In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. Orion adopted this ASU as of April 1, 2017. As a result of adopting the ~~income tax accounting provisions of this standard, Orion realized an increase in both its deferred tax assets related~~new standards for the current period, refer to ~~stock-based compensation awards and~~ the related valuation allowance. As Orion carries a full valuation allowance against its deferred tax assets, there was no net impact to its condensed consolidated balance sheets or statements of operations.section “Impacts on Financial Statements” below. In accordance with the modified retrospective transition method, the historical information within Orion’s financial statements has not been restated and continues to be reported under the accounting standard in effect for those periods. As a result, Orion has disclosed the accounting policies in effect prior to April 1, 2018, as well as the policies applied starting April 1, 2018.

Revenue Recognition

Periods prior to April 1, 2018

Revenue was recognized in accordance with ASC 605 when the following criteria were met:

persuasive evidence of an arrangement exists;

delivery has occurred and title has passed to the customer;

the sales price is fixed and determinable and no further obligation exists; and

collectability is reasonably assured.

Revenue was recorded net of estimated provisions for returns, early payment discounts and rebates and other consideration paid to Orion’s customers. Revenues were presented net of sales tax and other sales related taxes.

Deferred contract costs consisted primarily of the costs of products delivered, and services performed, that were subject to additional performance obligations or customer acceptance. These Deferred contract costs were expensed at the time the related revenue was recognized.

Deferred revenue related to advance customer billings and investment tax grants received related to power purchase agreement contracts still outstanding related to Orion’s legacy solar business.

Period Commencing April 1, 2018

General Information

Orion generates revenues primarily by selling commercial lighting fixtures and components and by installing these fixtures in its customer’s facilities. Orion recognizes revenue in accordance with the guidance in ASC 606 when control of the goods or services being provided (which Orion refers to as a performance obligation) is transferred to a customer at an amount that reflects the consideration that management expects to receive in exchange for those goods or services. Prices are generally fixed at the time of order confirmation. The amount of expected consideration includes estimated deductions and early payment discounts calculated based on historical experience, customer rebates based on agreed upon terms applied to actual and projected sales levels over the rebate period, and any amounts paid to customers in conjunction with fulfilling a performance obligation.

If there are multiple performance obligations in a single contract, the contract’s total sales price is allocated to each individual performance obligation based on their relative standalone selling price. A performance obligation’s standalone selling price is the price at which Orion would sell such promised good or service separately to a customer. Orion uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus margin approach when one is not available. The cost-plus margin approach is used to determine the stand-alone selling price for the installation performance obligation and is based on average historical installation margin.

Revenue derived from customer contracts which include only performance obligation(s) for the sale of lighting fixtures and components is classified as Product revenue in the Condensed Consolidated Statements of Operations. The revenue for these transactions is recorded at the point in time when management believes that the customer obtains control of the products, generally either upon shipment or upon delivery to the customer’s facility. This point in time is determined separately for each contract and requires judgment by management of the contract terms and the specific facts and circumstances concerning the transaction.

Revenue from a customer contract which includes both the sale of fixtures and the installation of such fixtures (which Orion refers to as a turnkey project) is allocated between each lighting fixture and the installation performance obligation based on relative standalone selling prices.

Revenue from turnkey projects that is allocated to the sale of the lighting fixtures is recorded at the point in time when management believes the customer obtains control of the product(s) and is reflected in Product revenue. This point in time is determined separately for each customer contract based upon the terms of the contract and the nature and extent of Orion’s control of the light fixtures during the installation. Product revenue associated with turnkey projects can be recorded (a) upon shipment or delivery, (b) subsequent to shipment or delivery and upon customer payments for the light fixtures, (c) when an individual light fixture is installed and working correctly, or (d) when the customer acknowledges that the entire installation project is

substantially complete. Determining the point in time when a customer obtains control of the lighting fixtures in a turnkey project can be a complex judgment and is applied separately for each individual light fixture included in a contract. In making this judgment, management considers the timing of various factors, including, but not limited to, those detailed below:

when there is a legal transfer of ownership;

when the customer obtains physical possession of the products;

when the customer starts to receive the benefit of the products;

the amount and duration of physical control that Orion maintains on the products after they are shipped to, and received at, the customer’s facility;

whether Orion is required to maintain insurance on the lighting fixtures when they are in transit and after they are delivered to the customer’s facility;

when each light fixture is physically installed and working correctly;

when the customer formally accepts the product; and

when Orion receives payment from the customer for the light fixtures.

Revenue from turnkey projects that is allocated to the single installation performance obligation is reflected in Service revenue. Service revenue is recorded over-time as Orion fulfills its obligation to install the light fixtures. Orion measures its performance toward fulfilling its performance obligations for installations using an output method that calculates the number of light fixtures completely installed as of the measurement date in comparison to the total number of light fixtures to be installed under the contract.

Most products are manufactured in accordance with Orion’s standard specifications. However, some products are manufactured to a customer’s specific requirements with no alternative use to Orion. In such cases, and when Orion has an enforceable right to payment, Product revenue is recorded on an over-time basis measured using an input methodology that calculates the costs incurred to date as compared to total expected costs. There was no over-time revenue related to custom products recognized in the three and nine months ended December 31, 2018.

Orion also records revenue in conjunction with several limited power purchase agreements (“PPAs”) still outstanding. Those PPAs are supply-side agreements for the generation of electricity. Orion’s last PPA expires in 2031. Revenue associated with the sale of energy generated by the solar facilities under these PPAs is within the scope of ASC 606. Revenues are recognized over-time and are equal to the amount billed to the customer, which is calculated by applying the fixed rate designated in the PPAs to the variable amount of electricity generated each month. This approach is in accordance with the “right to invoice” practical expedient provided for in ASC 606. Orion also recognizes revenue upon the sale to third parties of tax credits received from operating the solar facilities and from amortizing a grant received from the federal government during the period starting when the power generating facilities were constructed until the expiration of the PPAs; these revenues are not derived from contracts with customers and therefore not under the scope of ASC 606.

When shipping and handling activities are performed after a customer obtains control of the product, Orion has elected to ~~prospectively adopt~~treat shipping and handling costs as an activity necessary to fulfill the performance obligation to transfer product to the customer and not as a separate performance obligation. Any shipping and handling costs charged to customers are recorded in Product revenue. Shipping and handling costs are accrued and included in Cost of product revenue.

See Note 9, Accrued Expenses and Other for a discussion of Orion’s accounting ~~policy~~for the warranty it provides to ~~recognize forfeitures~~customers for its products and services.

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis.

Contract Fulfillment Costs

Costs associated with product sales are accumulated in inventory as the fixtures are manufactured and are transferred to Cost of product revenue at the time revenue is recorded. See Note 5, Inventories, Net. Costs associated with installation sales are expensed as incurred.

Disaggregation of Revenue

Orion’s Product revenue includes revenue from contracts with customers accounted for under the scope of ASC 606 and revenue which is accounted for under other guidance. For the three and nine months ended December 31, 2018, Product revenue included $1.0 million and $2.1 million, respectively, derived from sales-type leases for light fixtures, $25,615 and $0.2 million, respectively, derived from the sale of tax credits generated from Orion’s legacy operation for distributing solar energy, and $18,889 and $0.1 million, respectively, derived from the amortization of federal grants received in 2010 and 2011 as reimbursement for a portion of the costs to construct the legacy solar facilities which are not under the scope of ASC 606. All remaining Product revenue, and all Service revenue, are derived from contracts with customers as defined in ASC 606.

The primary end-users of Orion’s lighting products and services are (a) the federal government, and (b) commercial or industrial companies.

The federal government obtains Orion products and services primarily through turnkey project sales that Orion makes to a select group of contractors who focus on the federal government. Revenues associated with government end-users are primarily included in the Orion Engineered Systems Division segment.

Commercial or industrial end-users obtain Orion products and services through turnkey project sales or by purchasing products either direct from Orion or through distributors or energy service companies ("ESCOs"). Revenues associated with commercial and industrial end-users are included within each of Orion’s segments, dependent on the sales channel.

See Footnote 16, Segments, for additional discussion concerning Orion’s reportable segments.

The following table provides detail of Orion’s total revenues for the three and nine months ended December 31, 2018 (dollars in thousands):

	Three Months Ended December 31, 2018						Nine Months Ended December 31, 2018
	Product		Services		Total		Product		Services		Total
Revenue from contracts with customers:
Lighting revenues, by end user
Federal government	$	894	$	396	$	1,290	$	1,009	$	396	$	1,405
Commercial and industrial		11,976		1,943		13,919		34,987		4,565		39,552
Total lighting		12,870		2,339		15,209		35,996		4,961		40,957
Solar energy related revenues		8		—		8		46		—		46
Total revenues from contracts with customers		12,878		2,339		15,217		36,042		4,961		41,003
Revenue accounted for under other guidance		1,074		—		1,074		2,308		—		2,308
Total revenue	$	13,952	$	2,339	$	16,291	$	38,350	$	4,961	$	43,311

Cash Flow Considerations

Customer payments for material only orders are due shortly after shipment.

Turnkey projects where the end-user is the federal government typically span a three to six-month period. The contracts for these sales often provide for monthly progress payments equal to ninety percent (90%) of the value provided by Orion during the month.

Turnkey projects where the end-user is a commercial or industrial company typically span between two weeks to three months. Customer payment requirements for these projects vary by contract. Some contracts provide for customer payments for products and services as they ~~occur~~are delivered, other contracts specify that the customer will pay for the project in ~~lieu of estimating forfeitures. The cashflow presentation provisions~~its entirety upon completion of the ~~standard had no impact~~installation.

Orion provides long-term financing to one customer who frequently engages Orion in large turnkey projects that span between three and nine months. The customer executes an agreement providing for monthly payments of the contract price, plus interest, over a five-year period. The total transaction price in these contracts is allocated between product and services in the same manner as all other turnkey projects. The portion of the transaction associated with the installation is accounted for

consistently with all other installation related performance obligations. The portion of the transaction associated with the sale of the multiple individual light fixtures is accounted for as sales-type leases in accordance with ASC 840, "Leases". Revenues associated with the sales-type leases are included in Product revenue and recorded for each fixture separately based on the customer’s monthly acknowledgment that specified fixtures have been installed and are operating as specified.

The payments associated with these transactions that are due during the twelve months subsequent to December 31, 2018 are included in Accounts receivable, net in Orion’s Condensed Consolidated Balance Sheets. The remaining amounts due that are associated with these transactions are included in Other long-term assets in Orion’s Condensed Consolidated Balance Sheets.

The customer’s monthly payment obligation commences after completion of the turnkey project. Orion generally sells the receivable from the customer to an independent financial institution either during, or shortly after completion of, the installation period. Upon execution of the receivables purchase / sales agreement, all amounts due from the customer are included in Revenues earned but not billed on Orion’s ~~condensed consolidated~~Condensed Consolidated Balance Sheets until cash is received from the financial ~~statements. Finally, due~~institution. The financial institution releases funds to ~~Orion's net loss,~~Orion based on the ~~modifications~~customer’s monthly acknowledgment of the progress Orion has achieved in fulfilling its installation obligation. Orion provides the progress certifications to the ~~calculation~~financial institution one month in arrears.

The total amount received from the sales of ~~diluted earnings~~these receivables during the three and nine months ended December 31, 2018 was $1.5 million and $4.4 million, respectively. Orion’s losses on these sales aggregated to $28,891 and $0.2 million for the three and nine months ended December 31, 2018 and is included in Interest expense in the Condensed Consolidated Statements of Operations.

Practical Expedients and Exemptions

Orion expenses sales commissions when incurred because the amortization period is one year or less. These costs are recorded within Sales and marketing expense. There are no other capitalizable costs associated with obtaining contracts with customers.

Orion’s performance obligations related to lighting fixtures typically do not exceed nine months in duration. As a result, Orion has elected the practical expedient that provides an exemption to the disclosure requirements regarding information about value assigned to remaining performance obligations on contracts that have original expected durations of one year or less.

Orion has also adopted the practical expedient that provides an exemption to the disclosure requirement of the value assigned to performance obligations associated with contracts that were not complete as of April 1, 2018.

Orion also elected the practical expedient that permits companies to not disclose quantitative information about the future revenue when revenue is recognized as invoices are issued to customers for services performed.

Other than the turnkey projects which result in sales-type leases discussed above, Orion generally receives full payment for satisfied performance obligations in less than one year. Accordingly, Orion does not adjust revenues for the impact of any potential significant financing component as permitted by the practical expedients provided in ASC 606.

Contract Balances

A receivable is recognized when Orion has an enforceable right to payment in accordance with contract terms and an invoice has been issued to the customer. Payment terms on invoiced amounts are typically 30 days from the invoice date.

Revenue earned but not billed represents revenue that has been recognized in advance of billing the customer, which is a common practice in Orion turnkey contracts. Once Orion has an unconditional right to consideration under a turnkey contract, Orion typically bills the customer accordingly and reclassifies the amount to Accounts receivable, net. Revenue earned but not billed as of December 31, 2018 and April 1, 2018 includes $0.6 million and $0.6 million, respectively, which was not derived from contracts with customers and therefore not classified as a contract asset as defined by the new standards.

Deferred revenue, current as of December 31, 2018, included $43,448 of contract liabilities which represented consideration received from customers prior to the point that Orion has fulfilled the promises included in a performance obligation and recorded revenue.

Deferred revenue, long-term consists of the unamortized portion of the funds received from the federal government in 2010 and 2011 as reimbursement for the costs to build the two facilities related to the PPAs. As the transaction is not considered a contract with a customer, this value is not a contract liability as defined by the new standards.

The following chart shows the balance of Orion’s receivables arising from contracts with customers, contract assets and contract liabilities as of December 31, 2018, and April 1, 2018, after the adoption of the new standards (dollars in thousands):

	December 31, 2018		April 1, 2018
Accounts receivable, net	$	6,096	$	9,020
Contract assets	$	2,538	$	1,773
Contract liabilities	$	43	$	13

There were no significant changes in the contract assets outside of standard reclassifications to Accounts receivable, net upon billing. There were no significant changes to contract liabilities.

Impact on Financial Statements

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

	As Reported December 31, 2018			Adjustments			Balances without application of ASC 606
Assets
Cash and cash equivalents	$	6,596		$	—		$	6,596
Accounts receivable, net		6,096			(6	)		6,090
Revenue earned but not billed		3,125			(3,125	)		—
Inventories, net		9,024			(709	)		8,315
Deferred contract costs		—			1,510			1,510
Prepaid expenses and other current assets		627			2,036			2,663
Total current assets		25,468			(294	)		25,174
Property and equipment, net		12,056			—			12,056
Other intangible assets, net		2,554			—			2,554
Other long-term assets		255			—			255
Total assets	$	40,333		$	(294	)	$	40,039
Liabilities and Shareholders’ Equity
Accounts payable	$	11,345		$	980		$	12,325
Accrued expenses and other		5,314			(1,200	)		4,114
Deferred revenue, current		119			492			611
Current maturities of long-term debt		82			—			82
Total current liabilities		16,860			272			17,132
Revolving credit facility		3,329			—			3,329
Long-term debt, less current maturities		43			—			43
Deferred revenue, long-term		810			97			907
Other long-term liabilities		626			(97	)		529
Total liabilities		21,668			272			21,940
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.01 par value: Shares authorized: 30,000,000 at December 31, 2018 and March 31, 2018; no shares issued and outstanding at December 31, 2018 and March 31, 2018		—			—			—
Common stock, no par value: Shares authorized: 200,000,000 at December 31, 2018 and March 31, 2018; shares issued: 39,011,019 at December 31, 2018 and 38,384,575 at March 31, 2018; shares outstanding: 29,571,944 at December 31, 2018 and 28,953,183 at March 31, 2018		—			—			—
Additional paid-in capital		155,642			—			155,642
Treasury stock, common shares: 9,439,075 at December 31, 2018 and 9,431,392 at March 31, 2018		(36,092	)		—			(36,092	)
Retained deficit		(100,885	)		(566	)		(101,451	)
Total shareholders’ equity		18,665			(566	)		18,099
Total liabilities and shareholders’ equity	$	40,333		$	(294	)	$	40,039

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share ~~as a result of adopting this standard did not impact its diluted earnings per share.~~amounts)

	Three months ended December 31, 2018									Nine Months Ended December 31, 2018
	As Reported			Adjustments			Balances without application of ASC 606			As Reported			Adjustments			Balances without application of ASC 606
Product revenue	$	13,952		$	467		$	14,419		$	38,350		$	1,531		$	39,881
Service revenue		2,339			(1,476	)		863			4,961			(2,607	)		2,354
Total revenue		16,291			(1,009	)		15,282			43,311			(1,076	)		42,235
Cost of product revenue		10,508			—			10,508			29,599			1			29,600
Cost of service revenue		1,613			(954	)		659			3,544			(1,692	)		1,852
Total cost of revenue		12,121			(954	)		11,167			33,143			(1,691	)		31,452
Gross profit		4,170			(55	)		4,115			10,168			615			10,783
Operating expenses:
General and administrative		2,269			—			2,269			7,681			—			7,681
Sales and marketing		2,190			352			2,542			6,903			922			7,825
Research and development		298			—			298			1,057			—			1,057
Total operating expenses		4,757			352			5,109			15,641			922			16,563
Loss from operations		(587	)		(407	)		(994	)		(5,473	)		(307	)		(5,780	)
Other income (expense):
Other income		31			—			31			65			—			65
Interest expense		(77	)		12			(65	)		(335	)		13			(322	)
Amortization of debt issue cost		(31	)					(31	)		(31	)					(31	)
Interest income		2			—			2			8			—			8
Total other expense		(75	)		12			(63	)		(293	)		13			(280	)
Loss before income tax		(662	)		(395	)		(1,057	)		(5,766	)		(294	)		(6,060	)
Income tax expense		0			—			0			26			—			26
Net loss	$	(662	)	$	(395	)	$	(1,057	)	$	(5,792	)	$	(294	)	$	(6,086	)
Basic net loss per share attributable to common shareholders	$	(0.02	)	$	0.00		$	(0.04	)	$	(0.20	)	$	0.00		$	(0.21	)
Weighted-average common shares outstanding		29,568,986			—			29,568,986			29,376,959			—			29,376,959
Diluted net loss per share	$	(0.02	)	$	0.00		$	(0.04	)	$	(0.20	)	$	0.00		$	(0.21	)
Weighted-average common shares and share equivalents outstanding		29,568,986			—			29,568,986			29,376,959			—			29,376,959

