SHAREHOLDERS’ EQUITY

(in ~~thousands)~~thousands, except share amounts)

	Shareholders’ Equity
	Common Stock
	Shares			Additional Paid-in Capital		Treasury Stock			Retained Earnings (Deficit)			Total Shareholders’ Equity
Balance, March 31, 2019		29,600,158		$	155,828	$	(36,091	)	$	(101,767	)	$	17,970
Exercise of stock options for cash		10,000			16		—			—			16
Shares issued under Employee Stock Purchase Plan		613			—		2			—			2
Stock-based compensation		535,344			171		—			—			171
Employee tax withholdings on stock-based compensation		(24,628	)		—		(64	)		—			(64	)
Net income		—			—		—			3,968			3,968
Balance, June 30, 2019		30,121,487			156,015		(36,153	)		(97,799	)		22,063
Shares issued under Employee Stock Purchase Plan		570					2			—			2
Stock-based compensation		111,848			159		—			—			159
Employee tax withholdings on stock-based compensation		(2,828	)		—		(13	)		—			(13	)
Net income		—			—		—			6,721			6,721
Balance, September 30, 2019		30,231,077			156,174		(36,164	)		(91,078	)		28,932

	Shareholders’ Equity
	Common Stock
	Shares			Additional Paid-in Capital		Treasury Stock			Retained Earnings (Deficit)			Total Shareholders’ Equity
Balance, March 31, 2018		28,953,183		$	155,003	$	(36,085	)	$	(95,494	)	$	23,424
Shares issued under Employee Stock Purchase Plan		415			—		1			—			1
Stock-based compensation		453,754			228		—			—			228
Employee tax withholdings on stock-based compensation		(3,867	)		—		(3	)		—			(3	)
Cumulative effect of accounting change due to adoption of ASC 606		—			—		—			401			401
Net loss		—			—		—			(2,692	)		(2,692	)
Balance, June 30, 2018		29,403,485			155,231		(36,087	)		(97,785	)		21,359
Shares issued under Employee Stock Purchase Plan		938			—		1			—			1
Stock-based compensation		137,905			211		—			—			211
Employee tax withholdings on stock-based compensation		(4,854	)		—		(4	)		—			(4	)
Net loss		—			—		—			(2,438	)		(2,438	)
Balance, September 30, 2018		29,537,474			155,442		(36,090	)		(100,223	)		19,129

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

The accompanying notes are an integral part of these ~~condensed consolidated statements.~~

Condensed Consolidated Statements.

ORION ~~ENERGY~~ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended September 30,
	2019			2018
Operating activities
Net income (loss)	$	10,689		$	(5,130	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		610			679
Amortization of intangible assets		188			232
Stock-based compensation		330			439
Amortization of debt issue costs		121			—
Impairment of intangible assets		3			—
Provision for inventory reserves		119			(159	)
Provision for bad debts		—			85
Other		23			8
Changes in operating assets and liabilities:
Accounts receivable, current and long-term		(12,192	)		3,157
Revenue earned but not billed		(454	)		1,652
Inventories		(4,354	)		345
Prepaid expenses and other assets		10			141
Accounts payable		12,654			(1,941	)
Accrued expenses and other		749			(628	)
Deferred revenue, current and long-term		(47	)		(12	)
Net cash provided by (used in) operating activities		8,449			(1,132	)
Investing activities
Purchases of property and equipment		(461	)		(66	)
Additions to patents and licenses		(73	)		(28	)
Net cash used in investing activities		(534	)		(94	)
Financing activities
Payment of long-term debt		(44	)		(39	)
Proceeds from revolving credit facility		62,200			33,011
Payments of revolving credit facility		(67,646	)		(35,501	)
Payments to settle employee tax withholdings on stock-based compensation		(72	)		(6	)
Net proceeds from employee equity exercises		16			2
Net cash used in financing activities		(5,546	)		(2,533	)
Net increase (decrease) in cash and cash equivalents		2,369			(3,759	)
Cash and cash equivalents at beginning of period		8,729			9,424
Cash and cash equivalents at end of period	$	11,098		$	5,665

The accompanying notes are an integral part of these Condensed Consolidated Statements.

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF BUSINESS

Organization

Orion includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated subsidiaries. Orion ~~is a developer, manufacturer~~designs, manufactures, markets and ~~seller~~manages the installation of LED solid-state lighting ~~and energy management~~ systems to commercial and industrial businesses, and federal and local governments, predominantly in North America.

Orion’s corporate offices and leased primary manufacturing operations are located in Manitowoc, Wisconsin. Orion leases office space in Jacksonville, ~~Florida; Chicago, Illinois; and Houston, Texas. Orion also leases warehouse space in Manitowoc, Wisconsin and Augusta, Georgia.~~

Florida.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements include the accounts of Orion Energy Systems, Inc. and its wholly-owned subsidiaries. ~~All significant intercompany transactions and balances have been eliminated in consolidation.~~

Basis of Presentation

The accompanying unaudited ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements of Orion have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange ~~Commission.~~Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results that may be expected for the fiscal year ending March 31, ~~2018~~2020 or other interim periods.

The ~~condensed consolidated balance sheet~~Condensed Consolidated Balance Sheet at March 31, ~~2017~~2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements.

The accompanying unaudited ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in Orion’s Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017~~2019 filed with the ~~Securities and Exchange Commission~~SEC on June ~~13, 2017.~~

5, 2019.

In the warranty rollforward in Note 10 – Accrued Expenses and Other, certain prior period balances have been reclassified to conform to current period presentation. The reclassifications were immaterial to the condensed consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during that reporting period. Areas that require the use of significant management estimates include revenue recognition, inventory obsolescence, allowance for doubtful accounts, accruals for warranty, ~~and loss contingencies, impairments,~~ income taxes, impairment analyses, and certain equity transactions. Accordingly, actual results could differ from those estimates.

Concentration of Credit Risk and Other Risks and Uncertainties

Orion's cash is deposited with two financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. Orion has not experienced any losses in such accounts and believes that it is not exposed to any significant financial institution viability risk on these balances.

Orion purchases components necessary for its lighting products, including drivers, chips, ballasts, lamps and other LED components, from multiple suppliers. For the three months ended ~~December 31, 2017,~~September 30, 2019, one supplier accounted for ~~13.9% of~~17.2% and one supplier accounted for 10.0% of total ~~costs~~cost of revenue. For the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2019, one supplier accounted for 15.5% of total cost of revenue. For the three and six months ended September 30, 2018, no supplier accounted for more than ~~10%~~10.0% of total cost of ~~revenue For the three and nine months ended December 31, 2016, no supplier accounted for more than 10% of total cost of~~ revenue.

For the three months ended ~~December 31, 2017,~~September 30, 2019, one customer accounted for ~~13.4%~~81.1% of total revenue. For the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2019, one customer accounted for ~~11.1%~~79.2% of total revenue. For the three ~~and nine~~ months ended ~~December 31, 2016,~~September 30, 2018, one customer accounted for 14.0% of total revenue. For the six months ended September 30, 2018, no customer accounted for more than ~~10%~~10.0% of total revenue.

As of ~~December 31, 2017, three customers~~September 30, 2019, one customer accounted for ~~13.5%, 12.2%, and 10.1%, respectively,~~78.4% of ~~accounts~~Accounts receivable. As of March 31, ~~2017,~~2019, one customer accounted for ~~11.6%~~56.2% of ~~accounts~~Accounts receivable.

Recent Accounting Pronouncements

~~Issued: Not Yet~~

Recently Adopted

~~In August 2016, the Financial Accounting~~ Standards ~~Board (“FASB”) issued~~

On April 1, 2019, Orion adopted Accounting Standards Update ~~(“ASU”) 2016-15, "Classification of Certain Cash Receipts~~2016-02, and ~~Cash Payments,"~~subsequent amendments, which ~~provides clarification and additional guidance as to the presentation and classification of certain cash receipts and cash payments~~is included in the ~~statement~~Accounting Standards Codification (“ASC”) as Topic 842, Leases (“ASC 842”), retrospectively through a cumulative-effect adjustment. Orion elected the package of ~~cash flows. This~~practical expedients provided for in ASU ~~provides~~842, which among other things, allows companies to carry forward their historical lease classification. Previously, Orion followed the guidance ~~as to~~set forth in ASC 840, Leases.

For Orion, the ~~classification of a number of transactions including: contingent consideration payments made after a business combination, proceeds from~~most significant difference between ASC 840 and ASC 842 is the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. The new standard will be effective for Orion in the first quarter of fiscal 2019 and will be applied through retrospective adjustment to all periods presented. Orion does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

~~In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842)." This ASU requires~~requirement that lessees recognize right-of-use assets and liabilities on the balance sheet for the rights and obligations created by long-term ~~leases and disclose additional quantitative and qualitative information about leasing arrangements. Under this ASU, leases will be classified as either finance or~~ operating ~~with classification affecting~~leases. Previously, the ~~pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or~~financial impact associated with operating leases ~~with classification affecting~~was recorded only in Orion’s statement of operations. Determining whether a contract includes a lease, and assessing whether the ~~pattern~~lease should be accounted for as a finance lease or an operating lease, is a matter of ~~income recognition. Classification for both lessees and lessors will be~~judgment based on ~~an assessment of~~ whether the risks and rewards, as well as substantive control of the associated assets specified in the contract, have been transferred ~~through~~from the ~~lease contract. This ASU also provides guidance on~~lessor to the ~~presentation~~lessee.

Adoption of ~~the effects of leases~~ASC 842 resulted in the ~~income statement~~recording of additional lease assets and ~~statement~~lease liabilities of ~~cash flows. This guidance will be effective for Orion on~~approximately $0.2 million as of April 1, 2019. ~~Early~~There was no impact to retained earnings. The adoption of ASC 842 did not materially impact Orion’s consolidated results of operations and had no impact on Orion’s cash flows. Orion has updated its processes and controls necessary for implementing ASC 842, including the ~~standard is permitted~~increased footnote disclosure requirements.

NOTE 3 — REVENUE

Changes in Accounting Policies

Orion adopted ASC 606 and aASC 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 ~~approach is required for leases existing at, or entered into after,~~method. The cumulative effect of initially applying the ~~beginning~~new standards was recorded as an immaterial adjustment to the opening balance of retained deficit within Orion’s Condensed Consolidated Statement of Shareholders’ Equity.

General Information

Orion generates revenues primarily by selling commercial LED lighting fixtures and components, including controls and integrated IoT capabilities, and by installing these fixtures in its customer’s facilities on a turnkey basis via a dedicated installation and support team. Orion recognizes revenue in accordance with the ~~earliest comparative period presented~~guidance in the financial statements, with certain practical expedients available. Orion has not yet completed its review of the full provisions of this standard against its outstanding lease arrangements and is in the process of quantifying the lease liability and related right of use asset which will be recorded to its consolidated balance sheets upon adoption of the standard. In addition, management continues to assess the impact of adoption of this standard on its consolidated statements of operations, cash flows, and the related footnote disclosures.

