdoor. The whole industry in my 25 years right and it never changes you, you introduce a technology, you validate it and then you start seeding the clouds with various installations and kind of proving it out and then you start generating pipeline. And the more pipeline you produce then it comes down to what’s their gestation period in the closing ratio and then you can get with the pretty higher level of surge, what you are going to see at the other end as it relates to sales and that’s the same thing that’s occurring without the outdoor as what it had happened in their early days with the original illuminator product. First you got to prove that people can actually do it, much like we had to do when we approved the people to replace HIDs with HIFs.

Brian Kremer – Roth Capital Partners

Okay. And then I guess on that note, LEDs, you did have an announcement I guess in the quarter if you are doing some niche LED applications where it looks like they make the most sense or they can make sense?

Neal Verfuerth

Actually, we’ve gotten -- I think right now we’re probably 5000 units or give or take that we produced and the application is in freezers, in my discussion and again I think I share some of these with you as we’ve gotten together in the past with CRI, the challenge is to basis physics, how do you manage the heat? So our tests and we do exhaustive testing here as you’ve seen firsthand are suggesting that the only place you are going to get anywhere near the hours of the LED industry at largest claiming is in a freezer application at 20 below zero.

So that’s where we are putting them and we’ve put our product up against other product and we are outperforming the other product very much almost in a linear base, what we see with the fluorescent, but for right now the only place I can justify the investment and keeping the promise of the customer for longevity and light of with is a 20 below environment, a constant 20 below zero environment.

So, they -- we are taking that and the ability to use our InteLite and giving very aggressive duty cycling and really kind of exploiting some of the attributes that the LED has, the fluorescent doesn’t have as it relates to cycling them endlessly and having if full alumina port in a 20 below zero application.

Brian Kremer – Roth Capital Partners

Okay. All right. Great. Thank you.

Neal Verfuerth

Thank you, Brian.

Operator

Thank you. Thank you. Our next question is from Eric Glover of Canaccord. Your line is open.

Eric Glover – Canaccord

I was wondering if you could talk about the SG&A savings that you were planning on. I believe you used the -- actually provided a figure of 2 million in savings and what was the timeframe on that and exactly where is that coming from? Can you just provide some detail there?

Neal Verfuerth

I referred to it in two areas, SG&A and COGS and we’ve got things already identified. We’ve got some product modification, we’ve been working on for some time and have proven out and are comfortably integrated in to our product, in our manufacturing processes and then we’ve got, again, a lot of investment we’ve had to absorb over the last eight to ten months in training people. So when our guys are all training, you are not -- neither one of you will be selling.

So we are going to start to see some savings there and we believe with some of the investments we are making at technology as our sales ramp up as they are now. We are not going to have to on a linear basis increase the head count and payroll. So overall just to really -- probably could be categorized best as the efficiency gains. People, processes and then our COGS are cost to goods sold.

Eric Glover – Canaccord

Okay. So I am trying to figure out how we should expect this to sort of flow through the income statement over the next -- I don’t know two quarters, four quarters?

Scott Jensen

Yeah. It’s targeted. I’d say to Neal’s point, it’s heavily skewed on the manufacturing side, Eric. You can figure two thirds on the manufacturing side and a third on the SG&A side. And these are all things they were planning on implementing in the near term here so that we can get the biggest benefit out of the remainder of fiscal 2011

Eric Glover – Canaccord

Okay. And that is factored into -- these savings are factored into your EPS guidance for fiscal 2011?

Scott Jensen

We currently are, yeah which is why we did not change our guidance range

Eric Glover – Canaccord

Okay. And then second question was on the -- lets talk about the progress you are making in terms of securing additional financing? You did mention the one $2.4 million agreement but sort of beyond that kind of progress?

Neal Verfuerth

Yeah. We have got another deal we are working on right now and a little less than that first deal but again proving capital and we are continuing to as I mentioned in my portion of the call, parallel passes. We are having conversations with larger banks about larger deployments of cash up, but we are realizing too Eric that they are ready to deploy $50 million of cash tomorrow, we don’t have portfolio of deals to be able to deploy that immediately. So we are engaging in dialogues, planning for the future and in the interim, we feel that the best opportunity for us in the near term to be able to finance projects is to be able to target regional banks.

So if you think of it if you will, marrying regional banks up with our partners in their geographies where they can go in into their backyards to owner deals and we have got a relationship with a bank there who knows the customer is comfortable with the due diligence of the credit underwriting process and is putting money to work in our near local markets as well. And that was really the success that we saw in this initial deal and we believe that we can scale that.

I think just a significantly two we were very aware that this is a unique financing model in terms of the term and energy efficiency and from a financing perspective I think there has been a reluctance to be the first one in the game if you will. Now that we’re past that barrier, we believe that we’ve established a model, we’ve got a base line for terms and we can be able to take this structure out and leverage that first deal with additional deals.

Eric Glover – Canaccord

Okay. Thank you very much.

Neal Verfuerth

Welcome.

Scott Jensen

Thanks. Thank you.

Operator

Thank you, sir. The next question is from Scott Reynolds of Stifel Nicolaus. Your line is open.

Scott Reynolds – Stifel Nicolaus

Good afternoon guys. Lets go back to the solar systems and just to be clear, is revenue recognition there on a percent of completion or is it going to come in one big chunk.

Neal Verfuerth

It will be performance driven so percent of completion if you will but driven by delivering product and completion of an installation.

