UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended December 31, 20172019
OR
☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-33887
Orion Energy Systems, Inc.
(Exact name of Registrant as specified in its charter)
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) |
Registrant’s telephone number, including area code: (920) 892-9340
Securities registered pursuant to Section 12(b) of the act:
Title of Each Class | Trading Symbol (s) | Name of Each Exchange on Which Registered | ||
Common stock, no par value | OESX | The Nasdaq Stock Market LLC (NASDAQ Capital Market) | ||
Common stock purchase rights | The Nasdaq Stock Market LLC (NASDAQ Capital Market) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes ☒x No ☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an "emerging growth company". See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | |||
☐ |
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. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐¨ No ☒x
There were 28,921,17030,255,062 shares of the Registrant’s common stock outstanding on February 2, 2018.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED
DECEMBER 31,TABLE OF CONTENTS
Page(s) | |||
ITEM 1. | |||
5 | |||
7 | |||
8 | |||
ITEM 2. | 25 | ||
ITEM 3. | 36 | ||
ITEM 4. | 36 | ||
37 | |||
ITEM 1. | 37 | ||
ITEM 1A. | 37 | ||
ITEM 2. | 37 | ||
ITEM 5. | 37 | ||
ITEM 6. | 38 | ||
39 |
(in thousands, except share amounts)
|
| December 31, 2019 |
|
| March 31, 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 13,762 |
|
| $ | 8,729 |
|
Accounts receivable, net |
|
| 15,224 |
|
|
| 14,804 |
|
Revenue earned but not billed |
|
| 789 |
|
|
| 3,746 |
|
Inventories, net |
|
| 12,235 |
|
|
| 13,403 |
|
Prepaid expenses and other current assets |
|
| 714 |
|
|
| 695 |
|
Total current assets |
|
| 42,724 |
|
|
| 41,377 |
|
Property and equipment, net |
|
| 11,920 |
|
|
| 12,010 |
|
Other intangible assets, net |
|
| 2,257 |
|
|
| 2,469 |
|
Other long-term assets |
|
| 139 |
|
|
| 165 |
|
Total assets |
| $ | 57,040 |
|
| $ | 56,021 |
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 16,950 |
|
| $ | 19,706 |
|
Accrued expenses and other |
|
| 6,241 |
|
|
| 7,410 |
|
Deferred revenue, current |
|
| 85 |
|
|
| 123 |
|
Current maturities of long-term debt |
|
| 56 |
|
|
| 96 |
|
Total current liabilities |
|
| 23,332 |
|
|
| 27,335 |
|
Revolving credit facility |
|
| 829 |
|
|
| 9,202 |
|
Long-term debt, less current maturities |
|
| 53 |
|
|
| 81 |
|
Deferred revenue, long-term |
|
| 734 |
|
|
| 791 |
|
Other long-term liabilities |
|
| 671 |
|
|
| 642 |
|
Total liabilities |
|
| 25,619 |
|
|
| 38,051 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: Shares authorized: 30,000,000 at December 31, 2019 and March 31, 2019; no shares issued and outstanding at December 31, 2019 and March 31, 2019 |
|
| — |
|
|
| — |
|
Common stock, no par value: Shares authorized: 200,000,000 at December 31, 2019 and March 31, 2019; shares issued: 39,717,207 at December 31, 2019 and 39,037,969 at March 31, 2019; shares outstanding: 30,253,062 at December 31, 2019 and 29,600,158 at March 31, 2019 |
|
| — |
|
|
| — |
|
Additional paid-in capital |
|
| 156,359 |
|
|
| 155,828 |
|
Treasury stock, common shares: 9,464,145 at December 31, 2019 and 9,437,811 at March 31, 2019 |
|
| (36,164 | ) |
|
| (36,091 | ) |
Retained deficit |
|
| (88,774 | ) |
|
| (101,767 | ) |
Total shareholders’ equity |
|
| 31,421 |
|
|
| 17,970 |
|
Total liabilities and shareholders’ equity |
| $ | 57,040 |
|
| $ | 56,021 |
|
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 |
The accompanying notes are an integral part of these condensed consolidated statements.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(in thousands, except share and per share amounts)
|
| Three Months Ended December 31, |
|
| Nine Months Ended December 31, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Product revenue |
| $ | 25,867 |
|
| $ | 13,952 |
|
| $ | 93,778 |
|
| $ | 38,350 |
|
Service revenue |
|
| 8,382 |
|
|
| 2,339 |
|
|
| 31,171 |
|
|
| 4,961 |
|
Total revenue |
|
| 34,249 |
|
|
| 16,291 |
|
|
| 124,949 |
|
|
| 43,311 |
|
Cost of product revenue |
|
| 19,075 |
|
|
| 10,508 |
|
|
| 68,778 |
|
|
| 29,599 |
|
Cost of service revenue |
|
| 6,900 |
|
|
| 1,613 |
|
|
| 24,823 |
|
|
| 3,544 |
|
Total cost of revenue |
|
| 25,975 |
|
|
| 12,121 |
|
|
| 93,601 |
|
|
| 33,143 |
|
Gross profit |
|
| 8,274 |
|
|
| 4,170 |
|
|
| 31,348 |
|
|
| 10,168 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
| 2,662 |
|
|
| 2,269 |
|
|
| 8,274 |
|
|
| 7,681 |
|
Sales and marketing |
|
| 2,735 |
|
|
| 2,190 |
|
|
| 8,359 |
|
|
| 6,903 |
|
Research and development |
|
| 439 |
|
|
| 298 |
|
|
| 1,240 |
|
|
| 1,057 |
|
Total operating expenses |
|
| 5,836 |
|
|
| 4,757 |
|
|
| 17,873 |
|
|
| 15,641 |
|
Income (loss) from operations |
|
| 2,438 |
|
|
| (587 | ) |
|
| 13,475 |
|
|
| (5,473 | ) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
| 2 |
|
|
| 31 |
|
|
| 22 |
|
|
| 65 |
|
Interest expense |
|
| (38 | ) |
|
| (77 | ) |
|
| (261 | ) |
|
| (335 | ) |
Amortization of debt issue costs |
|
| (61 | ) |
|
| (31 | ) |
|
| (182 | ) |
|
| (31 | ) |
Interest income |
|
| 2 |
|
|
| 2 |
|
|
| 5 |
|
|
| 8 |
|
Total other expense |
|
| (95 | ) |
|
| (75 | ) |
|
| (416 | ) |
|
| (293 | ) |
Income (loss) before income tax |
|
| 2,343 |
|
|
| (662 | ) |
|
| 13,059 |
|
|
| (5,766 | ) |
Income tax expense |
|
| 39 |
|
|
| 0 |
|
|
| 66 |
|
|
| 26 |
|
Net income (loss) |
| $ | 2,304 |
|
| $ | (662 | ) |
| $ | 12,993 |
|
| $ | (5,792 | ) |
Basic net income (loss) per share attributable to common shareholders |
| $ | 0.08 |
|
| $ | (0.02 | ) |
| $ | 0.43 |
|
| $ | (0.20 | ) |
Weighted-average common shares outstanding |
|
| 30,243,865 |
|
|
| 29,568,986 |
|
|
| 30,053,330 |
|
|
| 29,376,959 |
|
Diluted net income (loss) per share |
| $ | 0.07 |
|
| $ | (0.02 | ) |
| $ | 0.42 |
|
| $ | (0.20 | ) |
Weighted-average common shares and share equivalents outstanding |
|
| 30,824,078 |
|
|
| 29,568,986 |
|
|
| 30,862,088 |
|
|
| 29,376,959 |
|
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 |
The accompanying notes are an integral part of these condensed consolidated statements.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
(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 |
|
Shares issued under Employee Stock Purchase Plan |
|
| 605 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
Stock-based compensation |
|
| 22,046 |
|
|
| 185 |
|
|
| — |
|
|
| — |
|
|
| 185 |
|
Employee tax withholdings on stock-based compensation |
|
| (666 | ) |
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| (2 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,304 |
|
|
| 2,304 |
|
Balance, December 31, 2019 |
|
| 30,253,062 |
|
| $ | 156,359 |
|
| $ | (36,164 | ) |
| $ | (88,774 | ) |
| $ | 31,421 |
|
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.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)
|
| 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 |
|
Shares issued under Employee Stock Purchase Plan |
|
| 1,708 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Stock-based compensation |
|
| 34,785 |
|
|
| 200 |
|
|
| — |
|
|
| — |
|
|
| 200 |
|
Employee tax withholdings on stock-based compensation |
|
| (2,023 | ) |
|
| — |
|
|
| (3 | ) |
|
| — |
|
|
| (3 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (662 | ) |
|
| (662 | ) |
Balance, December 31, 2018 |
|
| 29,571,944 |
|
| $ | 155,642 |
|
| $ | (36,092 | ) |
| $ | (100,885 | ) |
| $ | 18,665 |
|
The accompanying notes are an integral part of these Condensed Consolidated Statements.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| Nine Months Ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Operating activities |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 12,993 |
|
| $ | (5,792 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
| 910 |
|
|
| 1,006 |
|
Amortization of intangible assets |
|
| 282 |
|
|
| 343 |
|
Stock-based compensation |
|
| 515 |
|
|
| 639 |
|
Amortization of debt issue costs |
|
| 182 |
|
|
| 31 |
|
Impairment of intangible assets |
|
| 3 |
|
|
| — |
|
Provision for inventory reserves |
|
| 192 |
|
|
| (144 | ) |
Provision for bad debts |
|
| — |
|
|
| 66 |
|
Other |
|
| 28 |
|
|
| 8 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, current and long-term |
|
| (420 | ) |
|
| 2,857 |
|
Revenue earned but not billed |
|
| 2,957 |
|
|
| (770 | ) |
Inventories |
|
| 970 |
|
|
| (367 | ) |
Prepaid expenses and other assets |
|
| 44 |
|
|
| 123 |
|
Accounts payable |
|
| (2,990 | ) |
|
| 555 |
|
Accrued expenses and other |
|
| (1,296 | ) |
|
| (136 | ) |
Deferred revenue, current and long-term |
|
| (95 | ) |
|
| (29 | ) |
Net cash provided by (used in) operating activities |
|
| 14,275 |
|
|
| (1,610 | ) |
Investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (582 | ) |
|
| (167 | ) |
Additions to patents and licenses |
|
| (73 | ) |
|
| (29 | ) |
Net cash used in investing activities |
|
| (655 | ) |
|
| (196 | ) |
Financing activities |
|
|
|
|
|
|
|
|
Payment of long-term debt |
|
| (68 | ) |
|
| (58 | ) |
Proceeds from revolving credit facility |
|
| 63,200 |
|
|
| 42,498 |
|
Payments of revolving credit facility |
|
| (71,572 | ) |
|
| (43,078 | ) |
Payments to settle employee tax withholdings on stock-based compensation |
|
| (76 | ) |
|
| (10 | ) |
Debt issue costs |
|
| (91 | ) |
|
| (377 | ) |
Net proceeds from employee equity exercises |
|
| 20 |
|
|
| 3 |
|
Net cash used in financing activities |
|
| (8,587 | ) |
|
| (1,022 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| 5,033 |
|
|
| (2,828 | ) |
Cash and cash equivalents at beginning of period |
|
| 8,729 |
|
|
| 9,424 |
|
Cash and cash equivalents at end of period |
| $ | 13,762 |
|
| $ | 6,596 |
|
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
Organization
Orion includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated subsidiaries. Orion is a developer, manufacturerdesigns, manufactures, markets and sellermanages 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.