~~In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue as~~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 itthat management expects to receive in exchange for those goods or services. ~~In addition, this ASU~~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 ~~enhanced and expanded financial statement disclosures. Since~~judgment by management of the issuance of this ASU, the FASB has issued further updates to this ASU to provide additional guidance and clarification and to delay the original effective date. This ASU allows companies to elect either a full retrospective or modified retrospective approach to adoption. Orion will adopt this ASUcontract terms and the ~~related updates (“ASC 606”)~~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 ~~their effective~~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 removed and installed as of the measurement date ~~April 1, 2018. As~~in comparison to the total number of ~~December 31, 2017,~~light fixtures to be removed or 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 ~~identified~~an enforceable right to payment, Product revenue is recorded on an over-time basis measured using an input methodology that calculates the ~~main types of contracts that require evaluation as~~costs incurred to ~~what, if any, changes will be necessary under ASC 606~~date as compared to ~~legacy accounting guidance~~total expected costs. There was no over-time revenue related to custom products recognized in the three and six months ended September 30, 2019 or September 30, 2018.

Orion also records revenue in conjunction with several limited power purchase agreements (“PPAs”) still outstanding. Those PPAs are ~~(a) material only sales that~~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 ~~shipped~~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 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 10, Accrued Expenses and Other for a discussion of Orion’s accounting for the warranty it provides to 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 ~~plant or directly~~Product revenue includes revenue from ~~Orion’s vendors, (b)~~ contracts ~~that involve a combination of material and installation services, (c) contracts entered into~~with customers accounted for under ~~Orion's legacy solar business, and (d) contracts that involve a combination of material and installation services where Orion also provides a financing arrangement to~~ the ~~customer.~~

~~Orion continues to review the provisions~~scope of ASC 606 ~~against~~and revenue which is accounted for under other guidance. For the three and six months ended September 30, 2019, Product revenue included $0.6 million and $1.0 million, respectively, derived from sales-type leases for light fixtures, $64 thousand derived from the sale of tax credits generated from Orion’s legacy operation for distributing solar energy,and $19 thousand and $38 thousand, respectively, derived from the amortization of federal grants received in 2010 and 2011 as reimbursement for a ~~sample~~portion of ~~its customer~~the costs to construct the legacy solar facilities which are not under the scope of ASC 606.

For the three and six months ended September 30, 2018, Product revenue included $0.3 million and $1.0 million, respectively, derived from sales-type leases for light fixtures, $0.1 million and $0.2 million, respectively, derived from the sale of tax credits generated from Orion’s legacy operation for distributing solar energy, and $19 thousand and $38 thousand, 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 ~~to determine~~with customers as defined in ASC 606.

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

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 ~~timing, measurement and presentation of revenue recognition and the cost of goods~~sales channel.

The federal government obtains Orion products and services ~~sold.~~ 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.

See Note 17, Segments, for additional discussion concerning Orion’s reportable segments.

The ~~review considers, among~~following table provides detail of Orion’s total revenues for the three and six months ended September 30, 2019 (dollars in thousands):

	Three Months Ended September 30, 2019						Six Months Ended September 30, 2019
	Product		Services		Total		Product		Services		Total
Revenue from contracts with customers:
Lighting revenues, by end user
Federal government	$	166	$	52	$	218	$	824	$	298	$	1,122
Commercial and industrial		34,758		12,698		47,456		65,942		22,491		88,433
Total lighting		34,924		12,750		47,674		66,766		22,789		89,555
Solar energy related revenues		22		—		22		41		—		41
Total revenues from contracts with customers		34,946		12,750		47,696		66,807		22,789		89,596
Revenue accounted for under other guidance		626		—		626		1,104		—		1,104
Total revenue	$	35,572	$	12,750	$	48,322	$	67,911	$	22,789	$	90,700

	Three Months Ended September 30, 2018						Six Months Ended September 30, 2018
	Product		Services		Total		Product		Services		Total
Revenue from contracts with customers:
Lighting revenues, by end user
Federal government	$	18	$	—	$	18	$	115	$	—	$	115
Commercial and industrial		11,110		1,608		12,718		23,011		2,622		25,633
Total lighting		11,128		1,608		12,736		23,126		2,622		25,748
Solar energy related revenues		18		—		18		38		—		38
Total revenues from contracts with customers		11,146		1,608		12,754		23,164		2,622		25,786
Revenue accounted for under other guidance		444		—		444		1,234		—		1,234
Total revenue	$	11,590	$	1,608	$	13,198	$	24,398	$	2,622	$	27,020

Cash Flow Considerations

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

Turnkey projects where the end-user is a commercial or industrial company typically span between one week to three months. Customer payment requirements for these projects vary by contract. Some contracts provide for customer payments for products and services as they are delivered, other ~~matters,~~contracts specify that the ~~evaluation~~customer will pay for the project in its entirety upon completion of the installation.

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.

Orion provides long-term financing to one customer who frequently engages Orion in large turnkey projects that span between three and ~~identification~~nine months. The customer executes an agreement providing for monthly payments of ~~distinct~~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 the guidance for 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 September 30, 2019 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 Balance Sheets until cash is received from the financial institution. The financial institution releases funds to Orion based on the customer’s monthly acknowledgment of the progress Orion has achieved in fulfilling its installation obligation. Orion provides the progress certifications to the financial institution one month in arrears.

The total amount received from the sales of these receivables during the three and six months ended September 30, 2019, was $0.9 million and $3.7 million, respectively. Orion’s losses on these sales were $23 thousand and $70 thousand for the three and six months ended September 30, 2019, respectively and are included in Interest expense in the Condensed Consolidated Statements of Operations.

The total amount received from the sales of these receivables during the three and six months ended September 30, 2018 was $0.9 million and $2.9 million, respectively. Orion’s losses on these sales aggregated to $0.1 million and $0.2 million for the three and six months ended September 30, 2018 and is included in Interest expense in the Condensed Consolidated Statement 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 ~~measurement of Orion's progress toward satisfying identified performance obligations, and variable consideration~~related to lighting fixtures typically do not exceed nine months in ~~the form of customer rebates, payment discounts and product returns. The Company's assessment is preliminary and may change as it finalizes its review. Since~~duration. As a result, Orion does not expect ASC 606 to impact the timing of its billings to customers or the receipt of customer payments, there could be fluctuations in the amount of deferred costs and liabilities reflected on Orion's future balance sheets as compared to historical presentations.

Under ASC 606, incremental contract costs, which for Orion includes sales commissions and costs paid to independent contractors for field audits, are required to be capitalized as contract assets and amortized over the period these costs are expected to be recovered. Although Orion incurs such costs, its contracts are typically completed within one year. As such, Orion's plans to electhas elected the practical expedient ~~provided in ASC 606 and expense incremental contract costs when incurred.~~

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 ~~is identifying~~has also adopted the ~~necessary changes in its ongoing process for~~practical expedient that provides an exemption to the review of new customer contracts and the identification of key terms impacting revenue recognition. Orion is also evaluating the necessary changes to its systems, revenue related processes and controls as a resultdisclosure requirement of the ~~new standard, including the related footnote disclosures.~~

~~ASC 606 permits the use of either a full retrospective or modified retrospective transition method.Orion will adopt the requirements of the new standard effective April 1, 2018 using the modified retrospective transition method~~value assigned to performance obligations associated with ~~the cumulative effect to the opening balance of retained earnings recognized as of the date of initial adoption.~~

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting” which provides guidance about which changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting. The provisions of this standard are effective for Orion beginning on April 1, 2018. The adoption of this standard iscontracts that were not ~~expected to have a material impact on Orion’s consolidated condensed financial statements.~~

~~Recently Adopted Standards~~

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” to simplify the presentation of deferred taxes. The amendments in this update require that deferred tax assets and liabilities be classified as non-current on the balance sheet. This ASU is effective for Orion's annual reporting period, and interim periods therein,complete as of April 1, ~~2017. The adoption~~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 ~~this standard had no impact~~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 ~~Orion’s condensed consolidated financial statements.~~

~~In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle for inventory~~invoiced amounts are typically 30 days from the ~~lower~~invoice date.

Revenue earned but not billed represents revenue that has been recognized in advance of ~~cost or market~~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 September 30, 2019 and March 31, 2019 includes $0.3 million and $0.7 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 September 30, 2019 and March 31, 2019 includes $38 thousand and $48 thousand, respectively, of contract liabilities which represented consideration received from customers prior to the ~~lower~~point that Orion has fulfilled the promises included in a performance obligation and recorded revenue.

Deferred revenue, long-term consists of ~~cost or net realizable value~~the unamortized portion of the funds received from the federal government in 2010 and 2011 as reimbursement for ~~entities that measure inventory using first-in, first-out ("FIFO") or average cost. Net realizable~~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 ~~the estimated selling prices~~of September 30, 2019 and March 31, 2019 (dollars in thousands):

	September 30, 2019		March 31, 2019
Accounts receivable, net	$	26,996	$	14,804
Contract assets	$	3,932	$	3,005
Contract liabilities	$	38	$	48

There were no significant changes in the ~~ordinary course~~contract assets outside of ~~business, less reasonably predictable costs of completion, disposal and transportation. Orion adopted this~~ standard ~~as of April 1, 2017. The adoption of this standard had~~reclassifications to Accounts receivable, net upon billing. There were no impact on Orion's condensed consolidated financial statements as the previous measurement and validation of the carrying value of its inventory incorporated market values consistent with the net realizable value measurements of the standard.

~~In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements~~significant changes 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 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. In accordance with the provisions of this standard, Orion elected to prospectively adopt an accounting policy to recognize forfeitures as they occur in lieu of estimating forfeitures. The cashflow presentation provisions of the standard had no impact on Orion’s condensed consolidated financial statements. Finally, due to Orion's net loss, the modifications to the calculation of diluted earnings per share as a result of adopting this standard did not impact its diluted earnings per share.

contract liabilities.

NOTE 34 — ACCOUNTS RECEIVABLE,

NET

As of September 30, 2019, and March 31, 2019, Orion's ~~accounts~~Accounts receivable and ~~allowance~~Allowance for doubtful accounts balances were as follows (dollars in thousands):

	September 30, 2019			March 31, 2019
Accounts receivable, gross	$	27,024		$	15,011
Allowance for doubtful accounts		(28	)		(207	)
Accounts receivable, net	$	26,996		$	14,804

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~~September 30, 2019, and March 31, ~~2017,~~2019, Orion's ~~inventory~~Inventory balances were as follows (dollars in thousands):

	Cost		Excess and Obsolescence Reserve			Net
As of September 30, 2019
Raw materials and components	$	12,803	$	(1,103	)	$	11,700
Work in process		1,028		(628	)		400
Finished goods		6,640		(1,105	)		5,535
Total	$	20,471	$	(2,836	)	$	17,635

As of March 31, 2019
Raw materials and components	$	9,161	$	(1,393	)	$	7,768
Work in process		1,010		(269	)		741
Finished goods		6,056		(1,162	)		4,894
Total	$	16,227	$	(2,824	)	$	13,403

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

Prepaid expenses and other current assets ~~include~~consist primarily of deferred financing costs, prepaid insurance premiums, sales tax receivable, prepaid license fees, purchase deposits, and advance payments to contractors.