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Nine Months Ended December 31, 2018
	As Reported			Adjustments			Balances without application of ASC 606
Operating activities
Net loss	$	(5,792	)	$	(294	)	$	(6,086	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,006			—			1,006
Amortization of intangible assets		343			—			343
Stock-based compensation		639			—			639
Amortization of debt issue costs		31			—			31
Provision for inventory reserves		(144	)		—			(144	)
Provision for bad debts		66			—			66
Other		8			—			8
Changes in operating assets and liabilities:
Accounts receivable, current and long-term		2,857			(276	)		2,581
Revenue earned but not billed		(770	)		770			—
Inventories		(367	)		22			(345	)
Deferred contract costs		—			(516	)		(516	)
Prepaid expenses and other assets		123			(129	)		(6	)
Accounts payable		555			95			650
Accrued expenses and other		(136	)		84			(52	)
Deferred revenue, current and long-term		(29	)		244			215
Net cash used in operating activities		(1,610	)		—			(1,610	)
Investing activities
Purchases of property and equipment		(167	)		—			(167	)
Additions to patents and licenses		(29	)		—			(29	)
Net cash used in investing activities		(196	)		—			(196	)
Financing activities
Payment of long-term debt and capital leases		(58	)		—			(58	)
Proceeds from revolving credit facility		42,498			—			42,498
Payment of revolving credit facility		(43,078	)		—			(43,078	)
Payments to settle employee tax withholdings on stock-based compensation		(10	)		—			(10	)
Deferred financing costs		(377	)		—			(377	)
Net proceeds from employee equity exercises		3			—			3
Net cash used in financing activities		(1,022	)		—			(1,022	)
Net decrease in cash and cash equivalents		(2,828	)		—			(2,828	)
Cash and cash equivalents at beginning of period		9,424			—			9,424
Cash and cash equivalents at end of period	$	6,596		$	—		$	6,596

NOTE 34 — ACCOUNTS RECEIVABLE,

NET

As of December 31, 2018, and March 31, 2018, Orion's ~~accounts~~Accounts receivable and ~~allowance~~Allowance for doubtful accounts balances were as follows (dollars in thousands):

	December 31, 2018			March 31, 2018
Accounts receivable, gross	$	6,313		$	8,886
Allowance for doubtful accounts		(217	)		(150	)
Accounts receivable, net	$	6,096		$	8,736

December 31, 2017 March 31, 2017
Accounts receivable, gross $ 8,827
$ 9,315
Allowance for doubtful accounts (164 ) (144 )
Accounts receivable, net $ 8,663
$ 9,171

NOTE 45 — INVENTORIES,

NET

As of December 31, ~~2017~~2018, and March 31, ~~2017,~~2018, Orion's ~~inventory~~Inventory balances were as follows (dollars in thousands):

	Cost		Reserve			Net
As of December 31, 2018
Raw materials and components	$	6,653	$	(1,345	)	$	5,308
Work in process		1,127		(311	)		816
Finished goods		4,137		(1,237	)		2,900
Total	$	11,917	$	(2,893	)	$	9,024

As of March 31, 2018
Raw materials and components	$	6,073	$	(1,363	)	$	4,710
Work in process		1,190		(263	)		927
Finished goods		3,934		(1,745	)		2,189
Total	$	11,197	$	(3,371	)	$	7,826

Cost Reserve Net
As of December 31, 2017
Raw materials and components $ 6,655
$ (1,406 ) $ 5,249
Work in process 1,316
(351 ) 965
Finished goods 4,385
(1,828 ) 2,557
Total $ 12,356
$ (3,585 ) $ 8,771

As of March 31, 2017
Raw materials and components $ 8,104
$ (1,807 ) $ 6,297
Work in process 1,918
(329 ) 1,589
Finished goods 7,044
(1,337 ) 5,707
Total $ 17,066
$ (3,473 ) $ 13,593

NOTE 56 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

As of December 31, 2018, and March 31, 2018, Prepaid expenses and other current assets ~~include~~included the following (dollars in thousands):

	December 31, 2018		March 31, 2018
Unbilled accounts receivable (1)	$	—	$	1,910
Other prepaid expenses		627		557
Total	$	627	$	2,467

December 31, 2017 March 31, 2017
Unbilled accounts receivable $ 1,034
$ 2,226
Other prepaid expenses 509
651
Total $ 1,543
$ 2,877

(1)	As of April 1, 2018, in conjunction with the adoption of ASC 606, the balance of unbilled Accounts receivable was included in Revenue earned but not billed on the Condensed Consolidated Balance Sheets.

NOTE 67 — PROPERTY AND EQUIPMENT,

NET

As of December 31, 2018, and March 31, 2018, Property and equipment, ~~were comprised of~~net, included the following (dollars in thousands):

	December 31, 2018			March 31, 2018
Land and land improvements	$	433		$	424
Buildings and building improvements		9,245			9,245
Furniture, fixtures and office equipment		7,144			7,096
Leasehold improvements		324			324
Equipment leased to customers		4,997			4,997
Plant equipment		12,027			12,106
Construction in Progress		47			—
		34,217			34,192
Less: accumulated depreciation and amortization		(22,161	)		(21,298	)
Property and equipment, net	$	12,056		$	12,894

December 31, 2017 March 31, 2017
Land and land improvements $ 424
$ 424
Buildings and building improvements 9,245
9,245
Furniture, fixtures and office equipment 7,083
7,056
Leasehold improvements 324
324
Equipment leased to customers 4,997
4,997
Plant equipment 11,888
11,627
Construction in progress 196
61
34,157
33,734
Less: accumulated depreciation and amortization (20,944 ) (19,948 )
Property and equipment, net $ 13,213
$ 13,786

~~During the second quarter~~

As of ~~fiscal~~September 30, 2018, ~~as a result of lower than anticipated operating results in the first half of fiscal 2018, Orion revised its full year fiscal 2018 forecast. As such,~~ a triggering event occurred ~~as of September 30, 2017,~~ requiring Orion to evaluate its long-lived assets for impairment. Due to the central nature of its operations, Orion’s tangible and intangible definite-lived assets support its full operations, are utilized by all three of its reportable segments, and do not generate separately identifiable cash flows. As such, these assets together represent a single asset group. In reviewing the asset group for impairment, Orion elected to bypass the qualitative impairment assessment and went directly to performing the Step 1 recoverability test. Orion performed the Step 1 recoverability test for the asset group comparing its carrying value to the group’s expected future undiscounted cash flows. Orion concluded that the undiscounted cash flows of the definite lived asset group exceeded its carrying value. As such the asset group was deemed recoverable and no impairment was recorded. ~~No triggering event occurred in the quarter ended December 31, 2017, so no impairment review was conducted.~~

Equipment included above under capital leases was as follows (dollars in thousands):

	December 31, 2018			March 31, 2018
Equipment	$	581		$	581
Less: accumulated depreciation and amortization		(450	)		(344	)
Equipment, net	$	131		$	237

December 31, 2017 March 31, 2017
Equipment $ 581
$ 581
Less: accumulated depreciation and amortization (308 ) (202 )
Equipment, net $ 273
$ 379

Orion recorded depreciation expense of $0.3 and $1.0 million for the three and nine months ended December 31, 2018, respectively, and $0.4 and $1.1 million for the three and nine months ended December 31, 2017, ~~respectively, and $0.3 and $1.1 million for the three and nine months ended~~respectively.

NOTE 8 —OTHER INTANGIBLE ASSETS, NET

As of December 31, ~~2016, respectively.~~

~~NOTE 7 — INTANGIBLE ASSETS~~

~~The~~2018, and March 31, 2018, the components of, and changes in, the carrying amount of ~~other~~Other intangible assets, net, were as follows (dollars in thousands):

	December 31, 2018							March 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Patents	$	2,665	$	(1,492	)	$	1,173	$	2,636	$	(1,370	)	$	1,266
Licenses		58		(58	)		—		58		(58	)		—
Trade name and trademarks		1,005		—			1,005		1,005		—			1,005
Customer relationships		3,600		(3,435	)		165		3,600		(3,326	)		274
Developed technology		900		(689	)		211		900		(582	)		318
Non-competition agreements		100		(100	)		—		100		(95	)		5
Total	$	8,328	$	(5,774	)	$	2,554	$	8,299	$	(5,431	)	$	2,868

December 31, 2017 March 31, 2017
Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net
Patents $ 2,702
$ (1,331 ) $ 1,371
$ 2,658
$ (1,211 ) $ 1,447
Licenses 58
(58 ) —
58
(58 ) —
Trade name and trademarks 1,005
—
1,005
1,715
—
1,715
Customer relationships 3,600
(3,286 ) 314
3,600
(3,054 ) 546
Developed technology 900
(546 ) 354
900
(426 ) 474
Non-competition agreements 100
(90 ) 10
100
(75 ) 25
Total $ 8,365
$ (5,311 ) $ 3,054
$ 9,031
$ (4,824 ) $ 4,207

~~During the second quarter~~

As of ~~fiscal 2018, as a result of lower than anticipated operating results in the first half of fiscal 2018, Orion revised its full year fiscal 2018 forecast. As such,~~September 30, 2017, a triggering event occurred ~~as of September 30, 2017,~~ requiring Orion to evaluate its long-lived assets for impairment. As such Orion performed a quantitative impairment review of its indefinite lived intangible assets related to the Harris trade name applying the royalty replacement method to determine the asset’s fair value as of September 30, 2017. Under the royalty

replacement method, the fair value of the Harris tradename was determined based on a market participant’s view of the royalty that would be paid to license the right to use the tradename. This quantitative analysis incorporated several assumptions including forecasted future revenues and cash flows, estimated royalty rate, based on similar licensing transactions and market royalty rates, and discount rate, which incorporates assumptions such as weighted-average cost of capital and risk premium. As a result of this impairment test, the carrying value of the Harris trade name exceeded its estimated fair value and an impairment of $0.7 million was recorded to Impairment of intangible assets during the quarter ended September 30, 2017 to reduce the asset’s carrying value to its calculated fair value. ~~No triggering event occurred in the quarter ended December 31, 2017, so no impairment review was conducted.~~ This fair value determination was categorized as Level 3 in the fair value hierarchy.

Amortization expense on intangible assets was $0.1 and $0.2 million for ~~both~~ the three months ended December 31, 2018 and 2017, ~~and 2016.~~

respectively. Amortization expense on intangible assets was ~~$0.5~~$0.3 and ~~$0.7~~$0.5 million for the nine months ended December 31, 2018 and 2017, ~~and 2016,~~ respectively.

As of December 31, ~~2017,~~2018, the weighted average remaining useful life of intangible assets was ~~5.7~~5.1 years.

The estimated amortization expense for the remainder of fiscal ~~2018,~~2019, the next five fiscal years and beyond is shown below (dollars in thousands):

Fiscal 2019 (period remaining)	$	95
Fiscal 2020		362
Fiscal 2021		287
Fiscal 2022		190
Fiscal 2023		98
Fiscal 2024		95
Thereafter		422
Total	$	1,549

Fiscal 2018 (period remaining) $ 138
Fiscal 2019 449
Fiscal 2020 363
Fiscal 2021 289
Fiscal 2022 191
Fiscal 2023 166
Thereafter 453
Total $ 2,049

NOTE 89 — ACCRUED EXPENSES AND OTHER ~~LONG-TERM LIABILITIES~~

As of December 31, 2018, and March 31, 2018, Accrued expenses and other ~~include~~included the following (dollars in thousands):

	December 31, 2018		March 31, 2018
Compensation and benefits	$	1,084	$	1,786
Accrued taxes		458		237
Contract costs		1,814		985
Legal and professional fees		168		400
Warranty		415		402
Sales returns reserve (1)		174		—
Credits due to customers (1)		980		—
Other accruals		221		361
Total	$	5,314	$	4,171

(1)

Sales returns reserve was previously classified in Accounts receivable, net and Credits due to customers was previously classified in Accounts payable. As of April 1, 2018, in conjunction with the adoption of ASC 606, these balances are now included in Accrued expenses and other on the Condensed Consolidated Balance Sheets.

December 31, 2017 March 31, 2017
Compensation and benefits $ 1,823
$ 2,431
Sales tax 202
213
Contract costs 515
223
Legal and professional fees 1,955
2,262
Warranty 347
449
Other accruals 313
410
Total $ 5,155
$ 5,988

~~Other long-term liabilities includes the following (dollars in thousands):~~

December 31, 2017 March 31, 2017
Warranty $ 270
$ 310
Medical benefits 126
—
Unrecognized tax benefits 113
113
Other —
19
Total $ 509
$ 442

Orion generally offers a limited warranty of one to ten years on its lighting products, ~~in addition to those~~including the pass through of standard warranties offered by major original equipment component manufacturers. The manufacturers’ warranties cover lamps, ballasts, LED modules, chips and drivers, control devices, and ~~ballasts,~~other fixture related items, which are significant components in Orion's lighting products.

Changes in Orion’s warranty accrual (both current and long-term) were as follows (dollars in thousands):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2018			2017			2018			2017
Beginning of period	$	721		$	739		$	673		$	759
Reclassification on adoption of ASC 606		—			—			73			—
Accruals		129			(78	)		177			(52	)
Warranty claims (net of vendor reimbursements)		(67	)		(44	)		(140	)		(90	)
End of period	$	783		$	617		$	783		$	617

Three Months Ended December 31, Nine Months Ended December 31,
2017 2016 2017 2016
Beginning of period $ 739
$ 1,114
$ 759
$ 864
Provision to product cost of revenue (122 ) (190 ) (138 ) 61
Charges —
(2 ) (4 ) (3 )
End of period $ 617
$ 922
$ 617
$ 922

NOTE 910 — NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing Basic net loss attributable to common shareholders by the ~~weighted-average~~Weighted-average number of common shares outstanding for the period and does not consider common stock equivalents.

For the three and nine months ended December 31, ~~2017~~2018 and ~~2016,~~2017, Orion was in a net loss position; therefore, the ~~basic~~Basic and ~~diluted weighted~~Diluted Weighted average shares outstanding are equal because any increase to the basic shares would be anti-dilutive. ~~Net~~Basic and Diluted net loss per common share iswas calculated based upon the following:

	Three Months Ended December 31,						Nine Months Ended December 31,
	2018			2017			2018			2017
Numerator:
Net loss (in thousands)	$	(662	)	$	(1,433	)	$	(5,792	)	$	(11,666	)
Denominator:
Weighted-average common shares outstanding		29,568,986			28,909,847			29,376,959			28,734,394
Weighted-average common shares and common share equivalents outstanding		29,568,986			28,909,847			29,376,959			28,734,394
Net loss per common share:
Basic	$	(0.02	)	$	(0.05	)	$	(0.20	)	$	(0.41	)
Diluted	$	(0.02	)	$	(0.05	)	$	(0.20	)	$	(0.41	)

Three Months Ended December 31, Nine Months Ended December 31,
2017 2016 2017 2016
Numerator:
Net loss (in thousands) $ (1,433 ) $ (1,086 ) $ (11,666 ) $ (4,996 )
Denominator:
Weighted-average common shares outstanding 28,909,847
28,258,742
28,734,394
28,106,209
Weighted-average common shares and common share equivalents outstanding 28,909,847
28,258,742
28,734,394
28,106,209
Net loss per common share:
Basic $ (0.05 ) $ (0.04 ) $ (0.41 ) $ (0.18 )
Diluted $ (0.05 ) $ (0.04 ) $ (0.41 ) $ (0.18 )

The following table indicates the number of potentially dilutive securities excluded from the calculation of ~~diluted~~Diluted net loss per common share because their inclusion would have been anti-dilutive. The number of shares are as of the end of each period:

	December 31, 2018		December 31, 2017
Common stock options		477,836		709,667
Restricted shares		1,329,693		1,545,209
Total		1,807,529		2,254,876

December 31, 2017 December 31, 2016
Common stock options 709,667
1,561,953
Restricted shares 1,545,209
1,661,543
Total 2,254,876
3,223,496

~~NOTE 10 — RELATED PARTY TRANSACTIONS~~

During the three months ended December 31, 2017, Orion did not have any related party transactions. During the nine months ended December 31, 2017, Orion incurred a de minimis expense for consulting services provided by a member of its Board of Directors. During the three and nine months ended December 31, 2016, Orion purchased goods and services from an entity in the amount of approximately twenty-one thousand and fifty-three thousand dollars, respectively, at which time a director of Orion served as a minority owner and as the president and chairman of the board of directors of the entity.