Scott Reynolds – Stifel Nicolaus

Okay. And what do you see our margins on that system today?

Neal Verfuerth

They are little less than 20, so and as we mentioned earlier we believe there is opportunities on the installation and integration side to be able to take cost out and we are working on that because we do believe the opportunities to take those margins higher in the future is very viable and we can deliver on that.

Scott Reynolds – Stifel Nicolaus

And you said it was a roughly a 180 days to install one of these systems, you guys will be installing this pretty much in the dead of winter. So do you see any risk that this -- a pretty large chunk of this doesn’t get recognized in the fiscal year?

Scott Jensen

This is in a part of the country where the winters are a lot more -- a lot milder than what we have here in the mid west. So we’ve done jobs in harsher environments and the trades that we are talking to they are used to working out in this environment and they need to work 12 months of the year. So worst case scenario once in a while if you -- blow a little snow out of the way but we will keep moving along and we’ve already got it factored in I think we are very conservative when we are suggesting like six months from beginning to them.

Scott Reynolds – Stifel Nicolaus

All right. Very good. And I was just wondering, what do you guys see the ongoing inventory levels whether it’s an absolute basis or percentage of COGS something rather than you can point to?

Scott Jensen

Well as Neal talked about our efforts to drive roughly 30% reduction, we believe that good inventory management and we will continue to attack it and improve it but we are targeting just over 20 million at that level.

Scott Reynolds – Stifel Nicolaus

Okay. And switching gears I suppose on the sales strategy. Are there other competitors that are using their current PBA type of strategy or is right in the first year?

Neal Verfuerth

Form the core lighting business?

Scott Reynolds – Stifel Nicolaus

Yeah.

Neal Verfuerth

I think what you’d just find out there is a -- probably characterizes more of a traditional performance contract or share savings. Nothing when it comes down to our model that we have seen yet today and we are in a unique position as we actually have some IP protection that’s working its way through the system, through the patent office. So as far as somebody copying and trying to replicate the model line for line, I think it might be difficult at best.

Scott Reynolds – Stifel Nicolaus

And now back on the sales strategy, there seems to be increasingly something that customers choose, should we expect that this continues to increase as percentage of your overall suppose non-GAAP revenue?

Neal Verfuerth

Yeah. That’s been the plan all along, it does a lot of things what we are really looking forward to do is compress the sales cycle more than anything else.

Scott Reynolds – Stifel Nicolaus

Okay.

Neal Verfuerth

Hundred plus trillion sitting in the sidelines of corporate treasury, this takes that primary objection, the money off the table.

Scott Reynolds – Stifel Nicolaus

Okay. And it looks like, despite maybe some of the inventory reductions that you might have to dip into that $15 million debt or revolver that you have. Are there any covenants on that?

Scott Jensen

There are covenants on that standard debt covenants, it’s kind of -- what I would say is -- that’s certainly available to us, but I think we feel that there is financing available that can be project specific and that would be an interest that we would have and then being able to utilize the line of credit to be available to just fund normal, call it cash deals as the economy improves, but our intent to be able to bring cash into support that would be project specific outside of our line of credit.

Scott Reynolds – Stifel Nicolaus

Okay. Very good. Thank you.

Scott Jensen

Thank you.

Operator

Thank you our next question is from Michael Legg of Merriman Capital. Your line is open.

Michael Legg – Merriman Capital

Just Scott, when you look at the beginning of the quarter and the number of sales people or partners you had out there versus the end of the quarter, was there anything different in your approach and your numbers in the pricing that helped drive the end of the quarter?

Scott Jensen

No. We didn’t. If your question Mike is did we do any dramatic discounting, we did not.

Michael Legg – Merriman Capital

Okay. And whether any material difference in the number of partners you had out there trying to sell the product?

Scott Jensen

We brought some partners on in the quarter. I want to say it was probably mid-quarter and always when you bring somebody new and you are introducing and you are deploying internal resources as Neal talked about the training and getting sales people up to speed that takes some time before they are actually bringing orders in house.

Neal Verfuerth

The largest number of new people would be working with the existing partners and having and helping them to build out their sales force.

Michael Legg – Merriman Capital

Okay. On the raw material side, we are talking about we do some inventory as far as obtaining raw materials now that you’re seeing any problems out there?

Scott Jensen

I think that there are still some, it’s -- the supply chain overall is still slow and this isn’t just something that is just with the electronic ballots, every device that has the power supply is affected by it. I saw an article not many weeks before, from players ATVs to a light fixtures, it’s all around power suppliers or iPhones, but we think that the move that GE is making, they are a pretty big player in the overall supply chain equation.

And they have got quite a bit of stick as it relates to working with the vendors and getting themselves to the front of the line and we are comfortable based on what we have here and how long this inventory will last as we move through it as they are working on their end that we are going to be in good shape, they should intersect quite nicely when the supply chains are normalized and as we worked on the inventory.

Michael Legg – Merriman Capital

Okay. Thank you.

Operator

Thank you. I am showing no further questions at this time. I would like to turn the conference over to Mr. Mike Harris for any closing remarks.

Mike Harris

Okay. Thank you everyone for joining us today. Please feel free to contact either Scott or myself should you have any follow-up regarding the quarter and we look forward to speaking to everyone once again in roughly three months to discuss Q3 results. Good evening.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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