Principles of Consolidation
The condensed consolidated financial statementsCondensed 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 statementsCondensed 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, 20182020 or other interim periods.
The condensed consolidated balance sheetCondensed Consolidated Balance Sheet at March 31, 20172019 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 statementsCondensed 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, 20172019 filed with the Securities and Exchange CommissionSEC on June 13, 2017.
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, 2017,2019, one supplier accounted for 13.9% of24.0% of total costscost of revenue. For the nine months ended December 31, 2017, no2019, one supplier accounted for more than 10%12.5% 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, 2019, one customer accounted for 13.4%72.3% of total revenue. For the nine months ended December 31, 2017,2019, one customer accounted for 11.1%77.3% of total revenue. For the three andmonths ended December 31, 2018, one customer accounted for 11.6% of total revenue. For the nine months ended December 31, 2016,2018, no customer accounted for more than 10%10.0% of total revenue.
As of December 31, 2017, three customers2019, one customer accounted for 13.5%, 12.2%, and 10.1%, respectively,63.5% of accountsAccounts receivable. As of March 31, 2017,2019, one customer accounted for 11.6%56.2% of accountsAccounts receivable.
Recent Accounting Pronouncements
Recently Adopted
On April 1, 2019, Orion adopted Accounting Standards Update (“ASU”) 2016-15, "Classification of Certain Cash Receipts2016-02, and Cash Payments,"subsequent amendments, which provides clarification and additional guidance as to the presentation and classification of certain cash receipts and cash paymentsis included in the statementAccounting Standards Codification (“ASC”) as Topic 842, Leases (“ASC 842”), retrospectively through a cumulative-effect adjustment. Orion elected the package of cash flows. Thispractical expedients provided for in ASU provides842, which among other things, allows companies to carry forward their historical lease classification. Previously, Orion followed the guidance as toset forth in ASC 840, Leases.
For Orion, the classification of a number of transactions including: contingent consideration payments made after a business combination, proceeds frommost 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.
Adoption of the effects of leasesASC 842 resulted in the income statementrecording of additional lease assets and statementlease liabilities of cash flows. This guidance will be effective for Orion onapproximately $0.2 million as of April 1, 2019. EarlyThere 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 permittedincreased footnote disclosure requirements.
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 beginningnew 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 presentedguidance 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.
If there are multiple performance obligations in a contract, the contract’s total sales price is allocated to each individual performance obligation based on their relative standalone selling price. A performance obligation’s standalone selling price is the price at which Orion would sell such promised good or service separately to a customer. Orion uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus margin approach when one is not available. The cost-plus margin approach is used to determine the stand-alone selling price for the installation performance obligation and is based on average historical installation margin.
Revenue derived from customer contracts which include only performance obligation(s) for the sale of lighting fixtures and components is classified as Product revenue in the Condensed Consolidated Statements of Operations. The revenue for these transactions is recorded at the point in time when management believes that the customer obtains control of the products, generally either upon shipment or upon delivery to the customer’s facility. This point in time is determined separately for each contract and requires judgment by management of the contract terms and the specific facts and circumstances concerning the transaction.
Revenue from a customer contract which includes both the sale of fixtures and the installation of such fixtures (which Orion refers to as a turnkey project) is allocated between each lighting fixture and the installation performance obligation based on relative standalone selling prices.
Revenue from turnkey projects that is allocated to the sale of the lighting fixtures is recorded at the point in time when management believes the customer obtains control of the product(s) and is reflected in Product revenue. This point in time is determined separately for each customer contract based upon the terms of the contract and the nature and extent of Orion’s control of the light fixtures during the installation. Product revenue associated with turnkey projects can be recorded (a) upon shipment or delivery, (b) subsequent to shipment or delivery and upon customer payments for the light fixtures, (c) when an individual light fixture is installed and working correctly, or (d) when the customer acknowledges that the entire installation project is substantially complete. Determining the point in time when a customer obtains control of the lighting fixtures in a turnkey project can be a complex judgment and is applied separately for each individual light fixture included in a contract. In addition,making this ASU requires enhancedjudgment, 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 expandedduration 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 in comparison to the total number of 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 an enforceable right to payment, Product revenue is recorded on an over-time basis measured using an input methodology that calculates the costs incurred to date as compared to total expected costs. There was no over-time revenue related to custom products recognized in the three and nine months ended December 31, 2019 or December 31, 2018.
Orion also records revenue in conjunction with several limited power purchase agreements (“PPAs”) still outstanding. Those PPAs are supply-side agreements for the generation of electricity. Orion’s last PPA expires in 2031. Revenue associated with the sale of energy generated by the solar facilities under these PPAs is within the scope of ASC 606. Revenues are recognized over-time and are equal to the amount billed to the customer, which is calculated by applying the fixed rate designated in the PPAs to the variable amount of electricity generated each month. This approach is in accordance with the “right to invoice” practical expedient provided for in ASC 606. Orion also recognizes revenue upon the sale to third parties of tax credits received from operating the solar facilities and from amortizing a grant received from the federal government during the period starting when the power generating facilities were constructed until the expiration of the PPAs; these revenues are not derived from contracts with customers and therefore not under the scope of ASC 606.
When shipping and handling activities are performed after a customer obtains control of the product, Orion has elected to 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 Product revenue includes revenue from contracts with customers accounted for under the scope of ASC 606 and revenue which is accounted for under other guidance. For the three and nine months ended December 31, 2019, Product revenue included $0.2 million and $1.2 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 $0.1 million, respectively, derived from the amortization of federal grants received in 2010 and 2011 as reimbursement for a portion of the costs to construct the legacy solar facilities which are not under the scope of ASC 606.
For the three and nine months ended December 31, 2018, Product revenue included $1.0 million and $2.1 million, respectively, derived from sales-type leases for light fixtures, $26 thousand 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 $0.1 million, respectively, derived from the amortization of federal grants received in 2010 and 2011 as reimbursement for a portion of the costs to construct the legacy solar facilities which are not under the scope of ASC 606. All remaining Product revenue, and all Service revenue, are derived from contracts with customers as defined in ASC 606.
The primary end-users of Orion’s lighting products and services are (a) commercial or industrial companies, and (b) the 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 sales channel.
The federal government obtains Orion products and services primarily through turnkey project sales that Orion makes to a select group of contractors who focus on the federal government. Revenues associated with government end-users are primarily included in the Orion Engineered Systems Division segment.
See Note 17, Segments, for additional discussion concerning Orion’s reportable segments.