NOTE 11 — LONG-TERM DEBT

Long-term debt consisted of the following (dollars in thousands):

	December 31, 2018			March 31, 2018
Revolving credit facility	$	3,329		$	3,908
Equipment lease obligations		125			184
Total long-term debt		3,454			4,092
Less current maturities		(82	)		(79	)
Long-term debt, less current maturities	$	3,372		$	4,013

December 31, 2017 March 31, 2017
Revolving credit facility $ 3,622
$ 6,629
Equipment lease obligations 204
321
Customer equipment finance notes payable 6
7
Other long-term debt —
14
Total long-term debt 3,832
6,971
Less current maturities (85 ) (152 )
Long-term debt, less current maturities $ 3,747
$ 6,819

Revolving Credit Agreement

On October 26, 2018, Orion ~~has an amended credit agreement ("~~and its subsidiaries entered into a new secured revolving Business Financing Agreement with Western Alliance Bank, as lender (the “New Credit ~~Agreement"~~Agreement”) ~~that~~. The New Credit Agreement replaced Orion’s existing Credit Agreement.

The New Credit Agreement provides for a two-year revolving credit facility ("(the “New Credit ~~Facility"~~Facility”) that matures on October 26, 2020. Borrowings under the New Credit Facility are initially limited to $20.15 million, subject to a borrowing base requirement based on eligible receivables and inventory. ~~As of December 31, 2017, Orion's borrowing base was approximately $3.8 million.~~ The New Credit ~~Facility has a maturity date of February 6, 2019, and~~Agreement includes a $2.0 million sublimit for the issuance of letters of credit. As of December 31, ~~2017,~~2018, Orion’s borrowing base was $4.4 million, and Orion had no$3.3 million in borrowings outstanding ~~letters of credit. Borrowings outstanding as of December 31, 2017, amounted to approximately $3.6 million and are~~which were included in non-current liabilities in the accompanying ~~condensed consolidated balance sheet.~~Condensed Consolidated Balance Sheets. Orion ~~estimates that~~had no outstanding letters of credit leaving additional borrowing availability of $1.1 million.

The New Credit Agreement is secured by a security interest in substantially all of Orion's and its subsidiaries’ personal property.

Borrowings under the New Credit Agreement generally bear interest at floating rates based upon the prime rate (but not be less than 5.00% per year) plus an applicable margin determined by reference to Orion’s quick ratio (defined as the aggregate amount of unrestricted cash, unrestricted marketable securities and, with certain adjustments, receivables convertible into cash divided by total current liabilities, including the obligations under the New Credit Agreement). As of December 31, ~~2017, it~~2018, the interest rate was ~~eligible~~6.0%. Among other fees, Orion is required to ~~borrow~~pay an ~~additional $0.2 million~~annual facility fee equal to 0.45% of the credit limit under the ~~Credit Facility based upon current levels of eligible inventory and accounts receivable.~~

~~Subject in each case to Orion's applicable borrowing base limitations, the~~New Credit Agreement, ~~otherwise provides for~~which was paid at commencement (October 26, 2018) and is due on each anniversary thereof. With certain exceptions, if the New Credit Agreement is terminated prior to the first anniversary of the closing date of the New Credit Agreement, Orion is required to pay a ~~$15.0 million~~termination fee equal to 0.50% of the credit limit under the New Credit Facility. This limit may increase to $20.0 million based on a borrowing base requirement, if Orion satisfies certain conditions. Orion did not meet the requirements to increase the borrowing limit to $20.0 million as of July 31, 2017, the most recent measurement date.

~~From and after any increase in the Credit Facility limit from $15.0 million to $20.0 million, the~~Agreement.

The New Credit Agreement requires ~~that~~ Orion to maintain nine months’ of “RML” as of the end of each ~~month, a minimum ratio~~month. For purposes of the New Credit Agreement, RML is defined as, as of the applicable determination date, unrestricted cash on deposit with Western Alliance Bank plus availability under the New Credit Agreement divided by an amount equal to, for the applicable trailing ~~twelve-month~~three-month period, ~~of (i) earnings~~consolidated net profit before ~~interest, taxes,~~tax, plus depreciation expense, amortization expense and ~~amortization, subject to certain adjustments, to (ii) the sum of cash interest expense, certain~~stock-based compensation, minus capital lease principal payments, ~~on indebtedness and certain dividends, distributions and stock redemptions, equal to at least 1.10 to 1.00.~~ tested as of the end of each month.

The New Credit Agreement also contains ~~additional~~ customary events of default and other covenants, including certain restrictions on Orion’s ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, ~~guarantee obligations of third parties, make loans or advances, declare or~~ pay any dividend or distribution on Orion’s stock, redeem, retire or ~~repurchase~~purchase shares of Orion’s stock, make investments or pledge or ~~dispose~~transfer assets. If an event of ~~assets. Orion was in compliance with its covenants in~~default under the New Credit Agreement ~~as of December 31, 2017.~~

~~Each subsidiary of Orion~~occurs and is ~~a joint and several co-borrower or guarantor~~continuing, then Western Alliance Bank may cease making advances under the New Credit Agreement and declare any outstanding obligations under the New Credit Agreement ~~is secured by a security interest in substantially all~~to be immediately due and payable. In addition, if Orion becomes the subject of ~~Orion’s and each subsidiary’s personal property (excluding various assets relating to customer Orion Throughput Agreements ("OTAs") and a mortgage on certain real property.~~

~~Borrowings~~voluntary or involuntary proceedings under any bankruptcy or similar law, then any outstanding obligations under the New Credit Agreement bear interest at the daily three-month LIBOR plus 3.0% per annum, with a minimum interest charge for each year or portion of a year during the term of the Credit Agreement of $0.1 million, regardless of usage. As of December 31, 2017, the interest rate was 4.69%. Orion must pay an unused line fee of 0.25% per annum of the daily average unused amount of the Credit Facilitywill automatically become immediately due and ~~a letter of credit fee at the rate of 3.0% per annum on the undrawn amount of letters of credit outstanding from time to time under the Credit Facility.~~

~~Harris Seller's Note~~

On July 1, 2013, Orion issued an unsecured and subordinated promissory note in the principal amount of $3.1 million to partially fund the acquisition of Harris Manufacturing, Inc. and Harris LED, LLC (collectively, "Harris"). The note's interest rate was 4% per annum. Principal and interest were payable quarterly. The note matured in July 2016 and was paid in full upon maturity.

payable.

Equipment Lease Obligations

In ~~March 2016 and~~ June 2015, Orion entered into a lease ~~agreements~~agreement with a financing company in the principal amount of ~~nineteen thousand dollars and~~ $0.4 million ~~respectively,~~ to fund certain equipment. The ~~leases are~~lease is secured by the related equipment. The ~~leases bear~~lease bears interest at a rate of ~~5.9%~~3.6%, and ~~3.6%, respectively, and mature~~matures in ~~February 2018 and~~ June 2020. ~~Both leases contain~~The lease contains a one dollar buyout option.

Customer Equipment Finance Notes Payable

In December 2014, Orion entered into a secured borrowing agreement with a financing company in the principal amount of $0.4 million to fund completed customer contracts under its ~~OTA~~Orion Throughput Agreement (“OTA”) finance program that were previously funded under a different OTA credit agreement. The loan amount iswas secured by the OTA-related equipment and the expected future monthly payments under the supporting 25 individual OTA customer contracts. The borrowing agreement ~~bears~~bore an interest ~~at a~~ rate of 8.36% and ~~matures~~matured in April 2018.

In June 2011, Orion entered into a note agreement with a financial institution that provided Orion with $2.8 million to fund completed customer contracts under Orion’s OTA finance program. The note bore interest at 7.85%. The note matured in April 2016 and was paid in full upon maturity.

Other Long-Term Debt

In September 2010, Orion entered into a note agreement with the Wisconsin Department of Commerce that provided Orion with $0.3 million to fund Orion’s rooftop solar project at its Manitowoc facility. This note is included in the table above as other long-term debt. The note is collateralized by the related solar equipment. The note allowed for two years without interest accruing or principal payments due. Beginning in July 2012, the note bears interest at 2% and requires monthly payments of four thousand six hundred. The note matured in June 2017 and was paid in full upon maturity.

NOTE 12 — INCOME TAXES

~~The~~

Orion’s income tax provision ~~for the three months ended December 31, 2017~~ was determined by applying an estimated annual effective tax rate ~~of 1.6%~~based upon the facts and circumstances known to book loss before income ~~tax. The estimated~~tax, adjusting for discrete items. Orion’s actual effective tax rate is adjusted each interim period, as appropriate, for changes in facts and circumstances. For the ~~three month~~three-month period ended December 31, ~~2016 was 0.1%. The estimated effective~~2018 and 2017, Orion recorded income tax ~~rate was determined by applying statutory tax rates to pretax loss adjusted for certain permanent book to tax differences~~expense (benefit) of $0 and ~~tax credits.~~

~~The income tax provision for~~$(23,330), respectively, using this methodology. For the ~~nine months ended December 31, 2017 was determined by applying an estimated effective tax rate of 0.2% to loss before income tax. The estimated effective tax rate for the nine month~~nine-month period ended December 31, ~~2016 was (0.4)%. The estimated effective~~2018 and 2017, Orion recorded income tax ~~rate was determined by applying statutory tax rates to pretax loss adjusted for certain permanent book to tax differences~~expense (benefit) of $25,748 and ~~tax credits.~~

Orion is eligible for tax benefits associated with the excess of the tax deduction available for exercises of non-qualified stock options (NQSOs) over the amount recorded at grant. The amount of the benefit is based upon the ultimate deduction reflected in the applicable income tax return.

$(23,330), respectively, using this methodology.

As of December 31, ~~2017,~~2018, and March 31, 2018, Orion had federal net operating loss carryforwards of approximately $80.6 million. Orion also had state net operating loss carryforwards of approximately $68.7 million. Orion also had federal tax credit carryforwards of approximately $1.4 million and state tax credits of $0.7 million. Orion's net operating loss and tax credit carryforwards will begin to expire in varying amounts between 2020 and 2038. As of December 31, 2017, Orion had recorded a full valuation allowance ~~of $24.0 million equaling the net~~recorded against its deferred tax ~~asset due to the uncertainty of its realizable value in the future.~~assets. Orion considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event that Orion determines that the deferred tax assets are able to be realized, an adjustment to the ~~deferred tax asset~~valuation allowance would increase income in the period such determination is made.

~~The~~

During fiscal 2018, Orion recognized a provisional reduction to its deferred tax assets of ($9.9 million) related to the Tax Cut and Jobs Act ~~("Act"~~(“Act”) ~~was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings~~. Substantially all of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. At December 31, 2017, Orion had not completed its accounting for the tax effects of enactment of the Act; however, as described below, Orion has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax.

Orion remeasured its deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the 21% federal corporate tax rate. The provisional amount recorded related to the remeasurement of its deferred tax balance decreased deferred tax assets by $11.3 million. Thisthis decrease ~~to deferred tax assets~~ was ~~fully~~ offset by a corresponding decrease to the valuation allowance. ~~There is no impact on the current year income tax expense for the federal corporate tax rate change due to Orion's current year taxable loss.~~

~~The Act~~Orion also requires companies to pay a one-time transition tax on Orion's total post-1986 earnings and profits ("E&P") of its foreign subsidiary that were previously tax deferred from US income taxes. Since Orion's foreign subsidiary has negative E&P, there isprovisionally estimated it would incur no transition ~~tax to be reported in its income tax expense.~~

~~Uncertain Tax Positions~~

tax. As of December 31, ~~2017,~~2018, Orion did not adjust its estimates and considers all changes due to the Act final.

Uncertain Tax Positions

As of December 31, 2018, Orion’s balance of gross unrecognized tax benefits was approximately $0.1 million, all of which would reduce Orion’s effective tax rate if recognized.

Orion has classified the amounts recorded for uncertain tax benefits in the balance sheet as ~~other~~Other long-term liabilities ~~(non-current)~~ to the extent that payment is not anticipated within one year. Orion recognizes penalties and interest related to uncertain tax liabilities in ~~income~~Income tax expense. Penalties and interest are ~~immaterial and are~~ included in the unrecognized tax benefits.

NOTE 13 — COMMITMENTS AND CONTINGENCIES

Operating Leases

Orion leases office space and equipment under operating leases expiring at various dates through 2020. Rent expense under these operating leases was $0.2 million and ~~$0.3~~$0.2 million for the three months ended December 31, 2018 and 2017, ~~and 2016, respectively,~~respectively. Rent expense under these operating leases was $0.5 million and $0.7 ~~million and $0.6~~ million for the nine months ended December 31, 2018 and 2017, ~~and 2016,~~ respectively.

~~On April 28, 2017, Orion renewed the lease for its Jacksonville, Florida office space for an additional three-year term with annual rent expense of approximately $0.1 million.~~

On March 31, 2016, Orion entered into a purchase and sale agreement with a third party to sell and leaseback Orion's manufacturing and distribution facility for gross cash proceeds of $2.6 million. The transaction closed on June 30, 2016.

Litigation

Orion is subject to various claims and legal proceedings arising in the ordinary course of business. As of the date of this report, Orion is unable to currently assess whether the final resolution of any of such claims or legal proceedings may have a material adverse effect on our future results of operations. In addition to ordinary-course litigation, Orion iswas a party to the proceedings described below.

On March 27, 2014, Orion was named as a defendant in a civil lawsuit filed by Neal R. Verfuerth, a former chief executive officer who ~~was terminated for cause~~left Orion in November 2012, in the United States District Court for the Eastern District of Wisconsin (Green Bay Division). The plaintiff alleged, among other things, that Orion breached certain agreements entered into with the plaintiff, including the plaintiff’s employment agreement, and violated certain laws. The complaint sought, among other relief, unspecified

pecuniary and compensatory damages, fees and such other relief as the court may deem just and proper. On November 4, 2014, the court granted Orion's motion to dismiss six of the plaintiff's claims. On January 9, 2015, the plaintiff filed an amended complaint re-alleging claims that were dismissed by the court, including, among other things, a retaliation claim and certain claims with respect to prior management agreements and certain intellectual property rights. On January 22, 2015, Orion filed a motion to dismiss and a motion to strike certain of the claims made in the amended complaint. On May 18, 2015, the court dismissed the intellectual property claims re-alleged in the January 9, 2015 amended complaint. At the court's direction, the parties attempted to mediate the matter in May 2016, but were unsuccessful in resolving the matter.

On August 25, 2016, the Chief Judge of the United States District Court for the Eastern District of Wisconsin (Green Bay Division) dismissed all claims against Orion brought by the plaintiff, including his claims that Orion had allegedly breached the plaintiff’s employment agreement and had allegedly violated the plaintiff's whistleblower rights. On September 22, 2016, the plaintiff filed an appeal to the United States Court of Appeals challenging the judgment rendered on August 25, 2016. After the court-mandated mediation was unsuccessful, the plaintiff moved forward with his appeal focusing only on the District Court's dismissal of his whistleblower claims. The oral arguments for the appeal were held on September 27, 2017.

On January 11, 2018, a ~~three judge~~three-judge panel of the United States Court of Appeals Seventh Circuit unanimously affirmed the dismissal of all of the plaintiff’s claims against Orion. ~~It is currently uncertain whether the plaintiff intends to appeal the decision.~~

If the plaintiff chooses to appeal the decision, Orion intends to continue to defend against the claims vigorously. Orion believes it has substantial legal and factual defenses to the claims and allegations remaining in the case and that Orion will prevail in any further proceedings. Based upon the current status of the lawsuit, Orion does not believe that it is reasonably possible that the lawsuit will have a material adverse impact on its future continuing results of operations.

On November 10, 2017, a purported ~~Orion~~ shareholder, Stephen Narten, filed a civil lawsuit in the Circuit Court for Manitowoc County against those individuals who served on ~~Orion’s Board~~Orion's board of ~~Directors~~directors during fiscal years 2015, 2016, and 2017 and certain current and former officers during the same period. The plaintiff, who ~~purports~~purported to bring the suit derivatively on behalf of Orion, ~~alleges~~alleged that the director defendants breached their fiduciary duties in connection with granting certain stock-based incentive awards under ~~Orion’s~~Orion's 2004 Stock and Incentive Awards Plan and that the directors and current and former officers breached their fiduciary duties by accepting those awards. ~~On January 22, 2018, Orion moved to dismiss~~During the ~~lawsuit on~~first quarter of fiscal 2019, the ~~grounds that the complaint fails to state~~parties reached a ~~claim upon which relief may be granted. Orion intends to defend against~~settlement of the claims ~~vigorously. Orion believes that~~

~~it has substantial defenses to~~and the ~~claims in this proceeding. Based upon the current status of the lawsuit, Orion does~~case was dismissed. The settlement did not ~~believe that it is reasonably possible that the lawsuit will~~ have a material ~~adverse~~ impact on ~~its future continuing~~Orion's results of ~~operations.~~

operations, cash flows or financial condition.

State Tax Assessment

In June 2016, Orion negotiated a settlement with the Wisconsin Department of Revenue with respect to an assessment regarding the proper classification of its products for tax purposes under Wisconsin law for $0.5 million.

During ~~the nine months ended December 31, 2017,~~fiscal 2018, Orion was notified of a pending sales and use tax audit by the Wisconsin Department of Revenue for the period covering April 1, 2013 through March 31, 2017. Although the final resolution of ~~the Company’s~~Orion's sales and use tax audit is uncertain, based on current information, in the opinion of Orion's management, the ~~Company’s~~ultimate disposition of these matters will not have a material adverse effect on Orion's consolidated balance sheets, statements of operations, or liquidity.

During fiscal 2019, Orion was notified of a pending sales and use tax audit by the California Department of Tax and Fee Administration for the period covering April 1, 2015 through March 31, 2018. Although the final resolution of Orion's sales and use tax audit is uncertain, based on current information, in the opinion of Orion's management, the ultimate disposition of these matters will not have a material adverse effect on the ~~Company’s condensed~~Orion's consolidated balance ~~sheet,~~sheets, statements of operations, or liquidity.