NOTE 7 — PROPERTY AND EQUIPMENT, NET

As of September 30, 2019, and March 31, 2019, Property and equipment, net, included the following (dollars in thousands):

	September 30, 2019			March 31, 2019
Land and land improvements	$	433		$	433
Buildings and building improvements		9,402			9,245
Furniture, fixtures and office equipment		7,283			7,238
Leasehold improvements		324			324
Equipment leased to customers		4,997			4,997
Plant equipment		12,516			12,211
Construction in Progress		34			43
Gross property and equipment		34,989			34,491
Less: accumulated depreciation		(23,083	)		(22,481	)
Total property and equipment, net	$	11,906		$	12,010

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

~~NOTE 6 — PROPERTY AND EQUIPMENT~~

~~Property and equipment were comprised of the following (dollars in thousands):~~

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

Orion recorded depreciation expense of ~~$0.4~~$0.3 and ~~$1.1~~$0.6 million for the three and ~~nine~~six months ended ~~December 31, 2017, respectively,~~September 30, 2019 and ~~$0.3~~$0.4 and ~~$1.1~~$0.7 million for the three and ~~nine~~six months ended September 30, 2018, respectively.

NOTE 8 — LEASES

From time to time, Orion leases assets from third parties. Orion also leases certain assets to third parties. Effective April 1, 2019, leases are accounted for, and reported upon, following the requirements of ASC 842, Leases. Previously, leases were accounted for, and reported upon, following the requirements of ASC 840, Leases.

For Orion, the most significant difference between ASC 840 and ASC 842 is the requirement that it recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet whenever it leases assets from a third party. Previously, under ASC 840, only assets leased from third parties that meet certain requirements, referred to as finance leases, were recorded on Orion’s balance sheet. Previously, the financial impact of all other leases, referred to as operating leases, was limited to Orion’s results of operations.

Whether it is the lessee or the lessor, Orion’s determination of whether a contract includes a lease, and assessing how the lease should be accounted for, is a matter of judgment based on whether the risks and rewards, as well as substantive control of the assets specified in the contract, have been transferred from the lessor to the lessee. The judgement considers matters such as whether the assets are transferred from the lessor to the lessee at the end of the contract, the term of the agreement in relation to the asset’s remaining economic useful life, and whether the assets are of such a specialized nature that the lessor will not have an alternative use for such assets at the termination of the agreement. Other matters requiring judgement are the lease term when the agreement includes renewal or termination options and the interest rate used when initially determining the ROU asset and lease liability.

ROU assets represent Orion’s right to use an underlying asset for the lease term and lease liabilities represent Orion’s obligation to make lease payments arising from the lease. Under ASC 842, both finance and operating lease ROU assets and lease liabilities for leases with initial terms in excess of 12 months are recognized at the commencement date based on the present value of lease payments over the lease term. When available, Orion uses the implicit interest rate in the lease when completing this calculation. However, as most of Orion’s operating lease agreements generating ROU assets do not provide the implicit rate, Orion’s incremental borrowing rate under its line of credit, adjusted for differences in duration and the relative collateral value in relation to the payment obligation, at the commencement of the lease is generally used in this calculation. The lease term includes options to extend or renew the agreement, or for early termination of the agreement, when it is reasonably certain that Orion will exercise such option. ROU assets are depreciated using the straight-line method over the lease term.

Orion recognizes lease expense for leases with an initial term of 12 months or less, referred to as short term leases, on a straight-line basis over the lease term.

One of Orion’s frequent customers purchases products and installation services under agreements that provide for monthly payments, at a fixed monthly amount, of the contract price, plus interest, typically over a five-year period. While Orion retains ownership of the light fixtures during the financing period, the transaction terms and the underlying economics associated with used lighting fixtures results in Orion essentially ceding ownership of the lighting fixtures to the customer after completion of the agreement. The portions of the transaction associated with the sale of the light fixtures is accounted for as a sales-type lease. The total transaction price in these contracts is allocated between the lease and non-lease components in the same manner as the total transaction price of other turnkey projects containing lighting fixtures and installation services.

Orion leases portions of its corporate headquarters to third parties; all such agreements have been, and continue to be, classified as operating leases under the applicable authoritative accounting guidance. The assets being leased continue to be included in Property and equipment, net. Lease payments earned are recorded as a reduction in administrative expenses.

Assets Orion Leases from Other Parties

On March 31, 2016, Orion entered into a purchase and sale agreement with a third party to sell and leaseback Orion's primary manufacturing and distribution facility in Manitowoc, WI for gross cash proceeds of $2.6 million. The transaction closed on June 30, 2016. Pursuant to the Lease Agreement, Orion is leasing approximately 196,000 square feet with rent at $2.00 per square foot per annum. Orion's monthly payment under this lease is approximately $38 thousand. Orion is responsible for the costs of insurance and utilities for its portion of the facility. These costs are considered variable lease costs in the quantitative disclosures below. On March 22, 2018, both parties agreed to extend the lease until December 31, ~~2016, respectively.~~2020 with no change in payment terms.

The lease agreement provides the lessor the right to terminate the lease agreement at any time with twelve months’ notice to Orion. As a result, the agreement is classified as a short-term lease.

In February 2014, Orion entered into a multi-year lease agreement for use of approximately 10,500 square feet of office space in a multi-use office building in Jacksonville Florida. The lease has since been extended and presently terminates at June 30, 2020. The agreement was classified as an operating lease and represents the single largest operating asset established upon the adoption of ASC 842.

Orion has leased other assets from third parties, principally office and production equipment. The terms of our other leases vary from contract to contract and expire at various dates through 2020.

A summary of Orion’s assets leased from third parties follows (dollars in thousands):

	Balance sheet classification	September 30, 2019
Assets
Operating lease assets	Other long-term assets	$	109
Liabilities
Current liabilities
Operating lease liabilities	Accrued expenses and other		93
Non-current liabilities
Operating lease liabilities	Other long-term liabilities		6
Total lease liabilities		$	99

Orion had operating lease costs of $0.1 million and $0.3 million for the three and six months ended September 30, 2019.

Assets Orion Leases to Other Parties

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, at a fixed monthly amount, of the contract price, plus interest, over typically 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 under ASC 606.

While Orion retains ownership of the light fixtures during the financing period, the transaction terms and the underlying economics associated with used lighting fixtures results in Orion essentially ceding ownership of the lighting fixtures to the customer after completion of the agreement. Therefore, the portions of the transaction associated with the sale of the multiple individual light fixtures is accounted for as a sales-type lease under ASC 842.

Revenues, and production and acquisition costs, associated with sales-type leases are included in Product revenue and Costs of product revenues in the Condensed Consolidated Statement of Operations. These amounts are recorded for each fixture separately based on the customer’s monthly acknowledgment that specified fixtures have been installed and are operating as specified. The execution of the acknowledgement is considered the commencement date as defined in ASC 842.

The following chart shows the amount of revenue and cost of sales arising from sales-type leases during the three and six months ended September 30, 2019 (dollars in thousands):

	Three Months Ended		Six Months Ended
	September 30, 2019		September 30, 2019
Product revenue	$	606	$	1,002
Cost of product revenue	$	541	$	901

The Condensed Consolidated Balance Sheets as of September 30, 2019 and March 31, 2019 do not include a net investment in sales-type leases as all amounts due from the customer associated with lighting fixtures that were acknowledged to be installed and working correctly prior to period end were transferred to the financing institution prior to the respective balance sheet dates.

Other Agreements where Orion is the Lessor

Orion has leased unused portions of its corporate headquarters to third parties. The length and payment terms of the leases vary from contract to contract and, in some cases, include options for the tenants to extend the lease terms. Annual lease payments are recorded as a reduction in administrative operating expenses and not material in the six months ended September 30, 2019. Orion accounts for these transactions as operating leases.

NOTE 79 — OTHER INTANGIBLE ASSETS,

~~The~~ NET

As of September 30, 2019, and March 31, 2019, the components of, and changes in, the carrying amount of ~~other~~Other intangible assets, net, were as follows (dollars in thousands):

	September 30, 2019							March 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Patents	$	2,736	$	(1,614	)	$	1,122	$	2,667	$	(1,529	)	$	1,138
Licenses		58		(58	)		—		58		(58	)		—
Trade name and trademarks		1,008		—			1,008		1,007		—			1,007
Customer relationships		3,600		(3,506	)		94		3,600		(3,459	)		141
Developed technology		900		(773	)		127		900		(717	)		183
Total	$	8,302	$	(5,951	)	$	2,351	$	8,232	$	(5,763	)	$	2,469

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

Amortization expense on intangible assets ~~related to~~was $0.1 million for 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 quarterthree months 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.

2019 and 2018. Amortization expense on intangible assets was $0.2 million for ~~both~~ the ~~three~~six months ended ~~December 31, 2017~~September 30, 2019 and ~~2016.~~

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

2018.

As of ~~December 31, 2017,~~September 30, 2019, the weighted average remaining useful life of intangible assets was ~~5.7~~4.8 years.

The estimated amortization expense for the remainder of fiscal ~~2018,~~2020, the next five fiscal years and beyond is shown below (dollars in thousands):

Fiscal 2020 (period remaining)	$	180
Fiscal 2021		293
Fiscal 2022		196
Fiscal 2023		104
Fiscal 2024		101
Fiscal 2025		92
Thereafter		377
Total	$	1,343

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 810 — ACCRUED EXPENSES AND OTHER ~~LONG-TERM LIABILITIES~~

As of September 30, 2019, and March 31, 2019, Accrued expenses and other ~~include~~included the following (dollars in thousands):

	September 30, 2019		March 31, 2019
Compensation and benefits	$	2,072	$	1,212
Sales tax		775		713
Accrued project costs		3,163		3,293
Legal and professional fees		65		356
Warranty		380		282
Sales returns reserve		331		141
Credits due to customers		894		987
Other accruals		585		426
Total	$	8,265	$	7,410

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 September 30,						Six Months Ended September 30,
	2019			2018			2019			2018
Beginning of period	$	690		$	718		$	657		$	673
Reclassification on adoption of ASC 606		—			—			—			73
Accruals		228			97			346			48
Warranty claims (net of vendor reimbursements)		(115	)		(94	)		(200	)		(73	)
End of period	$	803		$	721		$	803		$	721

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 911 — NET ~~LOSS~~INCOME (LOSS) PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss attributable to common shareholders by the 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 and 2016,~~September 30, 2018, Orion was in a net loss position; therefore, the ~~basic~~Basic and ~~diluted weighted average~~Diluted weighted-average shares outstanding are equal because any increase to the basic shares would be anti-dilutive. ~~Net loss~~Basic and Diluted net income (loss) per common share iswas calculated based upon the following:

	Three Months Ended September 30,					Six Months Ended September 30,
	2019		2018			2019		2018
Numerator:
Net income (loss) (in thousands)	$	6,721	$	(2,438	)	$	10,689	$	(5,130	)
Denominator:
Weighted-average common shares outstanding		30,189,067		29,488,363			29,957,541		29,280,421
Weighted-average common shares and common share equivalents outstanding		30,830,381		29,488,363			30,757,863		29,280,421
Net income (loss) per common share:
Basic	$	0.22	$	(0.08	)	$	0.36	$	(0.18	)
Diluted	$	0.22	$	(0.08	)	$	0.35	$	(0.18	)

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~~income (loss) per common share because their inclusion would have been anti-dilutive. The number of shares are as of the end of each period:

	September 30, 2019		September 30, 2018
Common stock options		—		484,836
Restricted shares		—		1,365,678
Total		—		1,850,514

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~~12 — LONG-TERM DEBT

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

	September 30, 2019			March 31, 2019
Revolving credit facility	$	3,755		$	9,202
Equipment debt obligations		134			177
Total long-term debt		3,889			9,379
Less current maturities		(77	)		(96	)
Long-term debt, less current maturities	$	3,812		$	9,283

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~~and its subsidiaries entered into a new secured revolving Business Financing Agreement with Western Alliance Bank, as lender (the “Credit Agreement”). The Credit Agreement replaced Orion’s existing Credit Agreement. On June 3, 2019, Orion and certain of its subsidiaries entered into an amendment (the “First Amendment”) to the Credit Agreement. The First Amendment amended the Credit Agreement to increase the maximum borrowing base credit ~~agreement ("Credit Agreement") that provides~~available for certain of the customer receivables included in Orion’s borrowing base and to provide for a borrowing base credit of up to $3.0 million based on inventory, in each case, subject to certain conditions. On August 2, 2019, Orion and certain of its subsidiaries entered into an amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment amended the Credit Agreement to establish a rent reserve in an amount equal to three months’ rent payable at any leased location where Orion maintains inventory included in its borrowing base and to provide for a reduction of the borrowing base credit that Orion may receive for inventory if Orion defaults under the lease for any such location. As of September 30, 2019, this rent reserve equaled $0.1 million.

The Credit Agreement provides for a two-year revolving credit facility ("(the “Credit Facility”) that matures on October 26, 2020. Borrowings under the Credit ~~Facility")~~Facility are currently 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 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,~~September 30, 2019, Orion’s borrowing base was $20.0 million, and Orion had no$3.8 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 as~~had no outstanding letters of ~~December 31, 2017, it was eligible to borrow an~~credit leaving additional ~~$0.2 million~~borrowing availability of $16.2 million.

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

Borrowings under the Credit ~~Facility~~Agreement generally bear interest at floating rates based upon the prime rate (but not 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 ~~levels~~liabilities, including the obligations under the Credit Agreement). As of ~~eligible inventory and accounts receivable.~~

~~Subject in each case~~September 30, 2019, the applicable interest rate was 6.0%. Among other fees, Orion is required to ~~Orion's applicable borrowing base limitations,~~pay an annual facility fee equal to 0.45% of the credit limit under the Credit Agreement, ~~otherwise provides for a $15.0 million Credit Facility. This limit may increase to $20.0 million based~~which was paid at commencement (October 26, 2018) and is due 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~~each anniversary thereof.

The 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 Credit Agreement, RML is defined as, as of the applicable determination date, unrestricted cash on deposit with Western Alliance Bank plus availability under the 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. As of September 30, 2019, Orion was in compliance with this RML requirement.

The 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 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 Credit Agreement and the Credit Agreement is secured by a security interest in substantially all 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~~declare any outstanding obligations under the Credit Agreement ~~bear interest at~~to be immediately due and payable. In addition, if Orion becomes the ~~daily three-month LIBOR plus 3.0% per annum, with a minimum interest charge for each year~~subject of voluntary or ~~portion of a year during the term of~~involuntary proceedings under any bankruptcy or similar law, then any outstanding obligations under the Credit Agreement ~~of $0.1 million, regardless of usage. As of December 31, 2017, the interest rate was 4.69%.~~will automatically become immediately due and payable.

Equipment Debt Obligations

In June 2015, Orion ~~must pay~~entered into an ~~unused line fee of 0.25% per annum of the daily average unused amount of the Credit Facility and~~agreement with 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~~financing company in the principal amount of ~~$3.1~~$0.4 million to ~~partially~~ fund the ~~acquisition~~purchase of ~~Harris Manufacturing, Inc.~~certain equipment. The debt is secured by the related equipment. The debt bears interest at a rate of 5.94% and ~~Harris LED, LLC (collectively, "Harris"). The note's interest rate was 4% per annum. Principal and interest were payable quarterly. The note matured~~matures in ~~July 2016 and was paid in full upon maturity.~~

~~Equipment Lease Obligations~~

June 2020.

In ~~March 2016 and June 2015,~~February 2019, Orion entered into ~~lease~~additional debt agreements with a financing company in the principal amount of ~~nineteen~~$44 thousand ~~dollars~~ and ~~$0.4 million, respectively,~~$30 thousand to fund the purchase of certain equipment. The ~~leases~~debts are secured by the related equipment. The ~~leases~~debts bear interest at a rate of ~~5.9%~~6.43% and ~~3.6%~~8.77%, respectively, and both debts mature in ~~February 2018 and June 2020. Both leases contain a one dollar buyout option.~~

January 2024.

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 1213 — 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 income/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~~September 30, 2019 and 2018, Orion recorded income tax ~~rate was determined by applying statutory tax rates to pretax loss adjusted for certain permanent book to tax differences~~expense of $19 thousand and ~~tax credits.~~

~~The~~$4 thousand, respectively, using this methodology. For the six-month period ended September 30, 2019 and 2018, Orion recorded income tax ~~provision for the nine months ended December 31, 2017 was determined by applying an estimated effective tax rate~~expense of 0.2% to loss before income tax. The estimated effective tax rate for the nine month period ended December 31, 2016 was (0.4)%. The estimated effective income tax rate was determined by applying statutory tax rates to pretax loss adjusted for certain permanent book to tax differences$27 thousand 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.

$26 thousand, respectively, using this methodology.

As of ~~December~~September 30, 2019 and March 31, ~~2017,~~2019 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 Tax Cut and Jobs 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 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. This 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 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 is no transition tax to be reported in its income tax expense.

Uncertain Tax Positions

As of ~~December 31, 2017, the~~September 30, 2019, 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 1314 — COMMITMENTS AND CONTINGENCIES

~~Operating Leases~~

Orion leases office space and equipment under operating leases expiring at various dates through 2020. Rent expense under operating leases was $0.2 million and $0.3 million for the three months ended December 31, 2017 and 2016, respectively, and $0.7 million and $0.6 million for the nine months ended December 31, 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 is 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 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 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 of Directors during fiscal years 2015, 2016, and 2017 and certain current and former officers during the same period. The plaintiff, who purports to bring the suit derivatively on behalf of Orion, alleges that the director defendants breached their fiduciary duties in connection with granting certain stock-based incentive awards under 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 the lawsuit on the grounds that the complaint fails to state a claim upon which relief may be granted. Orion intends to defend against the claims vigorously. Orion believes that

it has substantial defenses to the claims in this proceeding. 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.

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 the Company’s management, the~~uncertain. The ultimate disposition of ~~these matters will~~this matter is not expected to have a material adverse effect on Orion's Condensed 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. During the quarter, the sales and use tax audit was finalized. The ultimate disposition of this matter did not have a material adverse effect on the ~~Company’s condensed consolidated balance sheet,~~Orion's Condensed Consolidated Balance Sheets, statements of operations, or liquidity.

NOTE 1415 — SHAREHOLDERS’ EQUITY

Shareholder Rights Plan

On January 3, 2019, Orion entered into Amendment No. 1 to the Rights Agreement, which amended the Rights Agreement dated as of January 7, 2009. Under the amendment, each common share purchase right (a “Right”), if exercisable, will initially represent the right to purchase from Orion, one share of Orion’s common stock, no par value per share, for a purchase price of $7.00 per share.

The Rights will not be exercisable (and will be transferable only with Orion’s common stock) until a “Distribution Date” occurs (or the Rights are earlier redeemed or expire). A Distribution Date generally will occur on the earlier of a public announcement that a person or group of affiliated or associated persons (“Acquiring Person”) has acquired beneficial ownership of 20% or more of Orion’s outstanding common stock (“Shares Acquisition Date”) or 10 business days after the commencement of, or the announcement of an intention to make, a tender offer or exchange offer that would result in any such person or group of persons acquiring such beneficial ownership.

If a person becomes an Acquiring Person, holders of Rights (except as otherwise provided in the Rights Agreement) will have the right to purchase that number of shares of Orion’s common stock having a market value of two times the then-current purchase price, and all Rights beneficially owned by an Acquiring Person, or by certain related parties or transferees, will be null and void. If, after a Shares Acquisition Date, Orion is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right (except as otherwise provided in the Rights Agreement) will thereafter have the right to purchase that number of shares of the acquiring company’s common stock which at the time of such transaction will have a market value of two times the then-current purchase price.

Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of Orion. At any time prior to a person becoming an Acquiring Person, the Board of Directors of Orion may redeem the Rights in whole, but not in part, at a price of $0.001 per Right. Unless they are extended or earlier redeemed or exchanged, the Rights will expire on January 7, 2022.

Employee Stock Purchase Plan

In August 2010, Orion’s ~~board~~Board of ~~directors~~Directors approved a non-compensatory employee stock purchase plan, or ESPP. In the three months ended September 30, 2019, Orion issued 570 shares under the ~~following shares from treasury during the nine months ended December 31, 2017:~~

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~~ESPP plan at a closing market price of its stock. The loan program has been discontinued and new loans are no longer issued. As of March 31, 2017, four thousand dollars 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.$2.85.

	Shares Issued Under ESPP Plan		Closing Market Price
Quarter Ended June 30, 2019		613	2.97
Quarter Ended September 30, 2019		570	2.85
Total issued in fiscal 2020		1,183	$ 2.85 - 2.97

NOTE 1516 — STOCK OPTIONS AND RESTRICTED SHARES

At ~~Orion's 2016 Annual Meeting~~Orion’s 2019 annual meeting of ~~Shareholders~~shareholders held on August ~~3, 2016, Orion's~~7, 2019, Orion’s shareholders approved the Orion Energy Systems, Inc. 2016 Omnibus Incentive Plan, as amended and restated (the ~~"Plan"~~“Amended 2016 Plan”). Approval of the Amended 2016 Plan increased the number of shares of Orion’s common stock available for issuance under the Amended 2016 Plan from 1,750,000 shares to 3,500,000 shares (an increase of 1,750,000 shares); added a minimum vesting period for all awards granted under the Amended 2016 Plan (with limited exceptions); and added a specific prohibition on the payment of dividends and dividend equivalents on unvested awards.