The following table provides detail of Orion’s total revenues for the three and nine months ended December 31, 2019 (dollars in thousands):
|
| Three Months Ended December 31, 2019 |
|
| Nine Months Ended December 31, 2019 |
| ||||||||||||||||||
|
| Product |
|
| Services |
|
| Total |
|
| Product |
|
| Services |
|
| Total |
| ||||||
Revenue from contracts with customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting revenues, by end user |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal government |
| $ | 78 |
|
| $ | 68 |
|
| $ | 146 |
|
| $ | 902 |
|
| $ | 366 |
|
| $ | 1,268 |
|
Commercial and industrial |
|
| 25,467 |
|
|
| 8,314 |
|
|
| 33,781 |
|
|
| 91,411 |
|
|
| 30,805 |
|
|
| 122,216 |
|
Total lighting |
|
| 25,545 |
|
|
| 8,382 |
|
|
| 33,927 |
|
|
| 92,313 |
|
|
| 31,171 |
|
|
| 123,484 |
|
Solar energy related revenues |
|
| 10 |
|
|
| — |
|
|
| 10 |
|
|
| 50 |
|
|
| — |
|
|
| 50 |
|
Total revenues from contracts with customers |
|
| 25,555 |
|
|
| 8,382 |
|
|
| 33,937 |
|
|
| 92,363 |
|
|
| 31,171 |
|
|
| 123,534 |
|
Revenue accounted for under other guidance |
|
| 312 |
|
|
| — |
|
|
| 312 |
|
|
| 1,415 |
|
|
| — |
|
|
| 1,415 |
|
Total revenue |
| $ | 25,867 |
|
| $ | 8,382 |
|
| $ | 34,249 |
|
| $ | 93,778 |
|
| $ | 31,171 |
|
| $ | 124,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended December 31, 2018 |
|
| Nine Months Ended December 31, 2018 |
| ||||||||||||||||||
|
| Product |
|
| Services |
|
| Total |
|
| Product |
|
| Services |
|
| Total |
| ||||||
Revenue from contracts with customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting revenues, by end user |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal government |
| $ | 894 |
|
| $ | 396 |
|
| $ | 1,290 |
|
| $ | 1,009 |
|
| $ | 396 |
|
| $ | 1,405 |
|
Commercial and industrial |
|
| 11,976 |
|
|
| 1,943 |
|
|
| 13,919 |
|
|
| 34,987 |
|
|
| 4,565 |
|
|
| 39,552 |
|
Total lighting |
|
| 12,870 |
|
|
| 2,339 |
|
|
| 15,209 |
|
|
| 35,996 |
|
|
| 4,961 |
|
|
| 40,957 |
|
Solar energy related revenues |
|
| 8 |
|
|
| — |
|
|
| 8 |
|
|
| 46 |
|
|
| — |
|
|
| 46 |
|
Total revenues from contracts with customers |
|
| 12,878 |
|
|
| 2,339 |
|
|
| 15,217 |
|
|
| 36,042 |
|
|
| 4,961 |
|
|
| 41,003 |
|
Revenue accounted for under other guidance |
|
| 1,074 |
|
|
| — |
|
|
| 1,074 |
|
|
| 2,308 |
|
|
| — |
|
|
| 2,308 |
|
Total revenue |
| $ | 13,952 |
|
| $ | 2,339 |
|
| $ | 16,291 |
|
| $ | 38,350 |
|
| $ | 4,961 |
|
| $ | 43,311 |
|
Cash Flow Considerations
Customer payments for material-only orders are due shortly after shipment.
Turnkey projects where the end-user is 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 contracts specify that the 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 nine months. The customer executes an agreement providing for monthly payments of the contract price, plus interest, over a five-year period. The total transaction price in these contracts is allocated between product and services in the same manner as all other turnkey projects. The portion of the transaction associated with the installation is accounted for consistently with all other installation related performance obligations. The portion of the transaction associated with the sale of the multiple individual light fixtures is accounted for as sales-type leases in accordance with 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 December 31, 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 statement disclosures. Sinceinstitution either during, or shortly after completion of, the issuanceinstallation period. Upon execution of this ASU, the FASBreceivables 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 issued further updatesachieved in fulfilling its installation obligation. Orion provides the progress certifications to this ASUthe financial institution one month in arrears.
The total amount received from the sales of these receivables during the three and nine months ended December 31, 2019, was $0.7 million and $4.4 million, respectively. Orion’s losses on these sales were $39 thousand and $0.1 million for the three and nine months ended December 31, 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 nine months ended December 31, 2018 was $1.5 million and $4.4 million, respectively. Orion’s losses on these sales were $29 thousand and $0.2 million for the three and nine months ended December 31, 2018, respectively and are 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 related to provide additional guidance and clarification andlighting fixtures typically do not exceed nine months in duration. As a result, Orion has elected the practical expedient that provides an exemption to delay the disclosure requirements regarding information about value assigned to remaining performance obligations on contracts that have original effective date. This ASU allowsexpected durations of one year or less.
Orion has also adopted the practical expedient that provides an exemption to the disclosure requirement of the value assigned to performance obligations associated with contracts that were not complete as of April 1, 2018.
Orion also elected the practical expedient that permits companies to elect eithernot disclose quantitative information about the future revenue when revenue is recognized as invoices are issued to customers for services performed.
Other than the turnkey projects which result in sales-type leases discussed above, Orion generally receives full payment for satisfied performance obligations in less than one year. Accordingly, Orion does not adjust revenues for the impact of any potential significant financing component as permitted by the practical expedients provided in ASC 606.
Contract Balances
A receivable is recognized when Orion has an enforceable right to payment in accordance with contract terms and an invoice has been issued to the customer. Payment terms on invoiced amounts are typically 30 days from the invoice date.
Revenue earned but not billed represents revenue that has been recognized in advance of billing the customer, which is a full retrospective or modified retrospective approachcommon practice in Orion turnkey contracts. Once Orion has an unconditional right to adoption.consideration under a turnkey contract, Orion will adopttypically bills the customer accordingly and reclassifies the amount to Accounts receivable, net. Revenue earned but not billed as of December 31, 2019 and March 31, 2019 includes $0.1 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 December 31, 2019 and March 31, 2019 includes $9 thousand and $48 thousand, respectively, of contract liabilities which represented consideration received from customers prior to the point that Orion has fulfilled the promises included in a performance obligation and recorded revenue.
Deferred revenue, long-term consists of the unamortized portion of the funds received from the federal government in 2010 and 2011 as reimbursement for the costs to build the two facilities related to the PPAs. As the transaction is not considered a contract with a customer, this ASUvalue is not a contract liability as defined by the new standards.
The following chart shows the balance of Orion’s receivables arising from contracts with customers, contract assets and contract liabilities as of December 31, 2019 and March 31, 2019 (dollars in thousands):
|
| December 31, 2019 |
|
| March 31, 2019 |
| ||
Accounts receivable, net |
| $ | 15,224 |
|
| $ | 14,804 |
|
Contract assets |
| $ | 693 |
|
| $ | 3,005 |
|
Contract liabilities |
| $ | 9 |
|
| $ | 48 |
|
There were no significant changes in the related updates (“ASC 606”) on their effective date, April 1, 2018. contract assets outside of standard reclassifications to Accounts receivable, net upon billing. There were no significant changes to contract liabilities.
NOTE 4 — ACCOUNTS RECEIVABLE, NET
As of December 31, 2017, Orion has identified that the main types of contracts that require evaluation as to what, if any, changes will be necessary under ASC 606 as compared to legacy accounting guidance are (a) material only sales that are shipped to customers from Orion’s plant or directly from Orion’s vendors, (b) contracts that involve a combination of material2019, and installation services, (c) contracts entered into underMarch 31, 2019, 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.
|
| December 31, 2019 |
|
| March 31, 2019 |
| ||
Accounts receivable, gross |
| $ | 15,252 |
|
| $ | 15,011 |
|
Allowance for doubtful accounts |
|
| (28 | ) |
|
| (207 | ) |
Accounts receivable, net |
| $ | 15,224 |
|
| $ | 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 |
As of December 31, 20172019, and March 31, 2017,2019, Orion's inventoryInventory balances were as follows (dollars in thousands):
|
| Cost |
|
| Excess and Obsolescence Reserve |
|
| Net |
| |||
As of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials and components |
| $ | 8,570 |
|
| $ | (1,104 | ) |
| $ | 7,466 |
|
Work in process |
|
| 765 |
|
|
| (624 | ) |
|
| 141 |
|
Finished goods |
|
| 5,780 |
|
|
| (1,152 | ) |
|
| 4,628 |
|
Total |
| $ | 15,115 |
|
| $ | (2,880 | ) |
| $ | 12,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 includeconsist primarily of debt issue costs, prepaid subscription fees, prepaid insurance premiums, and sales tax receivable.