NOTE 14 — SHAREHOLDERS’ EQUITY

Employee Stock Purchase Plan

In August 2010, Orion’s board of directors approved a non-compensatory employee stock purchase plan, or ESPP. Orion issued the following shares from treasury under the ESPP during the nine months ended December 31, ~~2017:~~2018:

	Shares Issued Under ESPP Plan		Closing Market Price
Quarter Ended June 30, 2018		866	$1.10
Quarter Ended September 30, 2018		938	$0.96
Quarter Ended December 31, 2018		1,708	$0.57
Total issued in fiscal 2019		3,512	$ 0.57 - 1.10

Shares Issued Under ESPP
Plan Closing Market
Price
Quarter Ended June 30, 2017 2,150
$1.28
Quarter Ended September 30, 2017 2,681
$1.12
Quarter Ended December 31, 2017 3,446
$0.88
Total issued in fiscal 2018 8,277
$0.88 - 1.28

In prior years, Orion issued loans to non-executive employees to purchase shares of its ~~stock.~~stock under the ESPP. The loan program has been discontinued and new loans are no longer issued. As of March 31, 2017, ~~four thousand dollars~~$4,000 of such loans remained outstanding and were reflected on Orion’s balance sheet as a contra-equity account. During the nine months ended December 31, 2017, Orion entered into agreements with the counterparties to these loans. In exchange for the forgiveness of their outstanding loan balance, the employees returned their shares to Orion. As a result of these transactions, 1,230 shares were recorded within treasury stock and the loan balances were eliminated.

NOTE 15 — STOCK OPTIONS AND RESTRICTED SHARES

At Orion's 2016 ~~Annual Meeting~~annual meeting of ~~Shareholders~~shareholders held on August 3, 2016, Orion's shareholders approved the Orion Energy Systems, Inc. 2016 Omnibus Incentive Plan (the "Plan"). The Plan authorizes grants of equity-based and incentive cash awards to eligible participants designated by the Plan's administrator. Awards under the Plan may consist of stock options, stock appreciation rights, performance shares, performance units, common stock, restricted stock, restricted stock units, incentive awards or dividend equivalent units.

Prior to shareholder approval of the Plan, the Company maintained its 2004 Stock and Incentive Awards Plan, as amended, which authorized the grant of cash and equity awards to employees (the “Former Plan”). No new awards are being granted under the Former Plan; however, all awards granted under the Former Plan that ~~were~~are outstanding ~~as of August 3, 2016~~ will continue to be governed by the Former Plan.

~~Certain non-employee directors have elected to receive stock~~ Forfeited awards ~~in lieu of cash compensation pursuant to elections made~~originally issued under ~~Orion’s non-employee director compensation program.~~the Former Plan are canceled and are not available for subsequent issuance under the Plan. The ~~plans~~Plan and the Former Plan also permit accelerated vesting in the event of certain changes of control of Orion as well as under other special circumstances.

Certain non-employee directors have from time to time elected to receive stock awards in lieu of cash compensation pursuant to elections made under Orion’s non-employee director compensation program.

The following amounts of stock-based compensation were recorded (dollars in thousands):

	Three Months Ended December 31,				Nine Months Ended December 31,
	2018		2017		2018		2017
Cost of product revenue	$	1	$	1	$	3	$	11
Cost of service revenue		1		—		2		—
General and administrative		185		205		592		722
Sales and marketing		13		34		41		113
Research and development		—		10		1		22
Total	$	200	$	250	$	639	$	868

Three Months Ended December 31, Nine Months Ended December 31,
2017 2016 2017 2016
Cost of product revenue $ 1
$ 7
$ 11
$ 30
General and administrative 205
283
722
1,035
Sales and marketing 34
64
113
116
Research and development 10
30
22
71
Total $ 250
$ 384
$ 868
$ 1,252

During the first nine months of fiscal ~~2018,~~2019, Orion had the following activity related to its stock-based compensation:

	Restricted Shares			Stock Options
Balance at March 31, 2018		1,485,799			629,667
Awards granted		519,000			—
Awards vested		(626,444	)		—
Awards forfeited		(48,662	)		(151,831	)
Awards outstanding at December 31, 2018		1,329,693			477,836
Per share price on grant date		0.84			—

Restricted Shares Stock Options
Balance at March 31, 2017 1,704,543
1,520,953
Awards granted 730,410
—
Awards vested (592,851 ) —
Awards forfeited (296,893 ) (811,286 )
Awards outstanding at December 31, 2017 1,545,209
709,667
Per share price on grant date $0.88 - $1.95
—

As of December 31, ~~2017,~~2018, the amount of deferred stock-based compensation expense to be recognized, over a remaining period of ~~2.0~~1.7 years, was approximately ~~$1.6~~$1.0 million.

NOTE 16 — SEGMENTS

Orion has the following business segments: Orion ~~U.S. Markets Division ("USM"), Orion~~ Engineered Services Division ("OES") ~~and~~, Orion Distribution Services Division ("ODS"), and Orion U.S. Markets Division ("USM"). The accounting policies are the same for each business segment as they are on a consolidated basis.

~~Orion U.S. Markets Division ("USM")~~

The USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and electrical contractors. A significant portion of the historic sales of this division have migrated to distribution channel sales as a result of the implementation of Orion’s agent distribution strategy. The migrated sales are included in Orion's ODS Division.

Orion Engineered Systems Division ~~("OES")~~

The OES segment develops and sells lighting products and provides construction and engineering services for Orion's commercial lighting and energy management systems. OES provides turnkey solutions for large national accounts, governments, municipalities and schools.

Orion Distribution Services Division ~~("ODS")~~

The ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of broadline North American distributors. ~~This~~

Orion U.S. Markets Division

The USM segment ~~is expanding as a result of increased sales through distributors as Orion continues~~sells commercial lighting systems and energy management systems to ~~develop its agent distribution strategy. This expansion includes~~ the ~~migration of~~wholesale contractor markets. USM customers ~~from direct sales previously included in the USM division.~~

include ESCOs and electrical contractors.

Corporate and Other

Corporate and Other is comprised of operating expenses not directly allocated to Orion’s segments and adjustments to reconcile to consolidated results (dollars in thousands).

	Revenues				Operating Income (Loss)
	For the Three Months Ended December 31,				For the Three Months Ended December 31,
	2018		2017		2018			2017
Segments:
Orion Engineered Systems	$	6,802	$	7,316	$	33		$	185
Orion Distribution Services		6,102		7,779		(236	)		224
Orion U.S. Markets		3,387		2,168		569			(520	)
Corporate and Other		—		—		(953	)		(1,248	)
	$	16,291	$	17,263	$	(587	)	$	(1,359	)

	Revenues				Operating Income (Loss)
	For the Nine Months Ended December 31,				For the Nine Months Ended December 31,
	2018		2017		2018			2017
Segments:
Orion Engineered Systems	$	15,168	$	18,857	$	(1,944	)	$	(2,891	)
Orion Distribution Services		20,202		19,998		(1,082	)		(564	)
Orion U.S. Markets		7,941		6,388		793			(2,970	)
Corporate and Other		—		—		(3,240	)		(4,968	)
	$	43,311	$	45,243	$	(5,473	)	$	(11,393	)

Revenues Operating Income (Loss)
For the Three Months Ended December 31, For the Three Months Ended December 31,
2017 2016 2017 2016
Segments:
Orion U.S. Markets $ 2,168
$ 5,368
$ (520 ) $ 367
Orion Engineered Systems 7,316
8,288
185
(81 )
Orion Distribution Services 7,779
6,961
224
229
Corporate and Other —
—
(1,248 ) (1,543 )
$ 17,263
$ 20,617
$ (1,359 ) $ (1,028 )

Revenues Operating Income (Loss)
For the Nine Months Ended December 31, For the Nine Months Ended December 31,
2017 2016 2017 2016
Segments:
Orion U.S. Markets $ 6,388
$ 16,462
$ (2,970 ) $ 558
Orion Engineered Systems 18,857
22,062
(2,891 ) (878 )
Orion Distribution Services 19,998
16,397
(564 ) (132 )
Corporate and Other —
—
(4,968 ) (4,823 )
$ 45,243
$ 54,921
$ (11,393 ) $ (5,275 )

NOTE 17 — REORGANIZATION OF BUSINESS

During ~~the nine months ended December 31, 2017,~~fiscal 2018, Orion ~~implemented~~executed on a ~~reorganization and targeted~~ cost ~~savings plan. As a result, Orion entered~~reduction plan by entering into separation agreements with 20multiple employees. During the three months ended December 31, 2017, Orion recognized approximately nineteen thousand in savings due to outplacement services not used. For the nine months ended December 31, 2017, Orion recognized $2.0 million of restructuring expense consisting of severance, outplacement services, and continued medical benefits for terminated employees for a limited post-employment period. TheOrion's restructuring expense for the three and nine months ended December 31, 2018 and 2017 is reflected within ~~Orion’s condensed statement~~its Condensed Consolidated Statements of ~~operations~~Operations as follows (dollars in thousands):

	Three Months Ended December 31,					Nine Months Ended December 31,
	2018		2017			2018		2017
Cost of product revenue	$	—	$	(7	)	$	—	$	33
General and administrative		1		(7	)		13		1,808
Sales and marketing		—		(5	)		17		178
Total	$	1	$	(19	)	$	30	$	2,019

Three Months Ended December 31, Nine Months Ended December 31,
2017 2017
Cost of product revenue $ (7 ) $ 33
General and administrative (7 ) 1,808
Sales and marketing (5 ) 178
Total $ (19 ) $ 2,019

Total restructuring expense by segment was recorded as follows (dollars in thousands):

	Three Months Ended December 31,					Nine Months Ended December 31,
	2018		2017			2018		2017
Orion Engineered Systems	$	—	$	—			5	$	—
Orion Distribution Systems		—		(5	)		12		84
Corporate and Other		1		(14	)		13		1,935
Total	$	1	$	(19	)	$	30	$	2,019

Three Months Ended December 31, Nine Months Ended December 31,
2017 2017
Orion Distribution Systems $ (5 ) $ 84
Corporate and Other (14 ) 1,935
Total $ (19 ) $ 2,019

~~Orion recorded no restructuring expense to the Orion U.S. Markets or Orion Engineered Systems segments.~~

~~The following table displays a rollforward of the reorganization of business accruals established~~

Cash payments for employee separation costs ~~from March~~in connection with its reorganization of its business were $8,573 and $0.1 million in the three months ended December 31, ~~2017 to~~2018 and December 31, 2017, ~~(dollars in thousands):~~

March 31, 2017 Additions Amounts Used December 31, 2017
Employee separation costs $ —
$ 1,876
$ (1,635 ) $ 241
Post-employment medical benefits (1) —
143
(4 ) 139
Total $ —
$ 2,019
$ (1,639 ) $ 380

~~(1)~~

The severance agreement with one executive included a long-term post-employment medical benefit which will be paid over a period of approximately twelve years. Orion recorded a liability for the net present value of this obligation based on the current cost of premiums for this individual’s medical coverage increased by an estimated health care cost trend of 6.8% decreasing to 5% in nine years. This benefit is reflected in Orion’s condensed consolidated balance sheet within accrued expenses and other and other long-term liabilities.

~~The remaining accrual of $0.4 million~~respectively. Cash payments for employee separation costs ~~is expected to~~in connection with the reorganization of its business were $0.2 million and $1.6 million in the nine months ended December 31, 2018, and December 31, 2017, respectively. The remaining restructuring cost accruals as of December 31, 2018 were $0.1 million, which represents post-retirement medical benefits for one former employee which will be paid ~~within the next twelve months.~~over several years.

During the fourth quarter of fiscal 2018, Orion identified and implemented further expense reduction initiatives, including not renewing the lease for its Chicago office which was due to expire in May 2018, as well as related workforce reductions and other streamlining initiatives, that it expects will result in annualized cost savings of approximately $1.5 million. As these are fourth quarter events, restructuring expense related to these actions will be recognized in the fourth quarter of fiscal 2018.

NOTE 18 — SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and noted no subsequent event requiring accrual or disclosure. See discussion related to litigation matters in Note 13 and new reorganization and cost cutting measures in Note 17 and the MD&A.


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements and related notes included in this Form 10-Q, as well as our audited ~~consolidated financial statements~~Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017~~.

2018.

Cautionary Note Regarding Forward-Looking Statements

Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are “forward-looking statements” as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “believe”, “anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”, “positioned”, “strategy”, “outlook” and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017.~~2018. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We ~~are a leading designer~~provide enterprise-grade light emitting diode ("LED") lighting and ~~manufacturer of high-performance, energy-efficient LED and other lighting platforms.~~energy project solutions. We research, develop, design, manufacture, market, sell and implement energy management systems consisting primarily of high-performance, energy-efficient commercial and industrial interior and exterior lighting systems and related services. Our products are targeted for applications in three primary market segments: commercial office and retail, area lighting and industrial applications, although we do sell and install products into other markets. Virtually all of our sales occur within North America.

Our lighting products consist primarily of ~~light emitting diode ("LED")~~LED lighting fixtures. Our principal customers include national account end-users, electrical distributors, energy service companies ("ESCOs") and electrical contractors. Currently, substantially all of our products are manufactured at our leased production facility location in Manitowoc, Wisconsin, although ~~we are increasingly sourcing products and components from third parties~~ as the LED market continues to evolve, we have the flexibility to source products and components from third parties in order to provide versatility in our product development.

We believe the market for lighting products has shifted to LED lighting systems, and that the customer base for our legacy high intensity fluorescent ("HIF") technology products will continue to decline. Compared to our legacy HIF lighting systems, we believe that LED lighting technology allows for better optical performance, significantly reduced maintenance costs due to performance longevity and reduced energy consumption. Due to their size and flexibility in application, we also believe that LED lighting systems can address opportunities for retrofit applications that cannot be satisfied by ~~fluorescent~~HIF or other legacy technologies. ~~Our LED lighting technologies have become the primary component of our revenue as we continue to strive to be a leader in the LED market.~~ Although we continue to sell some lighting products using our legacy HIF technology, we do not build to stock HIF products and instead build to committed customer orders as received. We plan to ~~continue to primarily~~maintain our primary focus on developing and selling innovative LED products.

We do not have long-term contracts with our customers that provide us with recurring revenue from period to period and we typically generate substantially all of our revenue from sales of lighting systems and related services to governmental, commercial and industrial customers on a project-by-project basis. We typically sell our lighting systems in replacement of our customers’ existing fixtures. We call this replacement process a ~~“retrofit.”~~"retrofit". We frequently engage our ~~customer’s~~customers’ existing electrical contractor to provide installation and project management services. We also sell our lighting systems on a wholesale basis, principally to electrical contractors, electrical distributors, and ESCOs to sell to their own customer bases.

Our ability to achieve our desired revenue growth and profitability goals depends on our ability to effectively engage distribution and sales agents, develop recurring revenue streams, implement our cost reduction initiatives, manage pricing pressures in the LED market, and improve our marketing, new product development, project ~~management,~~execution, customer service, margin enhancement and operating expense management, as well as other factors. In addition, the gross margins of our products can vary significantly depending upon the types of products we sell, with margins typically ranging from ~~15%~~10% to 50%. As a result, a change in the total mix of our sales ~~toward~~among higher or lower margin products can cause our profitability to fluctuate from period to period.

Our fiscal year ends on March 31. We refer to our current fiscal year which will end on March 31, 2019 as "fiscal 2019". We refer to our most recently completed fiscal year, which ended on March 31, 2018, as “fiscal 2018”, and our prior fiscal year which ended on March 31, 2017 as "fiscal 2017"~~, and our current fiscal year, which ends on March 31, 2018, as “fiscal 2018.”~~. Our fiscal first quarter of each fiscal year ends on June 30,

our fiscal second quarter ends on September 30, our fiscal third quarter ends on December 31, and our fiscal fourth quarter ends on March 31.

Reportable segments are components of an entity that have separate financial data that the entity's chief operating decision maker ("CODM") regularly reviews when allocating resources and assessing performance. Our CODM is our chief executive officer. ~~Orion has~~We have three reportable segments: ~~Orion U.S. Markets Division ("USM"),~~ Orion Engineered Systems Division ("OES"), ~~and~~ Orion Distribution Services Division ("ODS"), and Orion U.S. Markets Division ("USM").

Market Shift to Light Emitting Diode Products

The rapid market shift in the lighting industry from legacy lighting products to LED lighting products has caused us to adopt new strategies, approaches and processes in order to respond proactively to this industry transition. These changing underlying business fundamentals in this transition include:

~~Rapidly declining LED component costs and~~

LED product end user customer pricing pressure.

Improving LED product performance and reducing customer return on investment payback periods resulting in increased customer preference for LED lighting products compared to legacy HIF lighting products.

Increasing LED lighting product customer sales compared to decreasing HIF product sales.

A broader and more diverse customer base and market opportunities compared to our historical commercial and industrial facility customers.

Increased importance of highly innovative product designs and features and enhanced product research and development capabilities requiring rapid new product introduction and new methods of product and company differentiation.

Significantly reduced product technology life cycles; significantly shorter product inventory shelf lives and the related increased risk of rapidly occurring product technology obsolescence.

Increased reliance on international component sources.

Less internal product fabrication and production capabilities needed to support LED product assembly.

Different and broader types of components, fabrication and assembly processes needed to support LED product assembly compared to our legacy products.

Expanding customer bases and sales channels.

Significantly longer end user product warranty requirements for LED products compared to our legacy products.

As we continue to focus our primary business on selling our LED product lines to respond to the rapidly changing market dynamics in the lighting industry, we face intense competition from an increased number of other LED product companies, a number of which have substantially greater resources and more experience and history with LED lighting products than we do.