The Amended 2016 Plan authorizes grants of equity-based and incentive cash awards to eligible participants designated by the Plan's administrator. Awards under the Amended 2016 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 2016 Omnibus Incentive 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~~“2004 Plan”). No new awards are being granted under the ~~Former~~2004 Plan; however, all awards granted under the ~~Former~~2004 Plan that ~~were~~are outstanding ~~as of August 3, 2016~~ will continue to be governed by the ~~Former~~2004 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 2004 Plan are canceled and are not available for subsequent issuance under the 2004 Plan or under the Amended 2016 Plan. The ~~plans~~Amended 2016 Plan and the 2004 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 September 30,				Six Months Ended September 30,
	2019		2018		2019			2018
Cost of product revenue	$	1	$	1	$	1		$	2
Cost of service revenue		—		—		(1	)		1
General and administrative		147		202		310			407
Sales and marketing		11		7		19			28
Research and development		0		1		1			1
Total	$	159	$	211	$	330		$	439

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~~six months of fiscal ~~2018,~~2020, Orion had the following activity related to its stock-based compensation:

	Restricted Shares			Stock Options
Balance at March 31, 2019		1,312,593			467,836
Awards granted		268,468			—
Awards vested or exercised		(647,192	)		(10,000	)
Awards forfeited		(15,150	)		(14,583	)
Awards outstanding at September 30, 2019		918,719			443,253
Per share price on grant date	$	3.03			—

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,~~September 30, 2019, the amount of deferred stock-based compensation expense to be recognized, over a remaining period of ~~2.0~~1.6 years, was approximately ~~$1.6~~$1.3 million.

NOTE 1617 — 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 engineering, design, lighting products and in many cases turnkey solutions for large national accounts, governments, municipalities, schools and ~~schools.~~

other customers.

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~~broadline electrical distributors and contractors.

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 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 September 30,				For the Three Months Ended September 30,
	2019		2018		2019			2018
Segments:
Orion Engineered Systems	$	42,306	$	5,135	$	7,831		$	(724	)
Orion Distribution Services		3,853		4,874		(148	)		(931	)
Orion U.S. Markets		2,163		3,189		271			355
Corporate and Other		—		—		(1,076	)		(983	)
	$	48,322	$	13,198	$	6,878		$	(2,283	)

	Revenues				Operating Income (Loss)
	For the Six Months Ended September 30,				For the Six Months Ended September 30,
	2019		2018		2019			2018
Segments:
Orion Engineered Systems	$	77,094	$	8,366	$	12,687		$	(1,977	)
Orion Distribution Services		7,557		14,100		(485	)		(846	)
Orion U.S. Markets		6,049		4,554		1,172			224
Corporate and Other		—		—		(2,337	)		(2,287	)
	$	90,700	$	27,020	$	11,037		$	(4,886	)

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, Orion implemented a reorganization and targeted cost savings plan. As a result, Orion entered into separation agreements with 20 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. The restructuring expense for the three and nine months ended December 31, 2017 is reflected within Orion’s condensed statement of operations as follows (dollars in thousands):

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,
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 for employee separation costs from March 31, 2017 to 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 for employee separation costs is expected to be paid within the next twelve months.~~

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~~.

2019.

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.~~2019. 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 state-of-the-art light emitting diode (“LED”) lighting, wireless Internet of Things (“IoT”) enabled control solutions, project engineering and ~~manufacturer of high-performance, energy-efficient LED~~design and ~~other lighting platforms.~~energy project management. We research, design, develop, ~~design,~~ manufacture, market, sell, install, 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.~~fixtures, many of which include IoT enabled control systems. Our principal customers include large national account end-users, electrical distributors and energy service companies ("ESCOs") ~~and electrical contractors. Currently, substantially all~~. A substantial amount of our products are manufactured at our leased production facility ~~location~~located in Manitowoc, ~~Wisconsin, although we are increasingly sourcing~~Wisconsin. In addition, certain products and components are sourced from third parties ~~as the LED market continues to evolve and~~ in order to provide versatility in our product ~~development.~~

development and portfolio.

We have significant experience offering our comprehensive project management services to national account customers to retrofit their multiple locations. Our comprehensive services include initial site surveys and audits, utility incentive and government subsidy management, engineering design, and project management from delivery through to installation and controls integration.

We believe the market for LED lighting products ~~has shifted~~and related services continues 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 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.grow. 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 or~~ other ~~legacy~~lighting technologies. Our LED lighting technologies and related services 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 focus on developing and selling innovative LED products.~~

Wegenerally 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 also perform work under global services or product purchasing agreements with major customers with sales completed on a purchase order basis. The loss of, or substantial reduction in sales to, any of our significant customers, or our current single largest customer, or the termination or delay of a significant volume of purchase orders by one or more key customers, could have a material adverse effect on our results of operations in any given future period.

We typically sell our lighting systems in replacement of our customers’ existing lighting fixtures. We call this replacement process a ~~“retrofit.”~~"retrofit". We frequently ~~engage~~sell our ~~customer’s existing electrical contractor~~products and services directly to our customers and in many cases we provide design and installation ~~and~~as well as 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, and improve our marketing, new product development, project management, margin enhancement and operating expense management, as well as other factors. In addition, the

The gross margins of our products can vary significantly depending upon the types of products we sell, with gross 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 gross 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, 2020 as "fiscal 2020". We refer to our most recently completed fiscal year, which ended on March 31, 2019, as “fiscal 2019”, and our prior fiscal year which ended on March 31, ~~2017~~2018 as "fiscal ~~2017", and our current fiscal year, which ends on March 31, 2018, as “fiscal 2018.”~~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").

~~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 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 of these plans by entering into separation agreements with 20 employees 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 to outplacement services not used. Our restructuring expense for the three and nine months ended December 31, 2017 is reflected within our condensed consolidated statements of operations as follows (dollars in thousands):

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,
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~~Division ("USM").

Recent Developments

During fiscal 2019, we signed a series of contracts to retrofit multiple locations for ~~employee separation costs in connection~~a major national account customer with our state-of-the-art LED lighting systems and wireless IoT enabled control solutions at locations nationwide. We currently expect total revenue from the ~~reorganization of business plans were $1.5~~customer to be approximately $110 million, ~~for the nine months ended December 31, 2017. The remaining reorganization of business accruals as of December 31, 2017 were $0.5 million,~~dependent on purchase orders, a significant amount of which ~~$0.4 million relates to employee separation costs that are expected~~we expect to be ~~paid within one year. The remaining accrual of $0.1 million represents post-retirement medical benefits for one employee which will be paid over several years.~~

~~During the fourth quarter of~~recognized during 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 in these assumptions or a change in circumstances could result in an impairment charge in a future period.

2020.

Fiscal ~~2018~~2020 Outlook

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

We remain optimistic about our near-term and long-term financial performance. Our ability to achieve our desired revenue growth and profitability goals depends on our ability to effectively execute on the following key strategic initiatives:

Focus on executing and marketing our turnkey LED retrofit capabilities to large national account customers.We ~~remain confident~~believe one of our competitive advantages is our ability to deliver full turnkey LED lighting project capabilities starting with energy audits and site assessments that lead to custom engineering and manufacturing through to fully managed installations. These attributes coupled with our superior customer service, high quality designs and expedited delivery responsiveness resulted in contracts to retrofit multiple locations for multiple national account customers. We believe that these contracts will help lead our growth momentum for fiscal 2020 and beyond. We also see the potential for maintenance and electrical services to be a component of our recurring revenue going forward as our customers recognize our ability to first deliver turnkey installations and then provide maintenance and other electrical services to their facilities.

Support success of our ESCO and agent-driven distribution sales channels. We continue to focus on building our relationships and product and sales support for our ESCO and agent driven distribution channels. These efforts include an array of product and sales training efforts as well as the development of new products to cater to the unique needs of these sales channels.

Continued Product Innovation. We continue to innovate, developing lighting fixtures and features that address specific customer requirements, while also working to maintain a leadership position in energy efficiency, smart product design and installation benefits. We also continue to deepen our capabilities in the ~~value, performance,~~integration of smart lighting controls. Our goal is to provide state-of-the-art lighting products with modular plug-and-play designs to enable lighting system customization from basic controls to advanced IoT capabilities.

Leveraging of our Smart Lighting Systems to Support Internet of Things Applications. We believe we are ideally positioned to help customers to efficiently deploy new IoT controls and applications by leveraging the “Smart Ceiling” capabilities of our solid state lighting system. IoT capabilities can include the management and tracking of facilities, personnel, resources and customer behavior, driving both sales and lowering costs. As a result, these added capabilities provide customers an even greater return on investment from their lighting system and make us an even more attractive partner.

Managing Impacts of Tariffs and Trade Policies. 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 imposition of tariffs on certain imports. Certain sourced finished products and certain of the components used in our ~~lighting products.~~products are impacted by the imposed tariffs on imports from certain countries. Our efforts to mitigate the impact of added costs include a variety of activities, such as sourcing from non-tariff impacted countries, value engineering our products to reduce cost and raising prices. We believe that ~~customer purchases of LED lighting systems~~these mitigation activities will ~~continue~~assist to ~~increase in the near-term as expected improvements in LED performance~~offset added costs, 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 factors below which~~ we ~~believe will directly or indirectly drive customer spending on LED lighting systems or will improve the profitability of our operations:~~

~~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;~~

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

~~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~~currently believe that ~~there is also an opportunity to utilize our system platform as~~such tariffs will have a ~~“digital” or “connected ceiling”, or a framework or network that can support the installation and integration of other business solutions~~limited adverse financial effect on our ~~digital platform. This anticipated growth opportunity is also known as~~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 ~~“Industrial Internet of Things” or IoT,~~changes would influence many factors, including business 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.~~

consumer sentiment.