NOTE 7 — PROPERTY AND EQUIPMENT, NET
As of December 31, 2019, and March 31, 2019, Property and equipment, net, included the following (dollars in thousands):
|
| December 31, 2019 |
|
| March 31, 2019 |
| ||
Land and land improvements |
| $ | 433 |
|
| $ | 433 |
|
Buildings and building improvements |
|
| 9,467 |
|
|
| 9,245 |
|
Furniture, fixtures and office equipment |
|
| 7,297 |
|
|
| 7,238 |
|
Leasehold improvements |
|
| 324 |
|
|
| 324 |
|
Equipment leased to customers |
|
| 4,997 |
|
|
| 4,997 |
|
Plant equipment |
|
| 12,757 |
|
|
| 12,211 |
|
Construction in Progress |
|
| 29 |
|
|
| 43 |
|
Gross property and equipment |
|
| 35,304 |
|
|
| 34,491 |
|
Less: accumulated depreciation |
|
| (23,384 | ) |
|
| (22,481 | ) |
Total property and equipment, net |
| $ | 11,920 |
|
| $ | 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 |
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 |
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$0.9 million for the three and nine months ended December 31, 2017, respectively,2019 and $0.3 and $1.1$1.0 million for the three and nine months ended December 31, 2016,2018, respectively.
Orion evaluates its long-lived assets for impairment whenever events or circumstances indicate that the carrying value of the assets recognized in its financial statements may not be recoverable. Orion has long-lived assets associated with its legacy solar business and recognizes revenue from the sale to third parties of tax credits received from operating these solar assets. There is currently legislation pending which may decrease the future cash flows associated with the sale of these tax credits. Depending on the result of this pending legislation change, Orion may record a non-cash impairment charge in a future period.
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. 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, 2020 with no change in payment terms. The lease agreement provided the lessor the right to terminate the lease agreement at any time with twelve months’ notice to Orion. As a result, the agreement was classified as a short-term lease.
On January 31, 2020, the existing lease was terminated and replaced with a new ten-year lease, with an option for Orion to terminate after six years. Orion is in the process of performing its assessment and analysis of the new lease agreement, and believes that the new lease will result in a material right-of-use-asset and lease liability.
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 on 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 |
| December 31, 2019 |
| |
Assets |
|
|
|
|
|
|
Operating lease assets |
| Other long-term assets |
| $ | 79 |
|
Liabilities |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Operating lease liabilities |
| Accrued expenses and other |
|
| 65 |
|
Non-current liabilities |
|
|
|
|
|
|
Operating lease liabilities |
| Other long-term liabilities |
|
| 4 |
|
Total lease liabilities |
|
|
| $ | 69 |
|
Orion had operating lease costs of $0.1 million and $0.4 million for the three and nine months ended December 31, 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 nine months ended December 31, 2019 (dollars in thousands):
|
| Three Months Ended |
|
| Nine Months Ended |
| ||
|
| December 31, 2019 |
|
| December 31, 2019 |
| ||
Product revenue |
| $ | 162,909 |
|
| $ | 1,164,547 |
|
Cost of product revenue |
| $ | 142,452 |
|
| $ | 1,043,874 |
|
The Condensed Consolidated Balance Sheets as of December 31, 2019 includes an immaterial amount related to the net investment in sales-type leases. The Condensed Balance Sheet as of and March 31, 2019 does 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 nine months ended December 31, 2019. Orion accounts for these transactions as operating leases.
As of December 31, 2019, and March 31, 2019, the components of, and changes in, the carrying amount of otherOther intangible assets, net, were as follows (dollars in thousands):
|
| December 31, 2019 |
|
| March 31, 2019 |
| ||||||||||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
| ||||||
Patents |
| $ | 2,736 |
|
| $ | (1,657 | ) |
| $ | 1,079 |
|
| $ | 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 |
|
|
| (3,529 | ) |
|
| 71 |
|
|
| 3,600 |
|
|
| (3,459 | ) |
|
| 141 |
|
Developed technology |
|
| 900 |
|
|
| (801 | ) |
|
| 99 |
|
|
| 900 |
|
|
| (717 | ) |
|
| 183 |
|
Total |
| $ | 8,302 |
|
| $ | (6,045 | ) |
| $ | 2,257 |
|
| $ | 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 was $0.2$0.1 million for both the three months ended December 31, 20172019 and 2016.
As of December 31, 2017,2019, the weighted average remaining useful life of intangible assets was 5.74.6 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) |
| $ | 79 |
|
Fiscal 2021 |
|
| 293 |
|
Fiscal 2022 |
|
| 196 |
|
Fiscal 2023 |
|
| 104 |
|
Fiscal 2024 |
|
| 101 |
|
Fiscal 2025 |
|
| 92 |
|
Thereafter |
|
| 384 |
|
Total |
| $ | 1,249 |
|
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 |
As of December 31, 2019, and March 31, 2019, Accrued expenses and other includeincluded the following (dollars in thousands):
|
| December 31, 2019 |
|
| March 31, 2019 |
| ||
Compensation and benefits |
| $ | 2,042 |
|
| $ | 1,212 |
|
Sales tax |
|
| 557 |
|
|
| 713 |
|
Accrued project costs |
|
| 1,677 |
|
|
| 3,293 |
|
Legal and professional fees |
|
| 47 |
|
|
| 356 |
|
Warranty |
|
| 502 |
|
|
| 282 |
|
Sales returns reserve |
|
| 145 |
|
|
| 141 |
|
Credits due to customers |
|
| 929 |
|
|
| 987 |
|
Other accruals |
|
| 342 |
|
|
| 426 |
|
Total |
| $ | 6,241 |
|
| $ | 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 |
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 thoseincluding 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):
|
| For the Three Months Ended December 31, |
|
| For the Nine Months Ended December 31, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Beginning of period |
| $ | 803 |
|
| $ | 721 |
|
| $ | 657 |
|
| $ | 673 |
|
Reclassification on adoption of ASC 606 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 73 |
|
Accruals |
|
| 157 |
|
|
| 129 |
|
|
| 503 |
|
|
| 177 |
|
Warranty claims (net of vendor reimbursements) |
|
| (51 | ) |
|
| (67 | ) |
|
| (251 | ) |
|
| (140 | ) |
End of period |
| $ | 909 |
|
| $ | 783 |
|
| $ | 909 |
|
| $ | 783 |
|
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 LOSSINCOME (LOSS) PER COMMON SHARE
For the three and nine months ended December 31, 2017 and 2016,2018, Orion was in a net loss position; therefore, the basicBasic and diluted weighted averageDiluted weighted-average shares outstanding are equal because any increase to the basic shares would be anti-dilutive. Net lossBasic and Diluted net income (loss) per common share iswas calculated based upon the following:
|
| For the Three Months Ended December 31, |
|
| For the Nine Months Ended December 31, |
| ||||||||||
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| |||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (in thousands) |
| $ | 2,304 |
|
| $ | (662 | ) |
| $ | 12,993 |
|
| $ | (5,792 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
| 30,243,865 |
|
|
| 29,568,986 |
|
|
| 30,053,330 |
|
|
| 29,376,959 |
|
Weighted-average common shares and common share equivalents outstanding |
|
| 30,824,078 |
|
|
| 29,568,986 |
|
|
| 30,862,088 |
|
|
| 29,376,959 |
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.08 |
|
| $ | (0.02 | ) |
| $ | 0.43 |
|
| $ | (0.20 | ) |
Diluted |
| $ | 0.07 |
|
| $ | (0.02 | ) |
| $ | 0.42 |
|
| $ | (0.20 | ) |
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 | ) |
Orion uses the numbertreasury stock method to calculate the effect of potentiallyoutstanding dilutive securitiesequity incentive instruments, which requires Orion to compute total proceeds as the sum of the amount the employee must pay upon exercise of the award and the amount of unearned stock-based compensation costs attributable to future services. Equity incentive instruments for which the total employee proceeds from exercise exceed the average fair value of the same equity incentive instrument over the period have an anti-dilutive effect on net income per common share during periods with net income, and accordingly, Orion excludes them from the calculation. Anti-dilutive equity instruments of approximately 203,734 and 220,534 common shares were excluded from the calculationcomputation of diluted net lossincome per common share because their inclusion would have been anti-dilutive. The number of shares are as of the end of each period:
December 31, 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 |
Long-term debt consisted of the following (dollars in thousands):
|
| December 31, 2019 |
|
| March 31, 2019 |
| ||
Revolving credit facility |
| $ | 829 |
|
| $ | 9,202 |
|
Equipment debt obligations |
|
| 109 |
|
|
| 177 |
|
Total long-term debt |
|
| 938 |
|
|
| 9,379 |
|
Less current maturities |
|
| (56 | ) |
|
| (96 | ) |
Long-term debt, less current maturities |
| $ | 882 |
|
| $ | 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 hasand its subsidiaries entered into a new secured revolving Business Financing Agreement with Western Alliance Bank, as lender (the “Credit Agreement”). On June 3, 2019, Orion and certain of its subsidiaries entered into an amendedamendment (the “First Amendment”) to the Credit Agreement, which increased the maximum borrowing base credit agreement ("available for certain of the customer receivables included in Orion’s borrowing base and provided 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 a second amendment (the “Second Amendment”) to the Credit Agreement"Agreement, which established 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 provided 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 December 31, 2019, this rent reserve equaled $0.1 million. On November 21, 2019, Orion and certain of its subsidiaries entered into a third amendment (the “Third Amendment”) thatto the Credit Agreement, which
extended the maturity date from October 26, 2020 to October 26, 2021; increased the sublimit under the Credit Agreement for advances under business credit cards from $1.5 million to $3 million; created a new $2 million sublimit permitting entry into foreign currency forward contracts with the lender; expanded the Company’s ability to make capital expenditures and incur other debt from time to time; and permitted the lender to amend the financial covenant included in the Credit Agreement (which requires the maintenance of a certain amount of unrestricted cash on deposit with the lender at the end of each month) upon receipt of the Company’s annual projections.