Management Restructuring and Focus on Profitability

On May 25, 2017, our Board of Directors restructured our management team. As part of this restructuring, our Chief Executive Officer, John Scribante, left our Company and Mike Altschaefl, our current Board Chair, assumed the role of Chief Executive Officer. In addition, Scott Green, our Executive Vice President, became our new Chief Operating Officer, with ongoing primary responsibility for improving our revenue generation. Mike Potts and Marc Meade, our then current Executive Vice Presidents, remained in their positions and were assigned primary responsibility for substantially reducing our cost structure and for streamlining operations. Bill Hull remained in his position as Chief Financial Officer.

On June 30, 2017, Mike Potts decided to retire as our Chief Risk Officer and Executive Vice President effective as of August 30, 2017. Mr. Potts continues to serve as a member of our Board of Directors and will continue to provide consulting services to us.

Our market and product strategies have not changed. We have renewed our focus on execution, including a reduction in our cost structure. Our restructured management team has developed a plan to achieve breakeven earnings (excluding employee separation costs) before interest, taxes, depreciation, and amortization, or EBITDA, through the implementation of the following cost reduction measures:

~~Constant monitoring and management of manufacturing overhead costs to ensure we continue to deliver strong gross margins amid an increasingly competitive market landscape;~~

~~Reducing staff positions through a targeted reduction in existing headcount;~~

~~Reductions in the total compensation of our executive management and board of directors;~~

~~Reductions in operating expenses, including better control of legal spending, elimination of our racing program and removal of various non-critical back office programs and initiatives.~~

We believe the above cost reduction plan, including the impact of fourth quarter fiscal 2018 actions, will result in annualized cost savings of approximately $6.0 million. These cost reductions, coupled with our renewed focus on sales channel execution, will help to drive revenue growth and accelerate our path to profitability.

During ~~the first nine months of~~ fiscal 2018, we executed on ~~the majority~~a cost reduction plan to reduce our costs and streamline operations. This cost reduction plan included a reduction in headcount, restructuring of ~~these plans by entering into separation agreements with 20 employees~~management and recognized $2.0 million of expense for the nine months ended December 31, 2017 in employee separation related costs. During the three months ended December 31, 2017, we recognized approximately nineteen thousand in savings due toboard compensation, and other cost reduction measures. Restructuring expenses included severance, outplacement services ~~not used.~~ and continued medical benefits for terminated employees for a limited post-employment period.

Our restructuring expense for the three and nine months ended December 31, 2018 and 2017 is reflected within our ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~operations~~Operations as follows (dollars in thousands):

	Three Months Ended December 31,					Nine Months Ended December 31,
	2018		2017			2018		2017
Cost of product revenue	$	—	$	(7	)	$	—	$	33
General and administrative		1		(7	)		13	$	1,808
Sales and marketing		—		(5	)		17	$	178
Total	$	1	$	(19	)	$	30	$	2,019

Three Months Ended December 31, Nine Months Ended December 31,
2017 2017
Cost of product revenue $ (7 ) $ 33
General and administrative (7 ) 1,808
Sales and marketing (5 ) 178
Total $ (19 ) $ 2,019

Total restructuring expense by segment was recorded as follows (dollars in thousands):

	Three Months Ended December 31,					Nine Months Ended December 31,
	2018		2017			2018		2017
Orion Engineered Systems	$	—	$	—		$	5	$	—
Orion Distribution Systems		—		(5	)		12		84
Corporate and Other		1		(14	)		13		1,935
Total	$	1	$	(19	)	$	30	$	2,019

Three Months Ended December 31, Nine Months Ended December 31,
2017 2017
Orion Distribution Systems $ (5 ) $ 84
Corporate and Other (14 ) 1,935
Total $ (19 ) $ 2,019

~~We recorded no restructuring expense to the Orion U.S. Markets or Orion Engineered Systems segments.~~

Cash payments for employee separation costs in connection with ~~the~~our reorganization of our business ~~plans~~ were $1.5 million for the nine months ended December 31, 2017. The remaining reorganization of business accruals as of December 31, 2017 were $0.5 million, of which $0.4 million relates to employee separation costs that are expected to be paid within one year. The remaining accrual of$8,573 and $0.1 million ~~represents post-retirement medical benefits for one employee which will be paid over several years.~~

During the fourth quarter of fiscal 2018, we identified and implemented further expense reduction initiatives, including not renewing the lease for our Chicago office which was due to expire in May 2018, as well as related workforce reductions and other streamlining initiatives. We expect these actions will result in annualized cost savings of approximately $1.5 million, which is included in the total estimated annual cost savings of $6.0 million discussed above. As these are fourth quarter events, restructuring expense related to these actions will be recognized in the fourth quarter of fiscal 2018.

~~Impairment of Intangible Assets~~

During the quarter ended September 30, 2017, we reviewed our definite and indefinite lived assets for impairment as a result of our lower than anticipated operating results and recent forecast revisions. As a result of these assessments, we determined that the carrying value of our indefinite lived intangible asset related to the Harris trade name exceeded the asset’s fair value. As a result, we recorded an impairment charge of $0.7 million. No impairment was recorded in the three months ended December 31, ~~2017. A change~~2018 and December 31, 2017, respectively. Cash payments for employee separation costs in ~~these assumptions or a change~~connection with our reorganization of our business were $0.2 million and $1.6 million in ~~circumstances could result in an impairment charge in a future period.~~

~~Fiscal 2018 Outlook~~

~~Despite lower than anticipated results for our three and~~ the nine months ended December 31, 2018, and December 31, 2017, werespectively.

Fiscal 2019 Outlook

We remain optimistic about our near-term and long-term financial performance. ~~We remain confident~~Our executive leadership team has developed a fiscal 2019 strategic plan to reflect our current business environment and the continuing opportunities and challenges of the LED and connected lighting marketplace. The overall goal of the plan is to build on what we achieved in ~~the value, performance, and return on investment~~fiscal 2018, both in terms of our ~~lighting products. We~~distribution network and reinvigoration of our direct sales effort, while leveraging our achieved cost containment efforts.

Our outlook for the remainder of fiscal 2019 is positive, as we believe that ~~customer purchases of LED lighting systems will continue to increase in~~ the ~~near-term as expected improvements in LED performance and expected decreases in LED product costs make our LED products even more economically compelling to our customers.~~

Our near-term optimism is based upon: (i) our efforts to expand our distribution services customer base; (ii) our intentions to continue to selectively expand our sales force; (iii) our investments into new high-performance LED industrial lighting fixtures

(iv) recent and planned new product introductions; and (v) our efforts to improve our gross margin as a result of focused inventory management, our cost containment initiatives and the development of higher-performance LED products.

~~Our long-term optimism is based upon the~~following factors ~~below which we believe~~ will directly or indirectly drive customer spending on ~~LED~~ lighting ~~systems or will improve the profitability of our operations:~~

solutions:

~~The considerable size of the existing market opportunity for lighting retrofits, including the market opportunities in commercial office, manufacturing, healthcare, government and retail markets;~~

~~The continued development of our new higher margin products and product enhancements, including our new LED product offerings;~~

~~Our efforts to expand our channels of distribution;~~

~~Our cost reduction initiatives which have included significant changes to our manufacturing operations to increase our flexibility and lower our cost structure;~~

LED adoption continues to grow in all sectors;

Commercial and industrial ~~economic~~ sentiment ~~is strengthening;~~remains strong;

Utility incentives continue to be ~~available and are increasing as a percent of project costs in many areas;~~available;

~~The passage of tax regulatory reform could encourage capital spending;~~

Capital spending is increasing;

Business profits are increasing; and

Consumer spending remains strong.

Beyond the benefits of our lighting fixtures, we believe that there is also an opportunity to utilize our ~~system~~ platform as a ~~“digital” or~~ “connected ceiling”, or a framework or network that can support the installation and integration of other business solutions on our digital platform. This anticipated potential growth opportunity is also known as the “Industrial Internet of Things” or IoT, and is still early in its development; however, we have already participated in a few compelling applications that deliver cost savings and efficiency in areas outside of lighting.

There continues to be a great amount of debate regarding a wide range of policy options with respect to monetary, regulatory, and trade, amongst others, that the U.S. federal government has and may pursue, including the recent imposition of tariffs on certain imports. Certain sourced finished products and certain of the components used in our products are impacted by the recently imposed tariffs on China imports. Our efforts to mitigate the impact of added costs include a variety of activities, such as sourcing from non-tariff impacted countries and raising prices. We believe that these mitigation activities will assist to offset added costs,

and we currently believe that such tariffs will have a limited adverse financial effect on our results of operations. Any future policy changes that may be implemented could have a positive or negative consequence on our financial performance depending on how the changes would influence many factors, including business and consumer sentiment.

Recent Developments

On January 11, 2019, we secured a letter of intent with an existing customer to retrofit a number of the customer's locations with our state-of-the-art LED lighting solutions. We expect to realize revenue of approximately $11 million under the letter of intent.

The project involves initial energy audits, custom design, production, logistics, wireless control systems commissioning and full project management through installation at a number of the customer's locations nationwide.

A significant portion of the installations are expected to be completed in the fourth quarter of fiscal 2019.

Recently Adopted Accounting Standards

We adopted ASC 606 ("ASC 606") and ASC 340-40 (the “new standards”) as of April 1, 2018 for contracts with customers that were not fully complete as of April 1, 2018 using the modified retrospective transition method. The cumulative effect of initially applying the new standards was recorded as an immaterial adjustment to our opening balance of retained deficit within our condensed consolidated statement of shareholders’ equity.

The new standards are applied separately for each contract between us and a customer. While the impact of the new standards vary for each contract based on its specific terms, in general, the new standards result in us (a) delaying the recognition of some of our Product revenue from the point of shipment until a later date during the installation period, (b) recording Service revenue associated with installing lighting fixtures as such fixtures are installed instead of recording all Services revenue at the completion of the installation, and (c) recording costs associated with installing lighting fixtures as they are incurred instead of deferring such costs and recognizing them at the time Service revenue was recorded.

The adoption of the new standards also resulted in reclassifications (a) between Product revenue and Service revenue, and between Cost of service revenue and Sales and marketing expenses in our Condensed Consolidated Statements of Operations, and (b) among Accounts receivable, Revenue earned but not billed, Inventories, net, Deferred contract costs, Prepaid expenses and other current assets, Accounts payable, Accrued expenses and other, Deferred revenue, current, Deferred revenue, long-term, and Other long-term liabilities in our Condensed Consolidated Balance Sheets.

Results of Operations - Three Months Ended December 31, ~~2017~~2018 versus Three Months Ended December 31 ~~2016~~

, 2017

The following table sets forth the line items of our ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~operations~~Operations and as a relative percentage of our total revenue for each applicable period, together with the relative percentage change in such line item between applicable comparable periods (dollars in thousands, except percentages):

	Three Months Ended December 31,
	2018			2017						2018			2017
	Amount			Amount			% Change			% of Revenue			% of Revenue
Product revenue	$	13,952		$	15,993			(12.8	)%		85.6	%		92.6	%
Service revenue		2,339			1,270			84.2	%		14.4	%		7.4	%
Total revenue		16,291			17,263			(5.6	)%		100.0	%		100.0	%
Cost of product revenue		10,508			11,181			(6.0	)%		64.5	%		64.8	%
Cost of service revenue		1,613			966			67.0	%		9.9	%		5.6	%
Total cost of revenue		12,121			12,147			(0.2	)%		74.4	%		70.4	%
Gross profit		4,170			5,116			(18.5	)%		25.6	%		29.6	%
General and administrative expenses		2,269			2,878			(21.2	)%		13.9	%		16.7	%
Sales and marketing expenses		2,190			2,981			(26.5	)%		13.4	%		17.3	%
Research and development expenses		298			616			(51.6	)%		1.8	%		3.6	%
Loss from operations		(587	)		(1,359	)		56.8	%		(3.6	)%		(7.9	)%
Other income		31			—		NM				0.2	%		—	%
Interest expense		(77	)		(74	)		(4.1	)%		(0.5	)%		(0.4	)%
Amortization of debt issue costs		(31	)		(28	)		(10.7	)%		(0.2	)%		(0.2	)%
Interest income		2			5			(60.0	)%		0.0	%		0.0	%
Loss before income tax		(662	)		(1,456	)		54.5	%		(4.1	)%		(8.4	)%
Income tax (benefit) expense		—			(23	)		(100.0	)%		—	%		(0.1	)%
Net loss	$	(662	)	$	(1,433	)		53.8	%		(4.1	)%		(8.3	)%

*	NM - Not Meaningful

Three Months Ended December 31,
2017 2016 2017 2016
Amount Amount %
Change % of
Revenue % of
Revenue
Product revenue $ 15,993
$ 19,259
(17.0 )% 92.6 % 93.4 %
Service revenue 1,270
1,358
(6.5 )% 7.4 % 6.6 %
Total revenue 17,263
20,617
(16.3 )% 100.0 % 100.0 %
Cost of product revenue 11,181
13,577
(17.6 )% 64.8 % 65.8 %
Cost of service revenue 966
885
9.2 % 5.6 % 4.3 %
Total cost of revenue 12,147
14,462
(16.0 )% 70.4 % 70.1 %
Gross profit 5,116
6,155
(16.9 )% 29.6 % 29.9 %
General and administrative expenses 2,878
3,541
(18.7 )% 16.7 % 17.2 %
Sales and marketing expenses 2,981
3,147
(5.3 )% 17.3 % 15.3 %
Research and development expenses 616
495
24.4 % 3.5 % 2.4 %
Loss from operations (1,359 ) (1,028 ) (32.2 )% (7.9 )% (5.0 )%
Interest expense (102 ) (65 ) (56.9 )% (0.5 )% (0.3 )%
Interest income 5
7
(28.6 )% — % — %
Loss before income tax (1,456 ) (1,086 ) (34.1 )% (8.4 )% (5.3 )%
Income tax benefit (23 ) —
NM
(0.1 )% — %
Net loss $ (1,433 ) $ (1,086 ) (32.0 )% (8.3 )% (5.3 )%

*NM - Not Meaningful

Revenue. Product revenue decreased ~~17.0%~~12.8%, or ~~$3.3~~$2.0 million, for the third quarter of fiscal ~~2018~~2019 versus the third quarter of fiscal ~~2017.~~2018. The decrease in ~~product~~Product revenue was ~~primarily the result of the continued decline in fluorescent product sales, $2.1 million quarter over quarter, and~~principally due to a decrease ~~of $1.0 million~~ in ~~LED lighting revenue. LED lighting revenue decreased by 6.4% from $15.5 million in the third quarter of fiscal 2017 to $14.5 million in the third quarter of fiscal 2018 primarily~~sales volume through our distribution channel, as ~~a result of~~well as the timing of ~~purchases by~~delivery of our ~~direct customers.~~turnkey projects. Service revenue ~~decreased 6.5%~~increased 84.2%, or ~~$0.1~~$1.1 million, primarily due to the timing of ~~completion of installations in the third quarter of fiscal 2018 when compared to the third quarter of fiscal 2017.~~project completions. Total revenue decreased by ~~16.3%~~5.6%, or ~~$3.4~~$1.0 million, primarily due to the items discussed above. Excluding the impact of the adoption of ASC 606, Product revenue decreased 9.8%, or $1.6 million, Service revenue decreased 32.0%, or $0.4 million, and Total revenue decreased by 11.5%, or $2.0 million, compared to the prior year quarter.

Cost of Revenue and Gross Margin. Cost of product revenue decreased 17.6%, or $2.4 million in the third quarter of fiscal 2018 versus the comparable period in fiscal 2017 primarily due to the decline in sales, partially offset by lower overhead absorption compared to the prior year period. Cost of service revenue increased 9.2%, or $0.1 million, in the third quarter of fiscal 2018 versus the comparable period in fiscal 2017 primarily due to costs incurred on a large installation project and the timing of project completions. Gross margin declined slightly from 29.9% of revenue in the third quarter of fiscal 2017 to 29.6% in the third quarter of fiscal 2018, primarily reflecting lower overhead absorption on lower revenue in the recent period.

~~Operating Expenses~~

~~General and Administrative.~~ ~~General and administrative expenses decreased 18.7%~~6.0%, or $0.7 million, in the third quarter of fiscal 2019 versus the third quarter of fiscal 2018 primarily due to the decrease in sales. Cost of service revenue increased 67.0%, or $0.6 million, in the third quarter of fiscal 2019 versus the third quarter of fiscal 2018. The increase was primarily due to the timing of project installations compared to the prior year quarter. Gross margin decreased to 25.6% of revenue in the third quarter fiscal 2019 from 29.6% in the third quarter of fiscal 2018, primarily due to the impact of fixed cost absorption on lower revenue. Excluding the impact of the adoption of ASC 606, gross margin as a percent of sales in the third quarter of fiscal 2019 was 26.9%.

Operating Expenses

General and Administrative. General and administrative expenses decreased 21.2%, or $0.6 million, in the third quarter of fiscal 2019 compared to the third quarter of fiscal ~~2017,~~2018, primarily due to ~~a decrease in wages~~reduced employee costs, legal expense, and consulting expense as a result of ~~headcount and salary reductions, legal expense, depreciation and amortization expense, and stock compensation expense.~~our cost reduction plan.

Sales and Marketing. Sales and marketing expenses decreased ~~5.3%~~26.5%, or ~~$0.2~~$0.8 million, in the third quarter of fiscal ~~2018~~2019 compared to the third quarter of fiscal ~~2017.~~2018. Excluding the impact of the adoption of ASC 606, Sales and marketing expenses decreased 14.7%, or $0.4 million, in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. The decrease quarter over quarter was primarily due to a decrease in commission expense on lower sales, reduced ~~consulting~~employee costs as a result of our cost reduction plan, and ~~professional fees related to special events~~lower travel and ~~field sales, partially offset by increased expenses focusing on additional sales activities.~~entertainment and marketing expenses.