Results of Operations - Three Months Ended ~~December 31, 2017~~September 30, 2019 versus Three Months Ended ~~December 31, 2016~~

September 30, 2018

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 September 30,
	2019			2018						2019			2018
	Amount			Amount			% Change			% of Revenue			% of Revenue
Product revenue	$	35,572		$	11,590			206.9	%		73.6	%		87.8	%
Service revenue		12,750			1,608			692.9	%		26.4	%		12.2	%
Total revenue		48,322			13,198			266.1	%		100.0	%		100.0	%
Cost of product revenue		25,878			9,367			176.3	%		53.6	%		71.0	%
Cost of service revenue		9,653			1,289			648.9	%		20.0	%		9.8	%
Total cost of revenue		35,531			10,656			233.4	%		73.5	%		80.7	%
Gross profit		12,791			2,542			403.2	%		26.5	%		19.3	%
General and administrative expenses		2,605			2,336			11.5	%		5.4	%		17.7	%
Sales and marketing expenses		2,918			2,135			36.7	%		6.0	%		16.2	%
Research and development expenses		390			354			10.2	%		0.8	%		2.7	%
Income (loss) from operations		6,878			(2,283	)	NM				14.2	%		(17.3	)%
Other income		8			15			(46.7	)%		0.0	%		0.1	%
Interest expense		(87	)		(169	)		(48.5	)%		(0.2	)%		(1.3	)%
Amortization of debt issue costs		(60	)		—		NM				(0.1	)%		—
Interest income		1			3			(66.7	)%		0.0	%		0.0	%
Income (loss) before income tax		6,740			(2,434	)	NM				13.9	%		(18.4	)%
Income tax expense		19			4			375.0	%		0.0	%		0.0	%
Net income (loss)	$	6,721		$	(2,438	)	NM				13.9	%		(18.5	)%

*	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%~~increased 206.9%, or ~~$3.3~~$24.0 million, for the ~~third~~second quarter of fiscal ~~2018~~2020 versus the ~~third~~second quarter of fiscal ~~2017.~~ 2019. The ~~decrease~~increase in product revenue was ~~primarily~~ the result of higher sales volume through our national account channel, and almost exclusively the ~~continued decline in fluorescent product~~result of a major retrofit project for multiple locations for one of our national account customers. Service revenue increased 692.9%, or $11.1 million, due to higher sales ~~$2.1 million quarter over quarter,~~volume through our national account channel for the major retrofit project for one customer and ~~a decrease~~the timing of ~~$1.0 million in LED lighting revenue. LED lighting revenue decreased by 6.4% from $15.5 million in~~those project installations. In the ~~third~~second quarter of fiscal ~~2017~~2020, sales to ~~$14.5 million in the third quarter~~this one national account customer represented 81.1% of ~~fiscal 2018 primarily as a result of the timing of purchases~~our total revenue. Total revenue increased by ~~our direct customers. Service revenue decreased 6.5%~~266.1%, or ~~$0.1~~$35.1 million, ~~due to the timing of completion of installations in the third quarter of fiscal 2018 when compared to the third quarter of fiscal 2017. Total revenue decreased by 16.3%, or $3.4 million, primarily~~ due to the items discussed above.

Cost of Revenue and Gross Margin. Cost of product revenue ~~decreased 17.6%~~increased 176.3%, or ~~$2.4~~$16.5 million, in the ~~third~~second quarter of fiscal ~~2018~~2020 versus the ~~comparable period in~~second quarter of fiscal ~~2017 primarily~~2019 due to the ~~decline~~significant increase in ~~sales, partially offset by lower overhead absorption compared to the prior year period.~~our sales. Cost of service revenue increased ~~9.2%,~~648.9% or ~~$0.1~~$8.4 million, in the ~~third~~second quarter of fiscal ~~2018~~2020 versus the ~~comparable period in~~second quarter of fiscal ~~2017 primarily~~2019 due to ~~costs incurred on a large installation project and~~ the ~~timing of project completions.~~increase in sales. Gross margin ~~declined slightly~~increased from ~~29.9%~~19.3% of revenue in ~~the third quarter of~~ fiscal ~~2017~~2019 to ~~29.6%~~26.5% in ~~the third quarter of~~ fiscal ~~2018, primarily reflecting lower overhead absorption on lower revenue in the recent period.~~2020, due to our higher sales levels covering fixed costs.

Operating Expenses

General and Administrative.General and administrative expenses ~~decreased 18.7%~~increased 11.5%, or ~~$0.7~~$0.3 million in the ~~third~~second quarter of fiscal ~~2018~~2020 compared to the ~~third~~second quarter of fiscal ~~2017,~~2019, primarily due to ~~a decrease in wages as a result of headcount~~higher bonus and ~~salary reductions, legal expense, depreciation and amortization expense, and stock compensation expense.~~employment costs.

Sales and Marketing. Sales and marketing expenses ~~decreased 5.3%~~increased 36.7%, or ~~$0.2~~$0.8 million, in the ~~third~~second quarter of fiscal ~~2018~~2020 compared to the ~~third~~second quarter of fiscal ~~2017. The decrease quarter over quarter~~2019. This comparative increase was primarily due to ~~reduced consulting~~an increase in commission expense on higher sales and ~~professional fees related to special events and field sales, partially offset by increased expenses focusing on additional sales activities.~~higher employment costs.

Research and Development. Research and development expenses ~~increased by 24.4%, or $0.1 million,~~ in the ~~third~~second quarter of fiscal ~~2018~~2020 remained relatively flat compared to the ~~third~~second quarter of fiscal ~~2017~~2019.

Other Income. Other income in the second quarter of fiscal 2020 primarily ~~due to increased testing and consulting costs.~~represented product royalties received from licensing agreements for our patents.

Interest Expense. Interest expense in the ~~third~~second quarter of fiscal ~~2018 increased~~2020 decreased by ~~56.9%~~48.5%, or ~~thirty-seven thousand dollars,~~$0.1 million, from the ~~third~~second quarter of fiscal ~~2017.~~2019. The ~~increase~~decrease in interest expense was primarily due to fewer sales of receivables in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019.

Amortization of debt issue costs. Amortization of debt issue costs in the second quarter of fiscal 2020 increased ~~third party financing costs.~~by $0.1 million from the second quarter of fiscal 2019. The increase in amortization of debt issue costs was due to the execution of our credit agreement.

Interest Income. Interest income in the ~~third~~second quarter of fiscal ~~2018 decreased by 28.6%, or two thousand dollars, from~~2020 remained relatively flat compared to the ~~third~~second quarter of fiscal ~~2017. Our~~2019. 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~~expense increased 375.0%, or $15 thousand, in the ~~third~~second quarter of fiscal ~~2018 primarily reflected federal tax refunds, offset by state tax liabilities. We recorded no income tax expense in~~2020 compared to the ~~third~~second 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~~

Our OES segment develops and sells lighting products and provides construction and engineering services for our commercial lighting and energy management systems. OES provides engineering, design, lighting products and in many cases turnkey solutions for large national accounts, governments, municipalities, schools and ~~schools.~~

other customers.

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

	For the Three Months Ended September 30,
	2019			2018			% Change
Revenues	$	42,306		$	5,135			723.9	%
Operating income (loss)	$	7,831		$	(724	)	NM
Operating margin		18.5	%		(14.1	)%

*	NM - Not Meaningful

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 segment revenue ~~decreased~~ in the ~~third~~second quarter of fiscal ~~2018 by 11.7%, or $1.0~~2020 was $42.3 million, ~~compared to~~an increase of $37.2 million from the ~~third~~second quarter of fiscal ~~2017 primarily~~2019, as a result of the ~~timing~~increase in volume of ~~delivery of our~~ turnkey projects ~~and reduced fluorescent purchases by a~~to one large ~~retail~~national account customer.

OES segment operating income in the ~~third~~second quarter of fiscal ~~2018~~2020 was ~~$0.2~~$7.8 million, an increase of ~~$0.3~~$8.6 million from ~~the $0.1~~an operating loss of $0.7 million ~~loss~~ in the ~~third~~second quarter of fiscal ~~2017.~~2019. The increase in the segment’s operating income was the result of higher sales in this segment, resulting in improved ~~delivery costs in the current quarter over the same period last year.~~

operating leverage.

Orion Distribution Services Division

~~The~~

Our 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~~broadline and electrical 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.~~

and contractors.

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

	For the Three Months Ended September 30,
	2019			2018			% Change
Revenues	$	3,853		$	4,874			(20.9	)%
Operating loss	$	(148	)	$	(931	)		84.1	%
Operating margin		(3.8	)%		(19.1	)%

*	NM - Not Meaningful

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~~second quarter of fiscal ~~2018~~2020 by ~~11.8%~~20.9%, or ~~$0.8~~$1.0 million, compared to the ~~third~~second quarter of fiscal ~~2017,~~2019, primarily due to a decrease in sales volume through our distribution channel.

ODS segment operating loss in the second quarter of fiscal 2020 was $(0.1 million), a decrease of $0.8 million from an ~~increase~~operating loss of $(0.9 million) in ~~select distributor sales.~~

~~While revenue increased period over period,~~ the ~~ODS segment’s~~second quarter of fiscal 2019. The decrease in the operating ~~results remained relatively flat~~loss in the second quarter of fiscal 2020 as compared to the ~~third~~second quarter of fiscal ~~2017~~2019 was due to ~~an increase~~lower operating costs on lower employment expenses and commissions.

Orion U.S. Markets Division

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

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

	For the Three Months Ended September 30,
	2019			2018			% Change
Revenues	$	2,163		$	3,189			(32.2	)%
Operating income	$	271		$	355			(23.7	)%
Operating margin		12.5	%		11.1	%

*	NM - Not Meaningful

USM segment revenue decreased from the second quarter of fiscal 2019 by 32.2 %, or $1.0 million. The decrease in revenue during the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 was due to a decrease in sales volume through the sales channel.

USM segment operating income for the second quarter of fiscal 2020 was $0.3 million, a decrease of $0.1 million compared to the second quarter of fiscal 2019. The decrease from the second quarter of fiscal 2019 was due primarily to the decrease in sales volume.

Results of Operations - ~~Nine~~Six Months Ended ~~December 31, 2017~~September 30, 2019 versus ~~Nine~~Six Months Ended ~~December 31, 2016~~

September 30, 2018

	Six Months Ended September 30,
	2019			2018						2019			2018
	Amount			Amount			% Change			% of Revenue			% of Revenue
Product revenue	$	67,911		$	24,398			178.3	%		74.9	%		90.3	%
Service revenue		22,789			2,622			769.1	%		25.1	%		9.7	%
Total revenue		90,700			27,020			235.7	%		100.0	%		100.0	%
Cost of product revenue		49,703			19,091			160.3	%		54.8	%		70.7	%
Cost of service revenue		17,923			1,931			828.2	%		19.8	%		7.1	%
Total cost of revenue		67,626			21,022			221.7	%		74.6	%		77.8	%
Gross profit		23,074			5,998			284.7	%		25.4	%		22.2	%
General and administrative expenses		5,612			5,412			3.7	%		6.2	%		20.0	%
Sales and marketing expenses		5,624			4,713			19.3	%		6.2	%		17.4	%
Research and development expenses		801			759			5.5	%		0.9	%		2.8	%
Income (loss) from operations		11,037			(4,886	)		325.9	%		12.2	%		(18.1	)%
Other income		20			34		NM				0.0	%		0.1	%
Interest expense		(223	)		(258	)		13.6	%		(0.2	)%		(1.0	)%
Amortization of debt issue costs		(121	)		—		NM				(0.1	)%		—
Interest income		3			6			(50.0	)%		0.0	%		0.0	%
Income (loss) before income tax		10,716			(5,104	)		310.0	%		11.8	%		(18.9	)%
Income tax expense		27			26			3.8	%		0.0	%		0.1	%
Net Income (loss)	$	10,689		$	(5,130	)		308.4	%		11.8	%		(19.0	)%