The Credit Agreement, as amended provides for a revolving credit facility ("(the “Credit Facility”) that matures on October 26, 2021. 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, andAgreement includes a $2.0 million sublimit for the issuance of letters of credit. As of December 31, 2017,2019, Orion’s borrowing base was $14.7 million, and Orion had no$0.8 million in borrowings outstanding letters of credit. Borrowings outstanding as of December 31, 2017, amounted to approximately $3.6 million and arewhich were included in non-current liabilities in the accompanying condensed consolidated balance sheet.Condensed Consolidated Balance Sheets. Orion estimates thathad no outstanding letters of credit leaving total borrowing availability of $13.9 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 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 liabilities, including the obligations under the Credit Agreement). As of December 31, 2017, it2019, the applicable interest rate was eligible5.25%. Among other fees, Orion is required to borrowpay an additional $0.2 millionannual facility fee equal to 0.45% of the credit limit under the Credit Facility based upon current levels of eligible inventoryAgreement, which was paid at commencement (October 26, 2018) and accounts receivable.
The Credit Agreement requires that Orion to maintain nine months’ of “RML” as of the end of each month, a minimum ratiomonth. For purposes of the Credit Agreement, RML is defined as, as of the applicable determination date, unrestricted cash on deposit with the lender plus availability under the Credit Agreement divided by an amount equal to, for the applicable trailing twelve-monththree-month period, of (i) earningsconsolidated 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, certainstock-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 December 31, 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 repurchasepurchase shares of Orion’s stock, make investments or pledge or disposetransfer assets. If an event of assets. Orion was in compliance with its covenants indefault under the Credit Agreement as of December 31, 2017.
Equipment Debt Obligations
In June 2015, Orion must payentered into an unused line fee of 0.25% per annum of the daily average unused amount of the Credit Facility andagreement 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.
In March 2016 and June 2015,February 2019, Orion entered into leaseadditional 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 leasesdebts are secured by the related equipment. The leasesdebts 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.
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 OTAOrion 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 bearsbore an interest at a rate of 8.36% and maturesmatured in April 2018.
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 lossbook income (loss) before income tax. The estimatedtax, 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 monththree-month period ended December 31, 2016 was 0.1%. The estimated effective2019 and 2018, Orion recorded income tax rate was determined by applying statutory tax rates to pretax loss adjusted for certain permanent book to tax differencesexpense of $39 thousand and tax credits.
As of December 31, 2017,2019 and March 31, 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 netrecorded 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 assetvaluation allowance would increase income in the period such determination is made.
Uncertain Tax Positions
As of December 31, 2017, the2019, 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 otherOther 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 incomeIncome tax expense. Penalties and interest are immaterial and are included in the unrecognized tax benefits.
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 whetherdoes not believe the final resolution of any of such claims or legal proceedings maywill have a material adverse effect on ourOrion’s future results of operations. In addition to ordinary-course litigation, Orion is a party to the proceedings described below.
State Tax Assessment
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’sOrion's sales and use tax audit is uncertain, based on current information, in the opinion of the Company’s management, the ultimate disposition of these matters willthis 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 previous 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.
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 and extended its terms by three years to January 7, 2022. 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 receive upon exercise 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 receive upon exercise 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 boardBoard of directorsDirectors approved a non-compensatory employee stock purchase plan, or ESPP. Orion issuedIn the following shares from treasury during the ninethree 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 |
|
| Shares Issued Under ESPP Plan |
|
| Closing Market Price | |
Quarter Ended June 30, 2019 |
|
| 613 |
|
| 2.97 |
Quarter Ended September 30, 2019 |
|
| 570 |
|
| 2.85 |
Quarter Ended December 31, 2019 |
|
| 666 |
|
| 3.35 |
Total issued in fiscal 2020 |
|
| 1,849 |
|
| $ 2.85 - 3.35 |
NOTE 1516 — STOCK OPTIONS AND RESTRICTED SHARES
At Orion's 2016 Annual MeetingOrion’s 2019 annual meeting of Shareholdersshareholders held on August 3, 2016, Orion's7, 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 Former2004 Plan; however, all awards granted under the Former2004 Plan that wereare outstanding as of August 3, 2016 will continue to be governed by the Former2004 Plan.
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):
|
| For the Three Months Ended December 31, |
|
| For the Nine Months Ended December 31, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Cost of product revenue |
| $ | 1 |
|
| $ | 1 |
|
| $ | 2 |
|
| $ | 3 |
|
Cost of service revenue |
|
| — |
|
|
| 1 |
|
|
| (1 | ) |
|
| 2 |
|
General and administrative |
|
| 172 |
|
|
| 185 |
|
|
| 482 |
|
|
| 592 |
|
Sales and marketing |
|
| 1 |
|
|
| 13 |
|
|
| 1 |
|
|
| 41 |
|
Research and development |
|
| 11 |
|
|
| — |
|
|
| 31 |
|
|
| 1 |
|
Total |
| $ | 185 |
|
| $ | 200 |
|
| $ | 515 |
|
| $ | 639 |
|
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Cost of product revenue | $ | 1 | $ | 7 | $ | 11 | $ | 30 | |||||||
General and administrative | 205 | 283 | 722 | 1,035 | |||||||||||
Sales and marketing | 34 | 64 | 113 | 116 | |||||||||||
Research and development | 10 | 30 | 22 | 71 | |||||||||||
Total | $ | 250 | $ | 384 | $ | 868 | $ | 1,252 |
During the first nine months of fiscal 2018,2020, Orion had the following activity related to its stock-based compensation:
|
| Restricted Shares |
|
| Stock Options |
| ||
Awards outstanding at March 31, 2019 |
|
| 1,312,593 |
|
|
| 467,836 |
|
Awards granted |
|
| 279,468 |
|
|
| — |
|
Awards vested or exercised |
|
| (669,238 | ) |
|
| (10,000 | ) |
Awards forfeited |
|
| (17,150 | ) |
|
| (19,874 | ) |
Awards outstanding at December 31, 2019 |
|
| 905,673 |
|
|
| 437,962 |
|
Per share price on grant date |
| $ | 3.02 |
|
|
| — |
|
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, 2017,2019, the amount of deferred stock-based compensation expense to be recognized, over a remaining period of 2.01.6 years, was approximately $1.6$1.1 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 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.
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. Thisbroadline electrical distributors and contractors.
Orion U.S. Markets Division
The USM segment is expanding as a result of increased sales through distributors as Orion continuessells commercial lighting systems and energy management systems to develop its agent distribution strategy. This expansion includes the migration ofwholesale contractor markets. USM customers from direct sales previously included in the USM division.
Corporate and Other
Corporate and Other is comprised of operating expenses not directly allocated to Orion’s segments and adjustments to reconcile to consolidated results (dollars in thousands).
|
| Revenues |
|
| Operating Income (Loss) |
| ||||||||||
|
| For the Three Months Ended December 31, |
|
| For the Three Months Ended December 31, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orion Engineered Systems |
| $ | 27,275 |
|
| $ | 6,802 |
|
| $ | 3,174 |
|
| $ | 33 |
|
Orion Distribution Services |
|
| 3,634 |
|
|
| 6,102 |
|
|
| (206 | ) |
|
| (236 | ) |
Orion U.S. Markets |
|
| 3,340 |
|
|
| 3,387 |
|
|
| 578 |
|
|
| 569 |
|
Corporate and Other |
|
| — |
|
|
| — |
|
|
| (1,108 | ) |
|
| (953 | ) |
|
| $ | 34,249 |
|
| $ | 16,291 |
|
| $ | 2,438 |
|
| $ | (587 | ) |
|
| Revenues |
|
| Operating Income (Loss) |
| ||||||||||
|
| For the Nine Months Ended December 31, |
|
| For the Nine Months Ended December 31, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orion Engineered Systems |
| $ | 104,369 |
|
| $ | 15,168 |
|
| $ | 15,861 |
|
| $ | (1,944 | ) |
Orion Distribution Services |
|
| 11,191 |
|
|
| 20,202 |
|
|
| (691 | ) |
|
| (1,082 | ) |
Orion U.S. Markets |
|
| 9,389 |
|
|
| 7,941 |
|
|
| 1,750 |
|
|
| 793 |
|
Corporate and Other |
|
| — |
|
|
| — |
|
|
| (3,445 | ) |
|
| (3,240 | ) |
|
| $ | 124,949 |
|
| $ | 43,311 |
|
| $ | 13,475 |
|
| $ | (5,473 | ) |
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 | ) |
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 |
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 |
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 |
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 statementsCondensed Consolidated Financial Statements and related notes included in this Form 10-Q, as well as our audited consolidated financial statementsConsolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.
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.