Research and Development. Research and development expenses ~~increased~~decreased by ~~24.4%~~51.6%, or ~~$0.1~~$0.3 million, in the third quarter of fiscal ~~2018~~2019 compared to the third quarter of fiscal ~~2017~~2018 primarily due to ~~increased~~a decrease in testing costs based on timing of new product rollouts and ~~consulting costs.~~lower employee costs as a result of our cost reduction plan.

Other Income. Other income in the third quarter of fiscal 2019 primarily represented product royalties received from licensing agreements for our patents.

Interest Expense. Interest expense in the third quarter of fiscal ~~2018~~2019 increased by ~~56.9%~~4.1%, or ~~thirty-seven thousand dollars,~~$3,000, from the third quarter of fiscal ~~2017.~~2018. The increase in interest expense was due to increased third party financing costs.

Amortization of debt issue costs. Amortization of debt issue costs in the third quarter of fiscal 2019 increased by 10.7%, or $3,000, from the third quarter of fiscal 2018. The increase in amortization of debt issue costs was due to the execution of the new revolving credit agreement.

Interest Income. Interest income in the third quarter of fiscal ~~2018 decreased by 28.6%, or two thousand dollars, from~~2019 remained relatively flat compared to the third quarter of fiscal ~~2017. Our~~2018. Interest income relates to interest ~~income decreased as a result of the continued run-off of legacy customer financed projects.~~earned on sweep bank accounts.

Income Taxes. Income tax ~~benefit of twenty-three thousand~~expense was $0 in the third quarter of fiscal ~~2018 primarily reflected federal tax refunds, offset by state tax liabilities. We recorded no income tax expense in the third quarter of fiscal 2017 as a result of our operating losses.~~2019. Our ~~normal~~ income tax expense is due primarily to minimum state tax liabilities.

~~Orion U.S. Markets Division~~

The USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and electrical contractors. A significant portion of the historic sales of this division have migrated to distribution channel sales as a result of the implementation of our agent distribution strategy. The migrated sales are included in our ODS segment.

~~The following table summarizes our USM segment operating results (dollars in thousands):~~

For the Three Months Ended December 31,
2017 2016 %
Change
Revenues $ 2,168
$ 5,368
(59.6 )%
Operating (loss) income $ (520 ) $ 367
NM
Operating margin (24.0 )% 6.8 %

USM segment revenue decreased from the third quarter of fiscal 2017 by 59.6%, or $3.2 million. The decrease in revenue during the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017 was due to a $1.4 million decline in sales to select large direct customers. The remainder of the decline was due primarily to the migration of sales to our ODS segment.

The USM segment realized an operating loss in the third quarter of fiscal 2018 of $0.5 million as compared to operating income of $0.4 million during the third quarter of fiscal 2017. The decline in the segment’s operating results was primarily due to the significant decline in sales period over period, including the migration of sales to ODS, resulting in lost operating expense leverage.

Orion Engineered Systems Division

The OES segment develops and sells lighting products and provides construction and engineering services for our commercial lighting and energy management systems. OES provides turnkey solutions for large national accounts, governments, municipalities and schools.

The following table summarizes our OES segment operating results (dollars in thousands):

	For the Three Months Ended December 31,
	2018			2017			% Change
Revenues	$	6,802		$	7,316			(7.0	)%
Operating income	$	33		$	185			(82.2	)%
Operating margin		0.5	%		2.5	%

For the Three Months Ended December 31,
2017 2016 %
Change
Revenues $ 7,316
$ 8,288
(11.7 )%
Operating income (loss) $ 185
$ (81 ) NM
Operating margin 2.5 % (1.0 )%

OES revenue decreased in the third quarter of fiscal ~~2018~~2019 by ~~11.7%~~7.0%, or ~~$1.0~~$0.5 million, compared to the third quarter of fiscal ~~2017~~2018 primarily as a result of the timing of delivery of our turnkey ~~projects and reduced fluorescent purchases by a large retail customer.~~

projects.

OES segment operating income in the third quarter of fiscal ~~2018~~2019 was ~~$0.2 million, an increase~~$33,000, a decrease of ~~$0.3 million from the~~ $0.1 million ~~loss in~~from the third quarter of fiscal ~~2017.~~2018. The decrease in the segment’s operating income was the result of ~~improved delivery costs in the current quarter over the same period last year.~~

lower sales.

Orion Distribution Services Division

The ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of broadline North American distributors. This segment is expanding as a result of increased sales through distributors as we continue to develop our agent distribution strategy. This expansion includes the migration of customers from direct sales previously included in the USM segment.

The following table summarizes our ODS segment operating results (dollars in thousands):

	For the Three Months Ended December 31,
	2018			2017			% Change
Revenues	$	6,102		$	7,779			(21.6	)%
Operating income (loss)		(236	)		224			(205.4	)%
Operating margin		(3.9	)%		2.9	%

For the Three Months Ended December 31,
2017 2016 %
Change
Revenues $ 7,779
$ 6,961
11.8 %
Operating income 224
229
(2.2 )%
Operating margin 2.9 % 3.3 %

ODS segment revenue ~~increased~~decreased in the third quarter of fiscal ~~2018~~2019 by ~~11.8%~~21.6%, or ~~$0.8~~$1.7 million, compared to the third quarter of fiscal ~~2017,~~2018, primarily due to ana decrease in sales volume through our distribution channel.

ODS segment operating loss in the third quarter of fiscal 2019 was ($0.2 million), a decrease of $0.5 million from the operating income of $0.2 million in the third quarter of fiscal 2018. The segment’s operating loss was primarily due to the decrease in sales.

Orion U.S. Markets Division

The USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and electrical contractors.

The following table summarizes our USM segment operating results (dollars in thousands):

	For the Three Months Ended December 31,
	2018			2017			% Change
Revenues	$	3,387		$	2,168			56.2	%
Operating income (loss)	$	569		$	(520	)		209.4	%
Operating margin		16.8	%		(24.0	)%

USM segment revenue increased from the third quarter of fiscal 2018 by 56.2%, or $1.2 million. The increase in ~~select distributor sales.~~

~~While~~ revenue ~~increased period over period,~~during the ~~ODS segment’s operating results remained relatively flat as~~third quarter of fiscal 2019 compared to the third quarter of fiscal ~~2017~~2018 was primarily due to an increase in ~~selling expenses.~~

sales volume as a result of our reengagement in the sales channel.

USM segment operating income for the third quarter of fiscal 2019 was $0.6 million, an improvement of $1.1 million over the third quarter of fiscal 2018. The improvement from the operating loss in the third quarter of fiscal 2018 represented the increase in sales volume, as well as improved operating expense leverage on lower allocated corporate costs.

Results of Operations - Nine Months Ended December 31, ~~2017~~2018 versus Nine Months Ended December 31, ~~2016~~

2017

	Nine Months Ended December 31,
	2018			2017						2018			2017
	Amount			Amount			% Change			% of Revenue			% of Revenue
Product revenue	$	38,350		$	41,883			(8.4	)%		88.5	%		92.6	%
Service revenue		4,961			3,360			47.6	%		11.5	%		7.4	%
Total revenue		43,311			45,243			(4.3	)%		100.0	%		100.0	%
Cost of product revenue		29,599			30,587			(3.2	)%		68.3	%		67.6	%
Cost of service revenue		3,544			3,209			10.4	%		8.2	%		7.1	%
Total cost of revenue		33,143			33,796			(1.9	)%		76.5	%		74.7	%
Gross profit		10,168			11,447			(11.2	)%		23.5	%		25.3	%
General and administrative expenses		7,681			11,370			(32.4	)%		17.7	%		25.1	%
Impairment of intangible assets		—			710			(100.0	)%		—	%		1.6	%
Sales and marketing expenses		6,903			9,241			(25.3	)%		15.9	%		20.4	%
Research and development expenses		1,057			1,519			(30.4	)%		2.4	%		3.4	%
Loss from operations		(5,473	)		(11,393	)		52.0	%		(12.6	)%		(25.2	)%
Other income		65			—		NM				0.2	%		—	%
Interest expense		(335	)		(225	)		(48.9	)%		(0.8	)%		(0.5	)%
Amortization of debt issue costs		(31	)		(83	)		62.7	%		(0.1	)%		(0.2	)%
Interest income		8			12			(33.3	)%		0.0	%		0.0	%
Loss before income tax		(5,766	)		(11,689	)		50.7	%		(13.3	)%		(25.8	)%
Income tax (benefit) expense	26				(23	)		(213.0	)%		0.1	%		(0.1	)%
Net loss	$	(5,792	)	$	(11,666	)		50.4	%		(13.4	)%		(25.8	)%

*	NM - Not Meaningful

Nine Months Ended December 31,
2017 2016 2017 2016
Amount Amount %
Change % of
Revenue % of
Revenue
Product revenue $ 41,883
$ 52,286
(19.9 )% 92.6 % 95.2 %
Service revenue 3,360
2,635
27.5 % 7.4 % 4.8 %
Total revenue 45,243
54,921
(17.6 )% 100.0 % 100.0 %
Cost of product revenue 30,587
36,748
(16.8 )% 67.6 % 66.9 %
Cost of service revenue 3,209
1,748
83.6 % 7.1 % 3.2 %
Total cost of revenue 33,796
38,496
(12.2 )% 74.7 % 70.1 %
Gross profit 11,447
16,425
(30.3 )% 25.3 % 29.9 %
General and administrative expenses 11,370
11,040
3.0 % 25.1 % 20.1 %
Impairment of intangible assets 710
—
NM
1.6 % — %
Sales and marketing expenses 9,241
9,167
0.8 % 20.4 % 16.7 %
Research and development expenses 1,519
1,493
1.7 % 3.4 % 2.7 %
Loss from operations (11,393 ) (5,275 ) (116.0 )% (25.2 )% (9.6 )%
Other income —
190
NM
— % 0.3 %
Interest expense (308 ) (203 ) (51.7 )% (0.7 )% (0.4 )%
Interest income 12
31
(61.3 )% — % 0.1 %
Loss before income tax (11,689 ) (5,257 ) (122.4 )% (25.9 )% (9.6 )%
Income tax (benefit) expense (23 ) (261 ) NM
(0.1 )% (0.5 )%
Net loss $ (11,666 ) $ (4,996 ) (133.5 )% (25.8 )% (9.1 )%

*NM - Not Meaningful

Revenue. Product revenue decreased ~~19.9%~~8.4%, or ~~$10.4~~$3.5 million, for the first nine months of fiscal ~~2018~~2019 versus the first nine months of fiscal ~~2017.~~2018. The decrease in ~~product~~Product revenue was primarily athe result of the ~~continued decline in fluorescent product~~timing of delivery of our turnkey projects, partially offset by higher sales ~~$6.4~~through our distribution and reseller channels. Service revenue increased 47.6%, or $1.6 million, ~~year over year, and a decrease~~primarily due to the timing of ~~$3.6 million in LED lighting revenue. LED lighting~~project installations. Total revenue decreased ~~8.7% from $41.2~~by 4.3%, or $1.9 million, primarily due to the items discussed above. Excluding the impact of the adoption of ASC 606, Product revenue decreased 4.8%, or $2.0 million, Service revenue decreased 29.9%, or $1.0 million, and Total revenue decreased by 6.6%, or $3.0 million, compared to the first nine months of fiscal 2018.

Cost of Revenue and Gross Margin. Cost of product revenue decreased 3.2%, or $1.0 million, in the first nine months of fiscal ~~2017~~2019 versus the first nine months of fiscal 2018 primarily due to ~~$37.6~~the decrease in sales. Cost of service revenue increased 10.4%, or $0.3 million, in the first nine months of fiscal 2019 versus the first nine months of fiscal 2018, primarily due to the increase in service revenue on timing of delivery of our turnkey projects. Gross margin decreased to 23.5% of revenue in the first nine months of fiscal 2019 from 25.3% in the first nine months of 2018, primarily reflecting the impact of fixed cost absorption on lower revenue. Excluding the impact of the adoption of ASC 606, gross margin in the first nine months of fiscal 2019 was 25.5%.

Operating Expenses

General and Administrative. General and administrative expenses decreased 32.4%, or $3.7 million, in the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018, primarily due to $1.8 million in employee separation costs incurred in fiscal 2018 which did not recur in fiscal 2019, as well as reduced employee costs, legal expense, and consulting expense as a result of our cost reduction plan.

Sales and Marketing. Sales and marketing expenses decreased 25.3%, or $2.3 million, in the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018. Excluding the impact of the adoption of ASC 606, Sales and marketing expenses decreased 15.3%, or $1.4 million, in the first nine months of fiscal 2019 compared to the prior year period. The decrease year over year was primarily due to reduced employee costs due to the impact of our cost reduction plan, and lower travel and entertainment and marketing expenses.

Research and Development. Research and development expenses decreased by 30.4%, or $0.5 million, in the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018 primarily due to lower employee costs as a result of our cost reduction plan, as well as a decrease in testing costs based on timing of new product rollouts.

Other income. Other income in the first nine months of fiscal 2019 primarily represented product royalties received from licensing agreements for our patents.

Interest Expense. Interest expense in the first nine months of fiscal 2019 increased by 48.9%, or $0.1 million, from the first nine months of fiscal 2018. The increase in interest expense was due to increased third-party financing costs related to the sale of receivables.

Amortization of debt issue costs. Amortization of debt issue costs in the first nine months of fiscal 2019 decreased by 62.7%, or $0.1 million, from the first nine months of fiscal 2018. The decrease in amortization of debt issue costs is due to the execution of the new revolving credit facility.

Interest Income. Interest income in the first nine months of fiscal 2019 remained relatively flat compared to the first nine months of fiscal 2018. Interest income relates to interest earned on sweep bank accounts.

Income Taxes. Income tax expense of $26,000 in the first nine months of 2019 primarily reflected state tax liabilities. Our income tax expense is due primarily to minimum state tax liabilities.

Orion Engineered Systems Division

The following table summarizes our OES segment operating results (dollars in thousands):

	For the Nine Months Ended December 31,
	2018			2017			% Change
Revenues	$	15,168		$	18,857			(19.6	)%
Operating loss	$	(1,944	)	$	(2,891	)		32.8	%
Operating margin		(12.8	)%		(15.3	)%

OES revenue decreased in the first nine months of fiscal 2019 by 19.6%, or $3.7 million, compared to the first nine months of fiscal 2018 primarily as a result of the timing of ~~purchases by~~delivery of our ~~direct customers. Service~~turnkey projects.

OES segment operating loss in the first nine months of fiscal 2019 was ($1.9 million), an improvement of $0.9 million from the first nine months of fiscal 2018. The improvement in the segment’s operating loss was the result of the benefit of lower corporate allocated costs due to the impact of cost reduction initiatives, as well as a non-recurring asset impairment charge of $0.5 million in the third quarter of fiscal 2018.

Orion Distribution Services Division

The ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of broadline North American distributors.

The following table summarizes our ODS segment operating results (dollars in thousands):

	For the Nine Months Ended December 31,
	2018			2017			% Change
Revenues	$	20,202		$	19,998			1.0	%
Operating loss		(1,082	)		(564	)		(91.8	)%
Operating margin		(5.4	)%		(2.8	)%

ODS segment revenue increased ~~27.5%~~in the nine months of fiscal 2019 by 1.0%, or ~~$0.7~~$0.2 million, compared to the first nine months of fiscal 2018, primarily due to an increase in sales volume through our distribution channel.

ODS segment operating loss in the ~~timing~~first nine months of ~~installation projects~~fiscal 2019 was ($1.1 million), an increase in the operating loss of ($0.5 million) in the first nine months of fiscal 2018, ~~when compared to the first nine months of fiscal 2017. Total revenue decreased by 17.6%, or $9.7 million,~~ primarily due to ~~the items discussed above.~~

~~Cost of Revenue and Gross Margin.~~ Cost of product revenue decreased 16.8%, or $6.2 million, in the first nine months of fiscal 2018 versus the comparable period in fiscal 2017 primarily due to the decline in sales and the resulting lower overhead absorptionhigher allocated corporate costs compared to the prior year period. Cost of service revenue increased 83.6%, or $1.5 million, in the first nine months of fiscal 2018 versus the comparable period in fiscal 2017 primarily due to the timing of completion and costs on large projects. Gross margin decreased from 29.9% of revenue in the first nine months of fiscal 2017 to 25.3% in the first nine months of fiscal 2018. Our product gross margin decreased as a result of under-absorption within our manufacturing facility and an increase in ~~sales of products sourced from third party manufacturers.~~

~~Operating Expenses~~

~~General and Administrative.~~ ~~General and administrative~~selling expenses increased 3.0%, or $0.3 million, in the first nine months of fiscal 2018 compared to the first nine months of 2017, primarily due to $1.8 million in reorganization costs, offset by decreases in wages due to salary and headcount reductions, legal, depreciation and amortization and stock compensation expenses. Excluding the employee separation costs, general and administrative expenses decreased $1.7 million, or 15.1%.

~~Impairment of Intangible Assets.~~ During the nine months ended December 31, 2017, we performed a review of our definite and indefinite-lived tangible and intangible assets for impairment. In conjunction with this review, we determined that the carrying value of our Harris trade name intangible asset exceeded its fair value. As a result, we recorded an impairment charge of $0.7 million during the three months ended September 30, 2017.

~~Sales and Marketing.~~ Our sales and marketing expenses increased 0.8%, or $0.1 million, in the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017. The increase was primarily due to employee separation costs of $0.2 million and increased commissions related to our agency channel, offset by reduced consulting and professional fees related to special events and field sales, partially offset by increased expenses focusing on ~~additional sales activities.~~

~~Research and Development.~~ Research and development expenses increased by 1.7%, or twenty-six thousand dollars in the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017 primarily due to an increase in wages, offset by decreased testing and supply costs.