*	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%~~increased 178.3%, or ~~$10.4~~$43.5 million, for the first ~~nine months~~six month of fiscal ~~2018~~2020 versus the first ~~nine months~~six month of fiscal ~~2017.~~ 2019. The ~~decrease~~increase in product revenue was ~~primarily a~~the result of higher sales volume through our national account channel, and exclusively the ~~continued decline in fluorescent product~~result of a major retrofit project for multiple locations for one of our national account customers. Service revenue increased 769.1%, or $20.2 million, due to higher sales ~~$6.4 million year over year,~~volume through our national account channel for the major retrofit project for one customer and ~~a decrease~~the timing of ~~$3.6 million in LED lighting revenue. LED lighting revenue decreased 8.7% from $41.2 million in~~those project installations. In the first ~~nine~~six months of fiscal ~~2017~~2020, sales to ~~$37.6 million in the first nine months~~this one national account customer represented 79.2% of ~~fiscal 2018 primarily as a result of the timing of purchases by~~ our ~~direct customers. Service~~total revenue. Total revenue increased ~~27.5%~~by 235.7%, or ~~$0.7~~$63.7 million, primarily due to the timing of installation projects 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%~~increased 160.3%, or ~~$6.2~~$30.6 million, in the first ~~nine~~six months of fiscal ~~2018~~2020 versus the ~~comparable period in~~first six months of fiscal ~~2017 primarily~~2019 due to the ~~decline~~increase in ~~sales and the resulting lower overhead absorption compared to the prior year period.~~sales. Cost of service revenue increased ~~83.6%,~~828.2% or ~~$1.5~~$16.0 million, in the first ~~nine~~six months of fiscal ~~2018~~2020 versus the ~~comparable period in~~first six months of fiscal ~~2017 primarily~~2019 due to the ~~timing of completion and costs on large projects.~~increase in sales. Gross margin ~~decreased~~increased from ~~29.9%~~22.2% of revenue in ~~the first nine months of~~ fiscal ~~2017~~2019 to ~~25.3%~~25.4% in ~~the first nine months of~~ fiscal ~~2018. Our product gross margin decreased as a result of under-absorption within~~2020, due to our ~~manufacturing facility and an increase in~~higher sales ~~of products sourced from third party manufacturers.~~levels covering fixed costs.

Operating Expenses

General and Administrative.General and administrative expenses increased ~~3.0%~~3.7%, or ~~$0.3~~$0.2 million, in the first ~~nine~~six months of fiscal ~~2018~~2020 compared to the first ~~nine~~six months of ~~2017,~~fiscal 2019, primarily due to ~~$1.8 million in reorganization~~higher bonus and employment costs, partially offset by ~~decreases in wages due to salary~~lower consulting 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%.~~costs.

~~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~~Sales and marketing expenses increased ~~0.8%~~19.3%, or ~~$0.1~~$0.9 million, in the first ~~nine~~six months of fiscal ~~2018~~2020 compared to the first ~~nine~~six months of fiscal ~~2017.~~2019. The comparative increase was primarily due to an increase in commission expense on higher sales and higher employment costs.

Research and Development. Research and development expenses increased 5.5%, or $42 thousand, in the first six months of fiscal 2020 compared to the first six months of fiscal 2019. 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 supplyhigher employment costs.

Other ~~income.~~Income. Other income in the first ~~nine~~six months of fiscal ~~2017~~2020 primarily represented product royalties received from licensing agreements for our patents.

Interest Expense. Interest expense in the first ~~nine~~six months of fiscal ~~2018~~2020 decreased by 13.6%, or $35 thousand, from the first six months of fiscal 2019. The decrease in interest expense in the first six months of fiscal 2020 as compared to the first six months of fiscal 2019 was due primarily to fewer sales of receivables partially offset by higher interest expense of increased borrowings under our revolving credit agreement.

Amortization of debt issue costs. Amortization of debt issue costs in the first six months of fiscal 2020 increased by ~~51.7%, or~~ $0.1 million from the first ~~nine~~six months of fiscal ~~2017.~~2019. The increase in ~~interest expense~~amortization of debt issue costs was due to ~~increased third party financing costs.~~the execution of our credit agreement.

Interest Income. Interest income in the first ~~nine~~six months of fiscal ~~2018 decreased by 61.3%, or nineteen thousand dollars, from~~2020 remained relatively flat compared to the first ~~nine~~six months of fiscal ~~2017. Our~~2019. Interest income relates to interest ~~income decreased as a result of the continued run-off legacy customer financed projects.~~earned on sweep bank accounts.

Income Taxes. Income tax ~~benefit~~expense increased 3.8%, or $1 thousand, in the first ~~nine months of 2018 decreased $0.2 million from the first nine~~six months of fiscal ~~2017 primarily due~~2020 compared to the ~~release~~first six months of ~~a valuation reserve in~~ fiscal ~~2017.~~2019. Our income tax expense is due primarily to minimum state tax liabilities.

Orion ~~U.S. Markets~~Engineered Systems Division

The ~~USM~~following table summarizes our OES segment ~~sells commercial lighting systems and energy management systems to~~operating results (dollars in thousands):

	For the Six Months Ended September 30,
	2019			2018			% Change
Revenues	$	77,094		$	8,366			821.5	%
Operating income (loss)	$	12,687		$	(1,977	)	NM
Operating margin		16.5	%		(23.6	)%

*	NM - Not Meaningful

OES segment revenue in the ~~wholesale contractor markets. USM customers include ESCOs and electrical contractors. A significant portion~~first six months of fiscal 2020 was $77.1 million, an increase of $68.7 million from the ~~historic sales~~first six months of ~~this division have migrated to distribution channel sales~~fiscal 2019, as a result of the ~~implementation~~increase in volume of ~~our agent distribution strategy.~~turnkey projects, to one large national account customer.

OES segment operating income in the first six months of fiscal 2020 was $12.7 million, an increase of $14.7 million from an operating loss of $2.0 million in the first six months of fiscal 2019. The ~~migrated sales are included~~increase in the segment’s operating income was the result of significantly higher sales.

Orion Distribution Services Division

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

	For the Six Months Ended September 30,
	2019			2018			% Change
Revenues	$	7,557		$	14,100			(46.4	)%
Operating loss		(485	)		(846	)		42.7	%
Operating margin		(6.4	)%		(6.0	)%

*	NM - Not Meaningful

ODS segment revenue decreased in the first six months of fiscal 2020 by 46.4%, or $6.5 million, compared to the first six months of fiscal 2019, primarily due to a decrease in sales volume through our distribution channel.

ODS segment operating loss in the first six months of fiscal 2020 was $(0.5 million), a decrease of $0.4 million from an operating loss of $(0.9 million) in the first six months of fiscal 2019. The decrease in the operating loss in the first six months of fiscal 2020 as compared to the first six months of fiscal 2019 was primarily due to the decrease in sales and related product costs.

Orion U.S. Markets Division

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

	For the Six Months Ended September 30,
	2019			2018			% Change
Revenues	$	6,049		$	4,554			32.8	%
Operating income (loss)	$	1,172		$	224			423.2	%
Operating margin		19.4	%		4.9	%

*	NM - Not Meaningful

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~~six months of fiscal ~~2017~~2019 by ~~61.2%~~32.8%, or ~~$10.1~~$1.5 million. The ~~decrease~~increase in revenue during the first ~~nine~~six months of fiscal ~~2018~~2020 compared to the first nine months of fiscal 2017 included the continued transition 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 decline in sales to select large direct customers.

The USM segment’s operating results decreased $3.5 million in the first nine months of fiscal 2018 as compared to 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 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.

~~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. The segment's operating loss~~2019 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 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 as a result 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 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.~~

sales volume.

USM segment operating income for the first six months of fiscal 2020 was $1.2 million, an increase of $0.9 million over the first six months of fiscal 2019. The increase in operating income in the first six months of fiscal 2019 was due primarily to the increase in sales volume.

Liquidity and Capital Resources

Overview

We had approximately ~~$10.6~~$11.1 million in cash and cash equivalents as of ~~December 31, 2017,~~September 30, 2019, compared to ~~$17.3~~$8.7 million at March 31, ~~2017.~~2019. Our cash position ~~decreased primarily~~increased as a result of our significantly increased net ~~loss, separation payments to terminated employees in conjunction with our management reorganization and cost reduction initiatives,~~income, offset by working capital changes and the net repayment of ~~$3.0~~$5.4 million on our revolving credit facility.

During the second quarter of fiscal 2019, we listed our corporate office location in Manitowoc, Wisconsin for sale or lease to increase our liquidity by attempting to divest a non-core asset. Because of the uncertainty of a sale of our building in the next 12 months, the building continues to be classified as held and used as of September 30, 2019. However, any sale of our building will likely result in a non-cash impairment charge, as the building is currently listed for below its net book value.

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~~three months ended ~~December 31, 2017~~September 30, 2019 and ~~2016~~2018 (in thousands):

	Six Months Ended September 30,
	2019			2018
Operating activities	$	8,449		$	(1,132	)
Investing activities		(534	)		(94	)
Financing activities		(5,546	)		(2,533	)
Increase (decrease) in cash and cash equivalents	$	2,369		$	(3,759	)

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~~income (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 provided by operating activities for the first six months of fiscal 2020 was $8.5 million and consisted of our net income adjusted for non-cash expense items of $12.1 million and net cash used by changes in operating assets and liabilities of $3.6 million. Cash used by changes in operating assets and liabilities consisted primarily of an increase of $12.2 million in Accounts receivable due to higher sales and the timing of collections, and an increase in Inventory of $4.4 million on anticipated third quarter sales. Cash provided by changes in operating assets and liabilities consisted primarily of an increase of $12.7 million in Accounts payable and $0.8 million in Accrued expenses other based on timing of payments.

Cash used in operating activities for the first ~~nine~~six months of fiscal ~~2018~~2019 was ~~$3.1 million~~($1.1 million) and consisted of a net loss adjusted for non-cash expense items of ~~$7.8 million~~($3.8 million) and net cash provided by changes in operating assets and liabilities of ~~$4.7~~$2.7 million. Cash used by changes in operating assets and liabilities consisted primarily of a decrease of ~~$0.8 million~~($1.9 million) in ~~accrued~~Accounts payable and ($0.6 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.payments. Cash provided by changes in operating assets and liabilities included a decrease of ~~$0.5~~$3.2 million in ~~accounts~~Accounts receivable due to ~~the decline in~~lower sales and the timing of customer collections, a decrease in ~~inventory~~Revenue earned but not billed 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 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 activities for the first nine months of fiscal 2017 was $0.3 million and consisted of net cash provided by changes in operating assets and liabilities of $1.3 million and a net loss adjusted for non-cash expense items of $1.0 million. Cash used by changes in operating assets 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$1.7 million due to the timing of ~~product shipments at quarter end,~~billing to customers, a decrease in Inventories of $0.4 million due to an increased focus on inventory management, and a decrease of ~~$0.7~~$0.1 million in ~~accrued~~Prepaid expenses ~~due to the payment of a state tax liability~~ and ~~an increase in deferred contract costs of $1.3 million~~other assets due to the timing of ~~project completions. Cash provided by changes in operating assets and liabilities included an increase~~payment 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.

those expenses.

Cash Flows Related to Investing ~~Activities.~~Activities. Cash used byin investing activities ~~was $0.5 million~~of ($0.5 million) in the first ~~nine~~six months of fiscal ~~2018 which~~2020 consisted of purchases of property and equipment.

Cash used in investing activities in the first six months of fiscal 2019 consisted of purchases of Property and equipment and additions to patents and licenses.