We are a leading designerprovide 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 LEDdesign 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 locationlocated in Manitowoc, Wisconsin, although we are increasingly sourcingWisconsin. 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.
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 shiftedand 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 legacylighting 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.
We typically sell our lighting systems in replacement of our customers’ existing lighting fixtures. We call this replacement process a “retrofit.”"retrofit". We frequently engagesell our customer’s existing electrical contractorproducts and services directly to our customers and in many cases we provide design and installation andas 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.
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 towardamong 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, 20172018 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,
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 hasWe have three reportable segments: Orion U.S. Markets Division ("USM"), Orion Engineered Systems Division ("OES"), and Orion Distribution Services Division ("ODS").
Managing Impacts of Tariffs and LED product end user customer pricing pressure.
There continues to serve asbe a memberdebate regarding a wide range of our Boardpolicy options with respect to monetary, regulatory, and trade, amongst others, that the U.S. federal government has and may pursue, including the imposition of Directorstariffs on certain imports. Certain sourced finished products and will continue to provide consulting services to us.
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 |
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 |
Strategic Approach
We recorded no restructuring expense to the Orion U.S. Markets or Orion Engineered Systems segments.
Focus on executing and marketing our turnkey LED retrofit capabilities to large national account customers.We remain confidentbelieve 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 have resulted in contracts to retrofit multiple locations for multiple national account customers. We believe that these contracts will help lead our growth momentum for the remainder of 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 for our customers. 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.
Recent Developments
During fiscal 2019 and fiscal 2020, we signed a series of contracts to retrofit multiple locations for a major national account customer with our lighting products. We believe that customer purchases ofstate-of-the-art LED lighting systems will continueand wireless IoT enabled control solutions at locations nationwide. We currently expect total revenue from the customer to increase in the near-term as expected improvements in LED performance and expected decreases in LED product costs make our LED products even more economically compelling to our customers.
The following table sets forth the line items of our condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and as a relative percentage of our total revenue for each applicable period, together with the relative percentage change in such line item between applicable comparable periods (dollars in thousands, except percentages):
|
| Three Months Ended December 31, |
| |||||||||||||||||
|
| 2019 |
|
| 2018 |
|
|
|
|
|
| 2019 |
|
| 2018 |
| ||||
|
| Amount |
|
| Amount |
|
| % Change |
|
| % of Revenue |
|
| % of Revenue |
| |||||
Product revenue |
| $ | 25,867 |
|
| $ | 13,952 |
|
|
| 85.4 | % |
|
| 75.5 | % |
|
| 85.6 | % |
Service revenue |
|
| 8,382 |
|
|
| 2,339 |
|
|
| 258.4 | % |
|
| 24.5 | % |
|
| 14.4 | % |
Total revenue |
|
| 34,249 |
|
|
| 16,291 |
|
|
| 110.2 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of product revenue |
|
| 19,075 |
|
|
| 10,508 |
|
|
| 81.5 | % |
|
| 55.7 | % |
|
| 64.5 | % |
Cost of service revenue |
|
| 6,900 |
|
|
| 1,613 |
|
|
| 327.8 | % |
|
| 20.1 | % |
|
| 9.9 | % |
Total cost of revenue |
|
| 25,975 |
|
|
| 12,121 |
|
|
| 114.3 | % |
|
| 75.8 | % |
|
| 74.4 | % |
Gross profit |
|
| 8,274 |
|
|
| 4,170 |
|
|
| 98.4 | % |
|
| 24.2 | % |
|
| 25.6 | % |
General and administrative expenses |
|
| 2,662 |
|
|
| 2,269 |
|
|
| 17.3 | % |
|
| 7.8 | % |
|
| 13.9 | % |
Sales and marketing expenses |
|
| 2,735 |
|
|
| 2,190 |
|
|
| 24.9 | % |
|
| 8.0 | % |
|
| 13.4 | % |
Research and development expenses |
|
| 439 |
|
|
| 298 |
|
|
| 47.3 | % |
|
| 1.3 | % |
|
| 1.8 | % |
Income (loss) from operations |
|
| 2,438 |
|
|
| (587 | ) |
| NM |
|
|
| 7.1 | % |
|
| (3.6 | )% | |
Other income |
|
| 2 |
|
|
| 31 |
|
|
| (93.5 | )% |
|
| 0.0 | % |
|
| 0.2 | % |
Interest expense |
|
| (38 | ) |
|
| (77 | ) |
|
| (50.6 | )% |
|
| (0.1 | )% |
|
| (0.5 | )% |
Amortization of debt issue costs |
|
| (61 | ) |
|
| (31 | ) |
|
| 96.8 | % |
|
| (0.2 | )% |
|
| (0.2 | )% |
Interest income |
|
| 2 |
|
|
| 2 |
|
|
| — |
|
|
| 0.0 | % |
|
| 0.0 | % |
Income (loss) before income tax |
|
| 2,343 |
|
|
| (662 | ) |
| NM |
|
|
| 6.8 | % |
|
| (4.1 | )% | |
Income tax expense |
|
| 39 |
|
|
| — |
|
| NM |
|
|
| 0.1 | % |
|
| — |
| |
Net income (loss) |
| $ | 2,304 |
|
| $ | (662 | ) |
| NM |
|
|
| 6.7 | % |
|
| (4.1 | )% |
* | 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 | )% |
Cost of Revenue and Gross Margin. Cost of product revenue decreased 17.6%increased 81.5%, or $2.4$8.6 million, in the third quarter of fiscal 20182020 versus the comparable period inthird quarter of fiscal 2017 primarily2019 due to the declinesignificant increase in sales, partially offset by lower overhead absorption compared to the prior year period.our sales. Cost of service revenue increased 9.2%,327.8% or $0.1$5.3 million, in the third quarter of fiscal 20182020 versus the comparable period in fiscal 2017 primarily due to costs incurred on a large installation project and the timing of project completions. Gross margin declined slightly from 29.9% of revenue in the third quarter of fiscal 20172019 due to 29.6%the increase in the third quartersales. Gross margin decreased from 25.6% of fiscal 2018, primarily reflecting lower overhead absorption on lower revenue in fiscal 2019 to 24.2% in fiscal 2020, due to the recent period.change in customer sales mix and lower average margins on sales for the major retrofit project to one national account customer.
Operating Expenses
General and Administrative.
General and administrative expensesSales and Marketing.
Sales and marketing expensesResearch and Development.
Research and development expensesOther Income. Other income in the third quarter of fiscal 2020 primarily represented product royalties received from licensing agreements for our patents.
Interest Expense. Interest expense in the third quarter of fiscal 2018 increased2020 decreased by 56.9%50.6%, or thirty-seven$39 thousand, dollars, from the third quarter of fiscal 2017.2019. The increasedecrease in interest expense was primarily due to fewer sales of receivables in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.
Amortization of debt issue costs. Amortization of debt issue costs in the third quarter of fiscal 2020 increased by $30 thousand from the third party financing costs.quarter of fiscal 2019. The increase in amortization of debt issue costs was due to the timing of the execution of our credit agreement.
Interest Income.
Interest income in the third quarter of fiscalIncome Taxes.
Income taxFor 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 | % |
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.
The following table summarizes our OES segment operating results (dollars in thousands):
|
| Three Months Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues |
| $ | 27,275 |
|
| $ | 6,802 |
|
|
| 301.0 | % |
Operating income |
| $ | 3,174 |
|
| $ | 33 |
|
|
| 9518.2 | % |
Operating margin |
|
| 11.6 | % |
|
| 0.5 | % |
|
|
|
|
* | 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 quarter of fiscal 2018 by 11.7%, or $1.02020 was $27.3 million, compared toan increase of $20.5 million from the third quarter of fiscal 2017 primarily2019, as a result of the timingincrease in volume of delivery of our turnkey projects and reduced fluorescent purchases by ato one large retailnational account customer.
OES segment operating income in the third quarter of fiscal 20182020 was $0.2$3.2 million, an increase of $0.3$3.2 million from the $0.1 million loss in the third 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.
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 throughbroadline 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.
The following table summarizes our ODS segment operating results (dollars in thousands):
|
| Three Months Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues |
| $ | 3,634 |
|
| $ | 6,102 |
|
|
| (40.4 | )% |
Operating loss |
| $ | (206 | ) |
| $ | (236 | ) |
|
| 12.7 | % |
Operating margin |
|
| (5.7 | )% |
|
| (3.9 | )% |
|
|
|
|
* | 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 increaseddecreased in the third quarter of fiscal 20182020 by 11.8%40.4%, or $0.8$2.5 million, compared to the third quarter of fiscal 2017,2019, primarily due to an increasea decrease in select distributor sales.
ODS segment operating loss in the ODS segment’s operating results remainedthird quarter of fiscal 2020 was relatively flat, as compared to the third quarter of fiscal 2017 due2019, reflecting lower allocated costs.
Our USM segment sells commercial lighting systems and energy management systems to an increasethe wholesale contractor markets. USM customers include ESCOs and contractors.