~~Other income.~~ ~~Other income in the first nine months of fiscal 2017 represented product royalties received from licensing agreements for our patents.~~

~~Interest Expense.~~ Interest expense in the first nine months of fiscal 2018 increased by 51.7%, or $0.1 million, from the first nine months of fiscal 2017. The increase in interest expense was due to increased third party financing costs.

~~Interest Income.~~ Interest income in the first nine months of fiscal 2018 decreased by 61.3%, or nineteen thousand dollars, from the first nine months of fiscal 2017. Our interest income decreased as a result of the continued run-off legacy customer financed projects.

~~Income Taxes.~~ Income tax benefit in the first nine months of 2018 decreased $0.2 million from the first nine months of fiscal 2017 primarily due to the release of a valuation reserve in fiscal 2017. Our income tax expense is due primarily to minimum state tax liabilities.

higher sales.

Orion U.S. Markets Division

The USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and electrical contractors. A significant portion of the historic sales of this division have migrated to distribution channel sales as a result of the implementation of our agent distribution strategy. The migrated sales are included in our ODS segment.

The following table summarizes our USM segment operating results (dollars in thousands):

	For the Nine Months Ended December 31,
	2018			2017			% Change
Revenues	$	7,941		$	6,388			24.3	%
Operating income (loss)	$	793		$	(2,970	)		126.7	%
Operating margin		10.0	%		(46.5	)%

For the Nine Months Ended December 31,
2017 2016 %
Change
Revenues $ 6,388
$ 16,462
(61.2 )%
Operating (loss) income $ (2,970 ) $ 558
NM
Operating margin (46.5 )% 3.4 %

USM segment revenue ~~decreased~~increased from the first nine months of fiscal ~~2017~~2018 by ~~61.2%~~24.3%, or ~~$10.1~~$1.6 million. The ~~decrease~~increase in revenue during the first nine months of fiscal ~~2018~~2019 compared to the first nine months of fiscal ~~2017 included the continued transition~~2018 was primarily due to our distribution sales model through the migration of sales to our ODS segment. Previously direct sales that are now sold through independent manufacturer representative agents are reflected within our ODS segment. The decrease also reflects a $2.4 million declinean increase in sales ~~to select large direct customers.~~

~~The~~ volume as a result of our reengagement in the sales channel.

USM ~~segment’s~~segment operating ~~results decreased $3.5 million in~~income for the first nine months of fiscal ~~2018 as compared to~~2019 was $0.8 million, an improvement of $3.8 million over the first nine months of fiscal 2017. The segment's operating loss was the result of the significant decline in sales due to the migration of customers to the distribution sales channel resulting in lost operating expense leverage and an intangible asset impairment in the second quarter of fiscal 2018 of $0.2 million.

~~Orion Engineered Systems Division~~

~~The following table summarizes our OES segment operating results (dollars in thousands):~~

For the Nine Months Ended December 31,
2017 2016 %
Change
Revenues $ 18,857
$ 22,062
(14.5 )%
Operating income (loss) $ (2,891 ) $ (878 ) (229.3 )%
Operating margin (15.3 )% (4.0 )%

OES revenue decreased in the nine months of fiscal 2018 by 14.5%, or $3.2 million, compared to the first nine months of fiscal 2017 primarily as a result of the timing of delivery of our turnkey projects and reduced florescent purchases by a large retail customer.

~~OES segment~~ operating loss in the first nine months of fiscal ~~2018 increased by $2.0 million from the first nine months of fiscal 2017.~~2018. The ~~segment's operating loss was the result of the decline in sales resulting in lost operating leverage and an intangible asset impairment in the second quarter of fiscal 2018 of $0.5 million .~~

~~Orion Distribution Services Division~~

The ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of broadline North American distributors. This segment is expanding as a result of increased sales through distributors as Orion continues to develop its agent distribution strategy. This expansion includes the migration of customers from direct sales previously included in the USM segment.

~~The following table summarizes our ODS segment operating results (dollars in thousands):~~

For the Nine Months Ended December 31,
2017 2016 %
Change
Revenues $ 19,998
$ 16,397
22.0 %
Operating loss (564 ) (132 ) NM
Operating margin (2.8 )% (0.8 )%

~~ODS segment revenue increased in the first nine months of fiscal 2018 from the first nine months of fiscal 2017 by $3.6 million. The increase in revenue~~improvement was primarily due to ~~our transition to a distribution channel sales model migrating direct sales through our manufacturer representative agents. In addition, ODS revenue grew~~better operating leverage on lower allocated corporate costs, as well as a ~~result~~non-recurring asset impairment charge of our expanding manufacturer representative agencies and the continued ramp of sales through these agencies. The total manufacturer representative agencies increased from 31 to approximately 50 agencies from the third quarter of fiscal 2017 to the third quarter of fiscal 2018.

~~ODS segment operating loss increased by $0.4~~$0.2 million in the first nine months of fiscal ~~2018 compared to the first nine months of fiscal 2017, primarily due to an increase in selling expenses.~~

2018.

Liquidity and Capital Resources

Overview

We had approximately ~~$10.6~~$6.6 million in cash and cash equivalents as of December 31, ~~2017,~~2018, compared to ~~$17.3~~$9.4 million at March 31, ~~2017.~~2018. Our cash position decreased primarily as a result of our net loss, ~~separation payments to terminated employees in conjunction with our management reorganization and cost reduction initiatives,~~offset by continued progress on managing working capital and the net repayment of ~~$3.0~~$0.6 million on our new and prior revolving credit facility.

During the second quarter, we listed our corporate office location in Manitowoc, Wisconsin for sale or lease to increase liquidity from divesting a non-core asset. Because of the uncertainty of a sale of our building in the next twelve months, the building continues to be classified as held and used as of December 31, 2018.

Our future liquidity needs and forecasted cash flows are dependent upon many factors, including our relative revenue, gross margins, cash management practices, cost reduction initiatives, working capital management, capital expenditures, pending or future litigation results and cost containment measures. In addition, we tend to experience ~~high~~higher working capital costs when we increase sales from existing levels. Based on our current expectations, while we anticipate realizing improved operating results in the future, we also currently believe that we may experience negative working capital cash flows during some interim periods.

Cash Flows

The following table summarizes our cash flows for the nine months ended December 31, ~~2017~~2018 and ~~2016~~2017 (in thousands):

	Nine Months Ended December 31,
	2018			2017
Operating activities	$	(1,610	)	$	(3,081	)
Investing activities		(196	)		(521	)
Financing activities		(1,022	)		(3,142	)
Decrease in cash and cash equivalents	$	(2,828	)	$	(6,744	)

Nine Months Ended December 31,
2017 2016
Operating activities $ (3,081 ) $ 266
Investing activities (521 ) 1,972
Financing activities (3,142 ) 1,338
Increase (decrease) in cash and cash equivalents $ (6,744 ) $ 3,576

Cash Flows Related to Operating Activities. Cash provided by or used in operating activities primarily consisted of a net loss adjusted for certain non-cash items, including depreciation, ~~and~~ amortization of intangible assets, stock-based compensation, ~~expenses,~~amortization of debt issue costs, provisions for reserves, and the effect of changes in working capital and other activities.

Cash used in operating activities for the first nine months of fiscal 2019 was ($1.6 million) and consisted of a net loss adjusted for non-cash expense items of ($3.8 million) and net cash provided by changes in operating assets and liabilities of $2.2 million. Cash used by changes in operating assets and liabilities consisted primarily of a decrease of $0.7 million in Revenue earned but not billed due to timing on revenue recognition compared to invoicing, and an increase in Inventory of $0.4 million on anticipated fourth quarter sales. Cash provided by changes in operating assets and liabilities consisted primarily of a decrease of $2.9 million in Accounts receivable due to lower sales and the timing of customer collections, and an increase of $0.6 million in Accounts payable based on timing of payments.

Cash used in operating activities for the first nine months of fiscal 2018 was ~~$3.1 million~~($3.1 million) and consisted of a net loss adjusted for non-cash expense items of ~~$7.8 million~~($7.8 million) and net cash provided by changes in operating assets and liabilities of $4.7 million. Cash used by changes in operating assets and liabilities consisted of a decrease of $0.8 million in accrued expenses and other primarily due to the timing of payment of commissions and lower accrued bonuses in the current fiscal year, a decrease of $0.3 million in deferred revenue due to the timing of project completion and a decrease of $0.2 million in deferred contract costs

due to the timing of project completions. Cash provided by changes in operating assets and liabilities included a decrease of $0.5 million in accounts receivable due to the decline in sales and the timing of customer collections, a decrease in inventory of $4.1 million as a result of increased focus on inventory management in consideration of the lower sales volume, a decrease of ~~$1.4~~$1.3 million in prepaid and other assets primarily due to the timing of project billings, and a negligible decrease in accounts payable.

Cash ~~provided by operating~~Flows Related to Investing Activities. Cash used in investing activities ~~for~~of ($0.2 million) in the first nine months of fiscal ~~2017 was $0.3 million and~~2019 consisted of ~~net cash provided by changes in operating assets~~purchases of Property and ~~liabilities of $1.3 million~~equipment and ~~a net loss adjusted for non-cash expense items of $1.0 million. Cash used by changes in operating assets~~additions to patents and liabilities consisted of an increase of $0.8 million in accounts receivable due to the increase in lighting revenue and the timing of collections from customers at period end, an increase of inventory by $0.2 million due to the timing of product shipments at quarter end, a decrease of $0.7 million in accrued expenses due to the payment of a state tax liability and an increase in deferred contract costs of $1.3 million due to the timing of project completions. Cash provided by changes in operating assets and liabilities included an increase of $0.6 million in accounts payable due to the timing of payments on balances at quarter end, a decrease in prepaid and other assets of $3.3 million primarily due to the timing of project billings, and an increase in deferred revenue of $0.4 million due to the timing of project completions.

~~Cash Flows Related to Investing Activities.~~licenses.

Cash used by investing activities was ~~$0.5 million~~($0.5 million) in the first nine months of fiscal 2018 which consisted of purchases of property and equipment and additions to patents and licenses.

Cash ~~provided by investing~~Flows Related to Financing Activities. Cash used in financing activities was ~~$2.0 million in the first nine months of fiscal 2017 which consisted of $2.6 million of proceeds from the sale of the Manitowoc manufacturing facility. Cash used by investing activities~~($1.0 million) for the first nine months of fiscal ~~2017 was $0.4 million for capital improvements related to production enhancements~~2019. This use of cash consisted primarily of net repayments of ($0.6 million) of our new and ~~technology purchases~~prior revolving credit facility and ~~$0.2 million~~deferred financing costs associated with our New Credit Agreement (defined below) of ~~additions to patents.~~

~~Cash Flows Related to Financing Activities.~~($0.4 million).

Cash used in financing activities was ~~$3.1 million~~($3.1 million) for the first nine months of fiscal 2018 ~~and~~ was due ~~almost entirely~~primarily to the net repayment of our prior revolving credit facility.

Cash provided by financing activities was $1.3 million for the first nine months of fiscal 2017. This included $0.8 million of cash used for the repayment of long-term debt, $11,000 for stock option exercises and stock related tax settlements, and net proceeds from the revolving credit facility of $2.2 million.

Working Capital

Our net working capital as of December 31, ~~2017~~2018 was ~~$13.4~~$8.6 million, consisting of ~~$30.6~~$25.5 million in current assets and ~~$17.2~~$16.9 million in current liabilities. Our net working capital as of March 31, ~~2017~~2018 was ~~$25.5~~$13.0 million, consisting of ~~$43.9~~$29.4 million in current assets and ~~$18.4~~$16.4 in current liabilities. Our current ~~accounts~~Accounts receivable, net balance decreased by ~~$0.5~~$2.6 million from the fiscal ~~2017 year end~~2018 year-end primarily due to ~~the decline in~~lower sales and the timing of customer collections. Our ~~inventory decreased~~Revenue earned but not billed balance increased $3.1 million from the fiscal ~~2017 year end by $4.8~~2018 year-end; the change in the account included reclassifications of $2.4 million ~~due to continued management~~as of ~~purchasing activities and inventory management initiatives.~~April 1, 2018 which were recorded in conjunction with the adoption of ASC 606. Our ~~prepaid~~Prepaid expenses and other current assets decreased $1.8 million primarily due to the reclassification of Revenue earned not billed of $1.9 million to its own balance sheet line item in conjunction with the adoption of ASC 606. Our Inventories, net increased from the fiscal 2018 year-end by ~~$1.3~~$1.2 million due to ~~a decrease~~reclassifications of $0.7 million as of April 1, 2018 in ~~unbilled revenue~~conjunction with the adoption of ASC 606 and an increase in inventory of $0.5 million due primarily to anticipated fourth quarter sales. Our Deferred contract costs decreased $1.0 million from the fiscal 2018 year-end due to the adoption of ASC 606 and reclassification of these costs to either equity or inventory as ~~a result~~part of the transition adjustment on April 1, 2018. Deferred costs is not used subsequent to the adoption of ASC 606. Our Accounts payable decreased $0.3 million due to reclassifications of $0.9 million of April 1, 2018 in conjunction with the adoption of ASC 606, offset by the timing of ~~customer billings.~~purchases during the quarter. Our ~~accounts payable remained relatively flat compared to fiscal 2017 year end. Our accrued~~Accrued expenses ~~decreased~~increased from our fiscal ~~2017 year end~~2018 year-end by ~~$0.8~~$1.1 million due to reclassifications of $1.3 million as of April 1, 2018 in conjunction with the ~~payment~~adoption of ASC 606 offset by payments for commissions and ~~a decrease in accrued bonuses in the current fiscal year.~~

other expenses.

We generally attempt to maintain at least a three-month supply of on-hand inventory of purchased components and raw materials to meet anticipated demand, as well as to reduce our risk of unexpected raw material or component shortages or supply interruptions. Our ~~accounts receivables, inventory~~Accounts receivable, Inventory and payables may increase to the extent our revenue and order levels increase.

Indebtedness

Revolving Credit Agreement

~~We have an amended credit agreement ("~~

On October 26, 2018, we entered into a new secured revolving Business Financing Agreement with Western Alliance Bank, as lender (the “New Credit ~~Agreement"~~Agreement”) ~~that~~. The New Credit Agreement replaced our existing Credit Agreement.

The New Credit Agreement provides for a two-year revolving credit facility ("(the “New Credit ~~Facility"~~Facility”) that matures on October 26, 2020. Borrowings under the New Credit Facility are initially limited to $20.15 million subject to a borrowing base requirement based on eligible receivables and inventory. ~~As of December 31, 2017 our borrowing base was approximately $3.8 million.~~ The New Credit ~~Facility has a maturity date of February 6, 2019 and~~Agreement includes a $2.0 million sublimit for the issuance of letters of credit. As of December 31, ~~2017,~~2018, our borrowing base was $4.4 million, and we had no$3.3 million in borrowings outstanding ~~letters of credit. Borrowings outstanding as of December 31, 2017, amounted to approximately $3.6 million and are~~which were included in non-current liabilities in the accompanying ~~condensed consolidated balance sheet. We estimate that as~~Condensed Consolidated Balance Sheets. As of December 31, ~~2017,~~2018, we ~~were eligible to borrow an~~had no outstanding letters of credit leaving additional ~~$0.2 million~~borrowing availability of $1.1 million.

The New Credit Agreement is secured by a security interest in substantially all of our and our subsidiaries’ personal property.

Borrowings under the New Credit ~~Facility~~Agreement generally bear interest at floating rates based upon ~~current levels of eligible inventory and accounts receivable.~~

~~Subject in each case~~the prime rate (but not be less than 5.00% per year) plus an applicable margin determined by reference to our ~~applicable borrowing base limitations,~~quick ratio (defined as the aggregate amount of unrestricted cash, unrestricted marketable securities and, with certain adjustments, receivables convertible into cash divided by the total current liabilities, including the obligations under the New Credit Agreement). As of December 31, 2018, the interest rate was 6.0%. Among other fees, we are required to pay an annual facility fee equal to 0.45% of the credit limit under the New Credit Agreement ~~otherwise provides for~~due on October 26, 2018 and on each anniversary thereof. With certain exceptions, if the New Credit Agreement is terminated prior to the first anniversary of the closing date of the New Credit Agreement, we are required to pay a ~~$15.0 million~~termination fee equal to 0.50% of the credit limit under the New Credit Facility. This limit may increase to $20.0 million based on a borrowing base requirement, if we satisfy certain conditions. We did not meet the requirements to increase the borrowing limit to $20.0 million as of July 31, 2017, the most recent measurement date.

~~From and after any increase in the Credit Facility limit from $15.0 million to $20.0 million, the~~Agreement.

The New Credit Agreement requires ~~that we~~us to maintain nine months’ of “RML” as of the end of each ~~month, a minimum ratio~~month. For purposes of the New Credit Agreement, RML is defined as, as of the applicable determination date, unrestricted cash on deposit with Western Alliance Bank plus availability under the New Credit Agreement divided by an amount equal to, for the applicable trailing ~~twelve-month~~three-month period, ~~of (i) earnings~~consolidated net profit before ~~interest, taxes,~~tax, plus depreciation expense, amortization expense and ~~amortization, subject to certain adjustments, to (ii) the sum of cash interest expense, certain~~stock-based compensation, minus capital lease principal payments, ~~on indebtedness and certain dividends, distributions and stock redemptions, equal to at least 1.10 to 1.00.~~ tested as of the end of each month.