Cash provided by investing 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 for the first nine months of fiscal 2017 was $0.4 million for capital improvements related to production enhancements and technology purchases and $0.2 million of additions to patents.

Cash Flows Related to Financing Activities. Cash used in financing activities was ~~$3.1 million~~($5.5 million) for the first ~~nine~~six months of fiscal ~~2018 and~~2020. This use of cash consisted primarily of net repayments of ($5.4 million) on our revolving credit facility.

Cash used in financing activities was ($2.5 million) for the first six months of fiscal 2019 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~~September 30, 2019 was ~~$13.4~~$19.7 million, consisting of ~~$30.6~~$60.6 million in current assets and ~~$17.2~~$40.9 million in current liabilities. Our net working capital as of March 31, ~~2017~~2019 was ~~$25.5~~$14.0 million, consisting of ~~$43.9~~$41.3 million in current assets and ~~$18.4~~$27.3 in current liabilities. Our current ~~accounts~~Accounts receivable, net balance ~~decreased~~increased by ~~$0.5~~$12.2 million from the fiscal ~~2017 year end~~2019 year-end primarily due to ~~the decline in~~higher sales to one national account customer and the timing of customer collections. Our ~~inventory decreased~~Inventories, net increased from the fiscal ~~2017 year end~~2019 year-end by ~~$4.8~~$4.2 million due primarily to ~~continued management of purchasing activities~~the project roll-out for one national account customer and ~~inventory management initiatives.~~anticipated third quarter sales. Our ~~prepaid and other current assets decreased by $1.3 million due to a decrease in unbilled revenue as a result of the timing of customer billings. Our accounts~~Accounts payable ~~remained relatively flat compared to fiscal 2017 year end. Our accrued expenses decreased from our fiscal 2017 year end by $0.8~~increased $12.7 million due to the ~~payment~~timing of purchases and payments during the quarter. Our Accrued expenses increased from our fiscal 2019 year-end by $0.9 million due primarily to higher accrued commissions and ~~a decrease in~~ accrued ~~bonuses in~~bonus related to the ~~current fiscal year.~~roll-out for one national account customer.

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~~

On October 26, 2018, we entered into a new secured revolving Business Financing Agreement with Western Alliance Bank, as lender (the “Credit Agreement”). The Credit Agreement replaced our prior Credit Agreement. On June 3, 2019, we and certain of our subsidiaries entered into an amendment (the “First Amendment”) to the Credit Agreement. The First Amendment amended the Credit Agreement to increase the maximum borrowing base credit ~~agreement ("~~available for certain of the customer receivables included in our borrowing base and to provide for a borrowing base credit of up to $3.0 million based on inventory, in each case, subject to certain conditions. On August 2, 2019, we and certain of our subsidiaries entered into an amendment (the “Second Amendment”) to the Credit ~~Agreement")~~Agreement. The Second Amendment amended the Credit Agreement to establish a rent reserve in an amount equal to three months’ rent payable at any leased location where we maintain inventory included in our borrowing base and to provide for a reduction of the borrowing base credit that we may receive for inventory if we default under the lease for any such location. As of the date of the Second Amendment, this rent reserve equaled $0.1 million.

The Credit Agreement provides for a two-year revolving credit facility ("(the “Credit Facility”) that matures on October 26, 2020. Borrowings under the Credit ~~Facility")~~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 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,~~September 30, 2019, our borrowing base was $20.0 million, and we had no$3.8 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,~~September 30, 2019, we ~~were eligible to borrow an~~had no outstanding letters of credit leaving additional ~~$0.2 million~~borrowing availability of $16.2 million.

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

Borrowings under the 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 less than 5.00% per year) plus an applicable margin determined by reference to our 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 Credit Agreement). As of September 30, 2019, the applicable ~~borrowing base limitations,~~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 Credit Agreement ~~otherwise provides for a $15.0 million Credit Facility. This limit may increase to $20.0 million based~~due 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~~October 26, 2018 and ~~after any increase in the Credit Facility limit from $15.0 million to $20.0 million, the~~on each anniversary thereof.

The 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 Credit Agreement, RML is defined as, as of the applicable determination date, unrestricted cash on deposit with Western Alliance Bank plus availability under the 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. As of September 30, 2019, we were in compliance with this RML requirement.

The 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 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 Credit Agreement and the Credit Agreement is secured by a security interest in substantially all of our and each subsidiary’s personal property (excluding various assets relating to customer OTAs) and a mortgage on certain real property.

~~Borrowings~~declare any outstanding obligations under the Credit Agreement ~~bear interest at~~to be immediately due and payable. In addition, if we become the ~~daily three-month LIBOR plus 3.0% per annum, with a minimum interest charge for each year~~subject of voluntary or ~~portion of a year during the term of~~involuntary proceedings under any bankruptcy or similar law, then any outstanding obligations under 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 Facility~~will 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 million and ~~$0.4~~$0.1 million for the ~~nine-month~~six-month periods ended ~~December 31, 2017~~September 30, 2019, and ~~2016,~~2018, respectively. We plan to incur approximately $0.6 million in capital expenditures in fiscal ~~2018.~~2020. 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 Credit ~~Facility.~~

Agreement.

Backlog

Backlog represents the amount of revenue that we expect to realize in the future as a result of firm, committed purchase orders. Backlog totaled $6.8 million and ~~$7.3~~$10.8 million as of ~~December 31, 2017~~September 30, 2019 and March 31, ~~2017,~~2019, 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.~~2019. For the ~~three~~six months ended ~~December 31, 2017,~~September 30, 2019, 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.~~2019. There have been no material changes to such exposures since March 31, ~~2017.~~

2019.


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.~~

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

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

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~~ Based on ~~Form 10-K for our fiscal year ended March 31, 2017, we identified the following material weaknesses~~ that existed as of March 31, 2017 and continued to exist at December 31, 2017. 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, 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 were inadequate to ensure that project costs were identified and recorded to expense in a timely manner. 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,~~assessment, 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 and December 31, 2017, based on the criteria in Internal Control - Integrated Framework (2013) issued by COSO.

For the year ended March 31, 2017 and subsequent interim periods, 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 and December 31, 2017.

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

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

We have developed a remediation plan (the “Remediation Plan”) to address the material weaknesses 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” state, process owners, and procedural or technological gaps causing the deficiency;~~

Design and evaluate a remediation action for the review and analysis of project costs; validate or improve the related policy and procedures; evaluate skills of the process owners with regard to the policy and adjust as required;

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

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

~~Review and acceptance of completion of the remediation effort by executive management and the Audit & Finance Committee.~~

~~We have have taken or~~September 30, 2019 are ~~in the process of taking the following steps toward implementation of the 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 by the accounting department to ensure the accurate and timely recording of necessary adjustments;~~

~~Formalized and strengthened management review controls as they pertain to the accounting close;~~

~~Provided training to key process owners;~~

~~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 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.

effective.

Changes in Internal Control over Financial Reporting

Effective April 1, 2019, we adopted Topic 842, “Leasing” ("ASC 842"). Although the adoption of this standard did not have a material impact on our financial results, we have implemented changes to our controls related to leases. These changes include enhanced reviews to ensure completeness of the lease population, evaluation of lease classification, 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 additional changes in our internal control over financial reporting during the quarter ended ~~December 31, 2017,~~September 30, 2019, 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.~~

reporting.

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, "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,~~2019, which we filed with the SEC on June ~~13, 2017~~5, 2019 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

10.1	Orion Energy Systems, Inc. 2016 Omnibus Incentive Plan, as amended and restated [Incorporated by reference to Annex A to the Registrant’s definitive proxy statement filed with the Securities and Exchange Commission on Schedule 14A on June 21, 2019 (File No. 001-33887)]

~~31.1~~ 10.2	Amendment No. 2 to Business Financing Agreement, dated as of August 2, 2019 among Orion Energy Systems, Inc., Western Alliance Bank, as lender and the subsidiary borrowers party thereto [Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed with Securities and Exchange Commission on August 5, 2019 (File No. 001-33887)]

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~~Document+

101.SCH	Taxonomy extension schema ~~document~~document+

101.CAL	Taxonomy extension calculation linkbase ~~document~~document+

~~101.LAB~~ 101.DEF	Taxonomy extension definition linkbase document+

101.LAB	Taxonomy extension label linkbase ~~document~~document+

101.PRE	Taxonomy extension presentation linkbase ~~document~~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.~~

November 6, 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~~September 30, 2019 and March 31, ~~2017~~2019	3
	Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~December 31, 2017~~September 30, 2019 and ~~December 31, 2016~~September 30, 2018	4
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended September 30, 2019 and September 30, 2018	5
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~December 31, 2017~~September 30, 2019 and ~~December 31, 2016~~September 30, 2018	5 6
	Notes to the Condensed Consolidated Financial Statements	6 7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21 24
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	33 35
ITEM 4.	Controls and Procedures	34 35
PART II OTHER INFORMATION		36
ITEM 1.	Legal Proceedings	36
ITEM 1A.	Risk Factors	36
ITEM 2.	Unregistered Sale of Equity Securities and Use of Proceeds	36
ITEM 5.	Other Information	36
ITEM 6.	Exhibits	37
~~SIGNATURES~~SIGNATURE		38
~~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



	Three Months Ended December 31,						Nine Months Ended December 31,
	2017			2016			2017			2016
Product revenue	$	15,993		$	19,259		$	41,883		$	52,286
Service revenue	1,270			1,358			3,360			2,635
Total revenue	17,263			20,617			45,243			54,921
Cost of product revenue	11,181			13,577			30,587			36,748
Cost of service revenue	966			885			3,209			1,748
Total cost of revenue	12,147			14,462			33,796			38,496
Gross profit	5,116			6,155			11,447			16,425
Operating expenses:
General and administrative	2,878			3,541			11,370			11,040
Impairment of intangible assets	—			—			710			—
Sales and marketing	2,981			3,147			9,241			9,167
Research and development	616			495			1,519			1,493
Total operating expenses	6,475			7,183			22,840			21,700
Loss from operations	(1,359		)	(1,028		)	(11,393		)	(5,275		)
Other income (expense):
Other income	—			—			—			190
Interest expense	(102		)	(65		)	(308		)	(203		)
Interest income	5			7			12			31
Total other (expense) income	(97		)	(58		)	(296		)	18
Loss before income tax	(1,456		)	(1,086		)	(11,689		)	(5,257		)
Income tax benefit	(23		)	—			(23		)	(261		)
Net loss	$	(1,433	)	$	(1,086	)	$	(11,666	)	$	(4,996	)
Basic net loss per share attributable to common shareholders	$	(0.05	)	$	(0.04	)	$	(0.41	)	$	(0.18	)
Weighted-average common shares outstanding	28,909,847			28,258,742			28,734,394			28,106,209
Diluted net loss per share	$	(0.05	)	$	(0.04	)	$	(0.41	)	$	(0.18	)
Weighted-average common shares and share equivalents outstanding	28,909,847			28,258,742			28,734,394			28,106,209



	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



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



	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



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		—



	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	)



	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