The following table summarizes our USM segment operating results (dollars in selling expenses.thousands):
|
| Three Months Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues |
| $ | 3,340 |
|
| $ | 3,387 |
|
|
| (1.4 | )% |
Operating income |
| $ | 578 |
|
| $ | 569 |
|
|
| 1.6 | % |
Operating margin |
|
| 17.3 | % |
|
| 16.8 | % |
|
|
|
|
* | NM - Not Meaningful |
USM segment revenue was relatively flat in the third quarter of fiscal 2020, compared to the third quarter of fiscal 2019.
USM segment operating income for the third quarter of fiscal 2020 was relatively flat, compared to the third quarter of fiscal 2019.
Results of Operations - Nine Months Ended December 31, 20172019 versus Nine Months Ended December 31, 2016
The following table sets forth the line items of our condensed consolidated statementsCondensed Consolidated Statements of operationsOperations 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 (in(dollars in thousands, except percentages):
|
| Nine Months Ended December 31, |
| |||||||||||||||||
|
| 2019 |
|
| 2018 |
|
|
|
|
|
| 2019 |
|
| 2018 |
| ||||
|
| Amount |
|
| Amount |
|
| % Change |
|
| % of Revenue |
|
| % of Revenue |
| |||||
Product revenue |
| $ | 93,778 |
|
| $ | 38,350 |
|
|
| 144.5 | % |
|
| 75.1 | % |
|
| 88.5 | % |
Service revenue |
|
| 31,171 |
|
|
| 4,961 |
|
|
| 528.3 | % |
|
| 24.9 | % |
|
| 11.5 | % |
Total revenue |
|
| 124,949 |
|
|
| 43,311 |
|
|
| 188.5 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of product revenue |
|
| 68,778 |
|
|
| 29,599 |
|
|
| 132.4 | % |
|
| 55.0 | % |
|
| 68.3 | % |
Cost of service revenue |
|
| 24,823 |
|
|
| 3,544 |
|
|
| 600.4 | % |
|
| 19.9 | % |
|
| 8.2 | % |
Total cost of revenue |
|
| 93,601 |
|
|
| 33,143 |
|
|
| 182.4 | % |
|
| 74.9 | % |
|
| 76.5 | % |
Gross profit |
|
| 31,348 |
|
|
| 10,168 |
|
|
| 208.3 | % |
|
| 25.1 | % |
|
| 23.5 | % |
General and administrative expenses |
|
| 8,274 |
|
|
| 7,681 |
|
|
| 7.7 | % |
|
| 6.6 | % |
|
| 17.7 | % |
Sales and marketing expenses |
|
| 8,359 |
|
|
| 6,903 |
|
|
| 21.1 | % |
|
| 6.7 | % |
|
| 15.9 | % |
Research and development expenses |
|
| 1,240 |
|
|
| 1,057 |
|
|
| 17.3 | % |
|
| 1.0 | % |
|
| 2.4 | % |
Income (loss) from operations |
|
| 13,475 |
|
|
| (5,473 | ) |
|
| 346.2 | % |
|
| 10.8 | % |
|
| (12.6 | )% |
Other income |
|
| 22 |
|
|
| 65 |
|
|
| (66.2 | )% |
|
| 0.0 | % |
|
| 0.2 | % |
Interest expense |
|
| (261 | ) |
|
| (335 | ) |
|
| 22.1 | % |
|
| (0.2 | )% |
|
| (0.8 | )% |
Amortization of debt issue costs |
|
| (182 | ) |
|
| (31 | ) |
|
| 487.1 | % |
|
| (0.1 | )% |
|
| (0.1 | )% |
Interest income |
|
| 5 |
|
|
| 8 |
|
|
| (37.5 | )% |
|
| 0.0 | % |
|
| 0.0 | % |
Income (loss) before income tax |
|
| 13,059 |
|
|
| (5,766 | ) |
|
| 326.5 | % |
|
| 10.5 | % |
|
| (13.3 | )% |
Income tax expense |
|
| 66 |
|
|
| 26 |
|
|
| 153.8 | % |
|
| 0.1 | % |
|
| 0.1 | % |
Net Income (loss) |
| $ | 12,993 |
|
| $ | (5,792 | ) |
|
| 324.3 | % |
|
| 10.4 | % |
|
| (13.4 | )% |
* | 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 | )% |
Revenue.
Product revenueCost of fiscal 2017. The decrease inRevenue and Gross Margin. Cost of product revenue was primarily a result of the continued decline in fluorescent product sales, $6.4 million year over year, and a decrease of $3.6 million in LED lighting revenue. LED lighting revenue decreased 8.7% from $41.2increased 132.4%, or $39.2 million, in the first nine months of fiscal 20172020 versus the first nine months of fiscal 2019 due to $37.6the increase in sales. Cost of service revenue increased 600.4% or $21.3 million, in the first nine months of fiscal 2018 primarily as a result2020 versus the first nine months of the timing of purchases by our direct customers. Service revenue increased 27.5%, or $0.7 million, primarilyfiscal 2019 due to the timingincrease in sales. Gross margin increased from 23.5% of installation projectsrevenue in fiscal 2019 to 25.1% in fiscal 2020, due to our higher sales levels covering fixed costs.
Operating Expenses
General and Administrative. General and administrative expenses increased 7.7%, or $0.6 million, in the first nine months of fiscal 2018 when2020 compared to the first nine months of fiscal 2017. Total revenue decreased by 17.6%, or $9.7 million,2019, primarily due to the items discussed above.
Sales and Marketing. Cost of product revenue decreased 16.8%, or $6.2 million, in the first nine months of fiscal 2018 versus the comparable period in fiscal 2017 primarily due to the decline in salesSales and the resulting lower overhead absorption compared to the prior year period. Cost of service revenuemarketing expenses increased 83.6%21.1%, or $1.5 million, in the first nine months of fiscal 2018 versus the comparable period in fiscal 2017 primarily due2020 compared to the timing of completion and costs on large projects. Gross margin decreased from 29.9% of revenue in the first nine months of fiscal 20172019. The comparative increase was primarily due to 25.3% in the first nine months of fiscal 2018. Our product gross margin decreased as a result of under-absorption within our manufacturing facility and an increase in commission expense on higher sales of products sourced from third party manufacturers.
Research and Development. GeneralResearch and administrativedevelopment expenses increased 3.0%17.3%, or $0.3$0.2 million, in the first nine months of fiscal 2018 compared to the first nine months of 2017, primarily due to $1.8 million in reorganization costs, offset by decreases in wages due to salary and headcount reductions, legal, depreciation and amortization and stock compensation expenses. Excluding the employee separation costs, general and administrative expenses decreased $1.7 million, or 15.1%.
Other income.
Interest Expense.
Interest expense in the first nine months of fiscalAmortization of debt issue costs. Amortization of debt issue costs in the first nine months of fiscal 2020 increased by $0.2 million from the first nine months of fiscal 2019. The increase in interest expenseamortization of debt issue costs was due to increased third party financing costs.the timing of the execution of our credit agreement.
Interest Income.
Interest income in the first nine months of fiscalIncome Taxes.
Income taxOrion U.S. MarketsEngineered Systems Division
The USMfollowing table summarizes our OES segment sells commercial lighting systems and energy management systems tooperating results (dollars in thousands):
|
| Nine Months Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues |
| $ | 104,369 |
|
| $ | 15,168 |
|
|
| 588.1 | % |
Operating income (loss) |
| $ | 15,861 |
|
| $ | (1,944 | ) |
| NM |
| |
Operating margin |
|
| 15.2 | % |
|
| (12.8 | )% |
|
|
|
|
* | NM - Not Meaningful |
OES segment revenue in the wholesale contractor markets. USM customers include ESCOs and electrical contractors. A significant portionfirst nine months of fiscal 2020 was $104.4 million, an increase of $89.2 million from the historic salesfirst nine months of this division have migrated to distribution channel salesfiscal 2019, as a result of the implementationincrease in volume of our agent distribution strategy.turnkey projects to one large national account customer.
OES segment operating income in the first nine months of fiscal 2020 was $15.9 million, an increase of $17.8 million from an operating loss of $2.0 million in the first nine months of fiscal 2019. The migrated sales are includedincrease 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):
|
| Nine Months Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues |
| $ | 11,191 |
|
| $ | 20,202 |
|
|
| (44.6 | )% |
Operating loss |
|
| (691 | ) |
|
| (1,082 | ) |
|
| 36.1 | % |
Operating margin |
|
| (6.2 | )% |
|
| (5.4 | )% |
|
|
|
|
* | NM - Not Meaningful |
ODS segment revenue decreased in the first nine months of fiscal 2020 by 44.6%, or $9.0 million, compared to the first nine months of fiscal 2019, primarily due to a decrease in sales volume through our distribution channel.
ODS segment operating loss in the first nine months of fiscal 2020 was $(0.7 million), a decrease of $0.4 million from an operating loss of $(1.1 million) in the first nine months of fiscal 2019. The decrease in the operating loss in the first nine months of fiscal 2020 as compared to the first nine 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):
|
| Nine Months Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| % Change |
| |||
Revenues |
| $ | 9,389 |
|
| $ | 7,941 |
|
|
| 18.2 | % |
Operating income |
| $ | 1,750 |
|
| $ | 793 |
|
|
| 120.7 | % |
Operating margin |
|
| 18.6 | % |
|
| 10.0 | % |
|
|
|
|
* | 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 decreasedincreased from the first nine months of fiscal 20172019 by 61.2%18.2%, or $10.1$1.5 million. The decreaseincrease in revenue during the first nine months of fiscal 20182020 compared to the third quarter of fiscal 2019 was due to an increase in sales volume.