The New Credit Agreement also contains ~~additional~~ customary events of default and other covenants, including certain restrictions on our ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, ~~guarantee obligations of third parties, make loans or advances, declare or~~ pay any dividend or distribution on our stock, redeem, retire or ~~repurchase~~purchase shares of our stock, make investments or pledge or ~~dispose~~transfer assets. If an event of ~~assets. We were in compliance with our covenants in~~default under the New Credit Agreement ~~as of December 31, 2017.~~

~~Each of our subsidiaries~~occurs and is ~~a joint and several co-borrower or guarantor~~continuing, then Western Alliance Bank may cease making advances under the New Credit Agreement and declare any outstanding obligations under the New Credit Agreement ~~is secured by a security interest in substantially all~~to be immediately due and payable. In addition, we become the subject of ~~our and each subsidiary’s personal property (excluding various assets relating to customer OTAs) and a mortgage on certain real property.~~

~~Borrowings~~voluntary or involuntary proceedings under any bankruptcy or similar law, then any outstanding obligations under the New Credit Agreement bear interest at the daily three-month LIBOR plus 3.0% per annum, with a minimum interest charge for each year or portion of a year during the term of the Credit Agreement of $0.1 million, regardless of usage. As of September 30, 2017, the interest rate was 4.69%. We must pay an unused line fee of 0.25% per annum of the daily average unused amount of the Credit Facilitywill automatically become immediately due and ~~a letter of credit fee at the rate of 3.0% per annum on the undrawn amount of letters of credit outstanding from time to time under the Credit Facility.~~

payable.

Capital Spending

Our capital expenditures are primarily for general corporate purposes for our corporate headquarters and technology center, production equipment and tooling and for information technology systems. Our capital expenditures totaled ~~$0.5~~$0.2 million and ~~$0.4~~$0.5 million for the nine-month periods ended December 31, ~~2017~~2018 and ~~2016,~~2017, respectively. We plan to incur approximately ~~$0.6~~$0.3 million in capital expenditures in fiscal ~~2018.~~2019. We expect to finance these capital expenditures primarily through our existing cash, ~~equipment secured~~equipment-secured loans and leases, to the extent needed, long-term debt financing, or by using our available capacity under our New Credit Facility.

Backlog

Backlog represents the amount of revenue that we expect to realize in the future as a result of firm, committed orders. Backlog totaled ~~$6.8~~$5.1 million and ~~$7.3~~$3.3 million as of December 31, ~~2017~~2018 and March 31, ~~2017,~~2018, respectively. We generally expect our backlog to be recognized as revenue within one year.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Inflation

Our results from operations have not been, and we do not expect them to be, materially affected by inflation.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make certain estimates and judgments that affect our reported assets, liabilities, revenue and expenses, and our related disclosure of contingent assets and liabilities. We re-evaluate our

estimates on an ongoing basis, including those related to revenue recognition, inventory valuation, collectability of receivables, stock-based compensation, warranty reserves and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. A summary of our critical accounting policies is set forth in the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended March 31, ~~2017.~~2018. For the three months ended December 31, ~~2017,~~2018, there were no material changes in our accounting policies.

Recent Accounting Pronouncements

For a complete discussion of recent accounting pronouncements, refer to Note 2 in the ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements included elsewhere in this report.

~~ITEM 3.~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk was discussed in the “Quantitative and Qualitative Disclosures About Market Risk” section contained in our Annual Report on Form 10-K for the year ended March 31, ~~2017.~~2018. There have been no material changes to such exposures since March 31, ~~2017.~~

2018.


ITEM 4.	CONTROLS AND PROCEDURES

Material Weaknesses on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:


i.	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;


ii.	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and


iii.	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our management has assessed the effectiveness of our internal control over financial reporting based on the criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

As previously disclosed under "Item 9A. Controls and Procedures" in our Annual Report on Form 10-K for our fiscal year ended March 31, ~~2017,~~2018, we identified the following material weaknesses that existed as of March 31, ~~2017~~2018 and continued to exist at December 31, ~~2017.~~2018. A material weakness is a control deficiency or a combination of control deficiencies that results in more

than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Information & Communication. We determined that our controls pertaining to information and communication did not operate effectively as of March 31, 2018, resulting in a material weakness pertaining to these COSO components. Specifically, we did not have sufficient communication of the status and evolution of a project to ensure timely and accurate recognition of project costs. In addition, we did not have sufficient communication and resolution of matters identified through management’s review impacting the accounting close as noted in the Control Activities discussion below.

Control Activities - Accounting Close. The operating effectiveness of our controls as of March 31, 2018 were inadequate related to ~~ensure~~management review controls over the accounting close process and forecasts used to support certain fair value estimates. Specifically, we did not have an accurate forecast that ~~project costs were identified~~impacted our assessment of triggering events and ~~recorded to expense in a timely manner.~~potential impairment. In addition, matters identified through management review controls were not brought to a timely resolution.

Because of the material weaknesses described above, in consultation with management, our Chief Executive Officer and Chief Financial Officer have concluded that we did not maintain effective internal control over financial reporting and our disclosure controls and procedures were not effective as of March 31, ~~2017~~2018 and December 31, ~~2017,~~2018, based on the criteria in Internal Control - Integrated Framework (2013) issued by COSO.

For the year ended March 31, ~~2017~~2018 and the subsequent interim ~~periods,~~period, we enhanced our closing procedures to ensure that, in all material respects, our financial statements are presented in conformity with GAAP and free of material misstatement as of and for the periods ended March 31, ~~2017~~2018 and December 31, ~~2017.~~

2018.

Plans for Remediation of ~~March 31, 2017~~ Material Weaknesses

Our ~~Board, our Audit & Finance Committee~~board, audit and finance committee and management have identified additional resources to assist in the remediation effort with respect to our above mentioned material weakness and are developing and implementing new processes, procedures and internal controls to remediate the material ~~weaknesses~~weakness that existed in our internal control over financial reporting as it related to project cost accounting, ~~and~~ the accounting close and forecasting processes, and our disclosure controls and procedures, as of March 31, ~~2017~~2018 and December 31, ~~2017.~~

2018.

We have developed a remediation plan (the “Remediation Plan”) to address the material ~~weaknesses~~weakness for the affected areas presented above. The Remediation Plan ensures that each area affected by a material control weakness is put through a comprehensive remediation process. The Remediation Plan entails a thorough analysis which includes the following phases:

Ensure a thorough understanding of the ~~“as is”~~current state, process owners, and procedural or technological gaps causing the ~~deficiency;~~deficiency.

Design ~~and evaluate~~ a remediation action for the ~~review~~forecasting process, to ensure supportable and ~~analysis of project costs; validate or improve the related policy~~accurate forecast data are gathered, analyzed and ~~procedures; evaluate skills of the process owners with regard to the policy and adjust as required;~~reviewed on a timely basis.

Implement specific remediation actions: train process owners, allow time for process adoption and adequate transaction volume for next ~~steps;~~steps.

Test and measure the design and effectiveness of the remediation ~~actions;~~actions: test and provide feedback on the design and operating effectiveness of the ~~controls; and~~controls.

~~Review~~

Complete the review and acceptance of completion of the remediation ~~effort~~efforts by ~~executive~~ management and the ~~Audit & Finance Committee.~~audit and finance committee.

We ~~have~~ have taken or are in the process of taking the following steps toward ~~implementation~~completion of ~~the~~our Remediation Plan:

Developed a ~~regular method for the evaluation of actual project costs incurred against budgeted costs and for the communication of such costs and project status;~~

~~Revisited the method in which projects are reviewed and evaluated~~forecast review process performed by the accounting department to ~~ensure~~confirm accuracy, completeness and reliability of forecast data.

Improved the ~~accurate~~process to evaluate potential triggering events and ~~timely recording~~impairment, including a more formal review of ~~necessary adjustments;~~our forecasts and enhanced documentation of our analysis and conclusions.

~~Formalized~~

•

Designed procedures and controls for project cost accounting, including enhanced communication and tracking of project costs.

Implemented controls related to inventory valuation, accounting close, tax, revenue and ~~strengthened~~project cost accounting, although additional testing is required to confirm operating effectiveness.

Strengthened management review controls and the timeliness of execution as they pertain to the accounting ~~close;~~close.

~~Provided~~

Updated policies and procedures for process and control changes and provided additional training to key ~~process owners;~~personnel.

~~Enhanced information technology reporting capabilities, where possible, to ensure consistent, accurate data to support accounting close processes in a timely and efficient manner; and~~

~~Continue to refine documentation of policies and procedures related to project accounting, account reconciliations, and other key areas within the accounting close.~~

The Remediation Plan is being administered by our Chief Financial Officer and involves key leaders from across ~~the~~our organization. The Chief Financial Officer is providing regular updates on the status of the remediation to our Audit and Finance Committee. While progress has been made, we continue to refine the new and enhanced processes and controls, finalize revisions to policies and procedures and provide additional training to our employees. Furthermore, many of these enhanced processes and controls have not yet operated for a sufficient period of time to conclude they are operating effectively, therefore the material weaknesses may continue to exist.

We will continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above and employ any additional tools and resources deemed necessary to ensure that our financial statements are fairly stated in all material respects.

Changes in Internal Control over Financial Reporting

Effective April 1, 2018, we adopted Topic 606, “Revenue from Contracts with Customers” ("ASC 606"), using the modified retrospective approach. Although the adoption of this standard did not have a significant impact on our financial results, we have implemented changes to our controls related to revenue recognition. These changes include enhanced reviews around customer contracts, the evaluation of contracts based on the five-step revenue recognition model, and additional ongoing monitoring activities. These enhanced controls are designed to provide reasonable assurance of the fair presentation of our financial statements and related disclosures.

There were no changes in our internal control over financial reporting during the quarter ended December 31, ~~2017,~~2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than with respect to the implementation of our Remediation Plans, as described above.

PART II – OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

We are subject to various claims and legal proceedings arising in the ordinary course of business. As of the date hereof, we are unable to currently assess whether the final resolution of any of such claims or legal proceedings may have a material adverse effect on Orion’s future results of operations.

See Note ~~14,~~13, "Commitments and Contingencies - Litigation", to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.


ITEM 1A.	RISK FACTORS

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I - Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017,~~2018, which we filed with the SEC on June 13, ~~2017~~2018 and in Part 1 - Item 2 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

~~None~~


ITEM 5.	OTHER INFORMATION

None


ITEM 6.	EXHIBITS

~~(a)Exhibits~~

(a)

Exhibits

4.1	Amendment No. 1 dated as of January 3, 2019 to Rights Agreement between Orion Energy Systems, Inc. and Equiniti Trust Company (as successor to Wells Fargo Bank, N.A.) [Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 3, 2019 (File No. 001-3887)]

~~31.1~~ 10.1	Business Financing Agreement dated as of October 26, 2018 among Orion Energy Systems, Inc., Western Alliance Bank, as lender, and the subsidiary borrowers party thereto. [Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2018 (File No. 001-3887)]

31.1	Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

31.2	Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

32.1	Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	Taxonomy extension schema document

101.CAL	Taxonomy extension calculation linkbase document

101.LAB	Taxonomy extension label linkbase document

101.PRE	Taxonomy extension presentation linkbase document


+
+	Filed herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 7, ~~2018.~~

2019.



ORION ENERGY SYSTEMS, INC. Registrant

By		/s/ William T. Hull
		William T. Hull
		Chief Financial Officer
		(Principal Financial Officer and Authorized Signatory)

Wisconsin		39-1847269

~~Wisconsin~~		~~39-1847269~~
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification number)



2210 Woodland Drive, Manitowoc, Wisconsin		54220
(Address of principal executive offices)		(Zip code)



Large accelerated filer	o ☐	Accelerated filer	o ☐

Non-accelerated filer	o ~~(Do not check if a smaller reporting company)~~ ☒	Smaller reporting company	ý ☒

		Emerging growth company	o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o			☐

		Page(s)

		~~Page(s)~~
PART I FINANCIAL INFORMATION		3
ITEM 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of December 31, ~~2017~~2018 and March 31, ~~2017~~2018	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, ~~2017~~2018 and December 31, ~~2016~~2017	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, ~~2017~~2018 and December 31, ~~2016~~2017	5
	Notes to the Condensed Consolidated Financial Statements	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21 27
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	33 39
ITEM 4.	Controls and Procedures	34 39
PART II OTHER INFORMATION		36 42
ITEM 1.	Legal Proceedings	36 42
ITEM 1A.	Risk Factors	36 42
ITEM 2.	Unregistered Sale of Equity Securities and Use of Proceeds	36 42
ITEM 5.	Other Information	36 42
ITEM 6.	Exhibits	37 43
SIGNATURES		38 44
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

☒
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	December 31, 2017			March 31, 2017
Assets
Cash and cash equivalents	$	10,563		$	17,307
Accounts receivable, net	8,663			9,171
Inventories, net	8,771			13,593
Deferred contract costs	1,115			935
Prepaid expenses and other current assets	1,543			2,877
Total current assets	30,655			43,883
Property and equipment, net	13,213			13,786
Other intangible assets, net	3,054			4,207
Other long-term assets	121			175
Total assets	$	47,043		$	62,051
Liabilities and Shareholders’ Equity
Accounts payable	$	11,685		$	11,635
Accrued expenses and other	5,155			5,988
Deferred revenue, current	277			621
Current maturities of long-term debt	85			152
Total current liabilities	17,202			18,396
Revolving credit facility	3,622			6,629
Long-term debt, less current maturities	125			190
Deferred revenue, long-term	946			944
Other long-term liabilities	509			442
Total liabilities	22,404			26,601
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.01 par value: Shares authorized: 30,000,000 at December 31, 2017 and March 31, 2017; no shares issued and outstanding at December 31, 2017 and March 31, 2017	—			—
Common stock, no par value: Shares authorized: 200,000,000 at December 31, 2017 and March 31, 2017; shares issued: 38,347,325 at December 31, 2017 and 37,747,227 at March 31, 2017; shares outstanding: 28,916,170 at December 31, 2017 and 28,317,490 at March 31, 2017	—			—
Additional paid-in capital	154,758			153,901
Treasury stock, common shares: 9,431,155 at December 31, 2017 and 9,429,737 at March 31, 2017	(36,085		)	(36,081		)
Shareholder notes receivable	—			(4		)
Retained deficit	(94,034		)	(82,366		)
Total shareholders’ equity	24,639			35,450
Total liabilities and shareholders’ equity	$	47,043		$	62,051



	Nine Months Ended December 31,
	2017			2016
Operating activities
Net loss	$	(11,666	)	$	(4,996	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation	1,050			1,103
Amortization	486			721
Stock-based compensation	868			1,252
Impairment of intangible assets	710			—
Loss on sale of property and equipment	—			1
Provision for inventory reserves	701			621
Provision for bad debts	21			118
Other	12			148
Changes in operating assets and liabilities:
Accounts receivable, current and long-term	492			(857		)
Inventories	4,120			(169		)
Deferred contract costs	(179		)	(1,296		)
Prepaid expenses and other assets	1,383			3,294
Accounts payable	30			602
Accrued expenses and other	(767		)	(661		)
Deferred revenue, current and long-term	(342		)	385
Net cash (used in) provided by operating activities	(3,081		)	266
Investing activities
Purchases of property and equipment	(478		)	(376		)
Additions to patents and licenses	(43		)	(252		)
Proceeds from sales of property, plant and equipment	—			2,600
Net cash (used in) provided by investing activities	(521		)	1,972
Financing activities
Payment of long-term debt and capital leases	(132		)	(814		)
Proceeds from revolving credit facility	51,926			63,705
Payment of revolving credit facility	(54,933		)	(61,542		)
Payments to settle employee tax withholdings on stock-based compensation	(9		)	(17		)
Net proceeds from employee equity exercises	6			6
Net cash (used in) provided by financing activities	(3,142		)	1,338
Net (decrease) increase in cash and cash equivalents	(6,744		)	3,576
Cash and cash equivalents at beginning of period	17,307			15,542
Cash and cash equivalents at end of period	$	10,563		$	19,118



	Cost		Reserve			Net
As of December 31, 2017
Raw materials and components	$	6,655	$	(1,406	)	$	5,249
Work in process	1,316		(351		)	965
Finished goods	4,385		(1,828		)	2,557
Total	$	12,356	$	(3,585	)	$	8,771

As of March 31, 2017
Raw materials and components	$	8,104	$	(1,807	)	$	6,297
Work in process	1,918		(329		)	1,589
Finished goods	7,044		(1,337		)	5,707
Total	$	17,066	$	(3,473	)	$	13,593



	December 31, 2017		March 31, 2017
Unbilled accounts receivable	$	1,034	$	2,226
Other prepaid expenses	509		651
Total	$	1,543	$	2,877



Fiscal 2018 (period remaining)	$	138
Fiscal 2019	449
Fiscal 2020	363
Fiscal 2021	289
Fiscal 2022	191
Fiscal 2023	166
Thereafter	453
Total	$	2,049



	December 31, 2017	December 31, 2016
Common stock options	709,667	1,561,953
Restricted shares	1,545,209	1,661,543
Total	2,254,876	3,223,496



	Shares Issued Under ESPP Plan	Closing Market Price
Quarter Ended June 30, 2017	2,150	$1.28
Quarter Ended September 30, 2017	2,681	$1.12
Quarter Ended December 31, 2017	3,446	$0.88
Total issued in fiscal 2018	8,277	$0.88 - 1.28



	Restricted Shares		Stock Options
Balance at March 31, 2017	1,704,543		1,520,953
Awards granted	730,410		—
Awards vested	(592,851	)	—
Awards forfeited	(296,893	)	(811,286	)
Awards outstanding at December 31, 2017	1,545,209		709,667
Per share price on grant date	$0.88 - $1.95		—



	March 31, 2017		Additions		Amounts Used			December 31, 2017
Employee separation costs	$	—	$	1,876	$	(1,635	)	$	241
Post-employment medical benefits (1)	—		143		(4		)	139
Total	$	—	$	2,019	$	(1,639	)	$	380