USM segment operating income for the first nine months of fiscal 2017 included2020 was $1.8 million, an increase of $1.0 million over the continued transition to our distribution sales model through the migrationfirst nine months of sales to our ODS segment. Previously direct sales that are now sold through independent manufacturer representative agents are reflected within our ODS segment.fiscal 2019. The decrease also reflects a $2.4 million declineincrease in sales to select large direct customers.
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 | )% |
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 | )% |
Overview
We had approximately $10.6$13.8 million in cash and cash equivalents as of December 31, 2017,2019, compared to $17.3$8.7 million at March 31, 2017.2019. Our cash position decreased primarilyincreased 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$8.4 million on our revolving credit facility.
During the third 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 December 31, 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 highhigher working capital costs when we increase sales from existing levels. Based on our current expectations, while we anticipate realizing improved operating results in the future, we also currently believe that we may experience negative working capital cash flows during some interim periods.
Cash Flows
The following table summarizes our cash flows for the nine months ended December 31, 20172019 and 20162018 (in thousands):
|
| Nine Months Ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Operating activities |
| $ | 14,275 |
|
| $ | (1,610 | ) |
Investing activities |
|
| (655 | ) |
|
| (196 | ) |
Financing activities |
|
| (8,587 | ) |
|
| (1,022 | ) |
Increase (decrease) in cash and cash equivalents |
| $ | 5,033 |
|
| $ | (2,828 | ) |
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 byCash provided by operating activities for the first nine months of fiscal 2020 was $14.3 million and consisted of our net income adjusted for non-cash expense items of $15.1 million and net cash used by changes in operating assets and liabilities of $0.8 million. Cash used by changes in operating assets and liabilities consisted primarily of a decrease of $3.0 million in Accounts payable, and a decrease of $1.3 million in Accrued expenses and other based on timing of invoice receipt and payment. Cash provided by changes in operating assets and liabilities consisted primarily of a decrease of $3.0 million in Revenue earned but not billed due to the timing on revenue recognition compared to invoicing, and $1.0 million in Inventory primarily due to the timing of anticipated fourth quarter sales.
Cash used in operating activities for the first nine months of fiscal 20182019 was $3.1 million($1.6 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 million.
Cash Flows Related to Investing Activities.
Cash used in investing activities in the first nine months of fiscal 2019 consisted of purchases of property and equipment and additions to patents and licenses.
Cash provided by investingFlows Related to Financing Activities. Cash used in financing activities was $2.0 millionof ($8.6 million) in the first nine months of fiscal 2017 which2020. This use of cash consisted primarily of $2.6 millionnet repayments of proceeds from the sale of the Manitowoc manufacturing($8.4 million) on our revolving credit facility.
Cash used by investingin financing activities forof ($1.0 million) in the first nine months of fiscal 2017 was $0.4 million for capital improvements related to production enhancements and technology purchases and $0.2 million2019. This use of additions to patents.
Working Capital
Our net working capital as of December 31, 20172019 was $13.4$19.4 million, consisting of $30.6$42.7 million in current assets and $17.2$23.3 million in current liabilities. Our net working capital as of March 31, 20172019 was $25.5$14.0 million, consisting of $43.9$41.4 million in current assets and $18.4$27.3 in current liabilities. Our current accountsAccounts receivable, net balance decreasedincreased by $0.5$0.4 million from the fiscal 2017 year end2019 year-end primarily due to the decline inhigher sales to one national account customer and the timing of customer collections. Our inventoryInventories, net decreased from the fiscal 2017 year end2019 year-end by $4.8$1.2 million due primarily to the timing of project installations and anticipated fourth quarter sales. Our Accounts payable decreased $2.8 million due to continued management of purchasing activities and inventory management initiatives. 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.purchases and payments during the quarter. Our accounts payable remained relatively flat compared to fiscal 2017 year end. Our accruedAccrued expenses decreased from our fiscal 2017 year end2019 year-end by $0.8$1.2 million due primarily to the payment of commissions and a decrease in accrued bonuses in the current fiscal year.project costs due to timing of project installation and invoice receipt, offset by higher accrued commissions, as a result of higher sales.
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, inventoryAccounts receivable, Inventory and payables may increase to the extent our revenue and order levels increase.
Indebtedness
Revolving Credit Agreement
On October 26, 2018, we entered into a secured revolving Business Financing Agreement with Western Alliance Bank, as lender (the “Credit Agreement”). On June 3, 2019, we and certain of our subsidiaries entered into an amendedamendment (the “First Amendment”) to the Credit Agreement, which increased the maximum borrowing base credit agreement ("available for certain of the customer receivables included in our borrowing base and provided 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 a second amendment (the “Second Amendment”) to the Credit Agreement"Agreement, which established 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 provided 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. On November 21, 2019, we entered into a third amendment (the “Third Amendment”) thatto the Credit Agreement, which extended the maturity date from October 26, 2020 to October 26, 2021; increased the sublimit under the Credit Agreement for advances under business credit cards from $1.5 million to $3 million; created a new $2 million sublimit permitting entry into foreign currency forward contracts with the lender; expanded our ability to make capital expenditures and incur other debt from time to time; and permitted the lender to amend the financial covenant included in the Credit Agreement (which requires the maintenance of a certain amount of unrestricted cash on deposit with the lender at the end of each month) upon receipt of the our annual projections.
The Credit Agreement, as amended, provides for a revolving credit facility ("(the “Credit Facility”) that matures on October 26, 2021. Borrowings under the Credit Facility")Facility are 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 andAgreement includes a $2.0 million sublimit for the issuance of letters of credit. As of December 31, 2017,2019, our borrowing base was $14.7 million, and we had no$0.8 million in borrowings outstanding letters of credit. Borrowings outstanding as of December 31, 2017, amounted to approximately $3.6 million and arewhich were included in non-current liabilities in the accompanying condensed consolidated balance sheet. We estimate that asCondensed Consolidated Balance Sheets. As of December 31, 2017,2019, we were eligible to borrow anhad no outstanding letters of credit leaving total additional $0.2 millionborrowing availability of $13.9 million.
The Credit Agreement is secured by a security interest in substantially all of our and our subsidiaries’ personal property.
Borrowings under the Credit FacilityAgreement generally bear interest at floating rates based upon current levels of eligible inventory and accounts receivable.
The Credit Agreement requires that weus to maintain nine months’ of “RML” as of the end of each month, a minimum ratiomonth. For purposes of the Credit Agreement, RML is defined as, as of the applicable determination date, unrestricted cash on deposit with the lender plus availability under the Credit Agreement divided by an amount equal to, for the applicable trailing twelve-monththree-month period, of (i) earningsconsolidated 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, certainstock-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 December 31, 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 repurchasepurchase shares of our stock, make investments or pledge or disposetransfer assets. If an event of assets. We were in compliance with our covenants indefault under the Credit Agreement as of December 31, 2017.
Our capital expenditures are primarily for general corporate purposes for our corporate headquarters and technology center, production equipment and tooling and for information technology systems. Our capital expenditures totaled $0.5$0.6 million and $0.4$0.2 million for the nine-month periods ended December 31, 20172019, and 2016,2018, respectively. We plan to incur approximately $0.6$0.7 million in capital expenditures in fiscal 2018.2020. We expect to finance these capital expenditures primarily through our existing cash, equipment securedequipment-secured loans and leases, to the extent needed, long-term debt financing, or by using our available capacity under our Credit Facility.
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$19.2 million and $7.3$10.8 million as of December 31, 20172019 and March 31, 2017,2019, respectively. We generally expect our backlog to be recognized as revenue within one year.
We have no off-balance sheet arrangements.
Our results from operations have not been, and we do not expect them to be, materially affected by inflation.
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 threenine months ended December 31, 2017,2019, there were no material changes in our accounting policies.
For a complete discussion of recent accounting pronouncements, refer to Note 2 in the condensed consolidated financial statementsCondensed Consolidated Financial Statements included elsewhere in this report.
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.
ITEM 4. |
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:
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).
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, 2017,2019, 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.
ITEM 1. |
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 whetherWe do not believe the final resolution of any of such claims or legal proceedings maywill 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. |
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, 20175, 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. |
None
ITEM 5. |
None
ITEM 6. |
(a) | Exhibits |
10.1 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance |
101.SCH | Taxonomy extension schema |
101.CAL | Taxonomy extension calculation linkbase |
101.DEF | Taxonomy extension definition linkbase document+ |
101.LAB | Taxonomy extension label linkbase |
101.PRE | Taxonomy extension presentation linkbase |
+ | |
Filed herewith |
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.
ORION ENERGY SYSTEMS, INC. Registrant | ||
By | /s/ William T. Hull | |
William T. Hull | ||
Chief Financial Officer | ||
(Principal Financial Officer and Authorized Signatory) |
39