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 September 30, 2022
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)
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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.
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 ☒
There were 31,984,645 shares of the Registrant’s common stock outstanding on October 31, 2022.
ORION ENERGY SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS
Page(s)
PART I FINANCIAL INFORMATION
3
ITEM 1.
Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2022 and March 31, 2022
Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2022 and September 30, 2021
4
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended September 30, 2022 and September 30, 2021
5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2022 and September 30, 2021
6
Notes to the Condensed Consolidated Financial Statements
7
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
31
ITEM 4.
Controls and Procedures
PART II OTHER INFORMATION
32
Legal Proceedings
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 5.
Other Information
ITEM 6.
Exhibits
33
SIGNATURE
34
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, 2022
March 31, 2022
Assets
Cash and cash equivalents
$
12,520
14,466
Accounts receivable, net
11,591
11,899
Revenue earned but not billed
1,346
2,421
Inventories, net
16,849
19,832
Prepaid expenses and other current assets
2,493
2,631
Total current assets
44,799
51,249
Property and equipment, net
10,911
11,466
Goodwill
564
350
Other intangible assets, net
2,282
2,404
Deferred tax assets
19,426
17,805
Other long-term assets
3,203
3,543
Total assets
81,185
86,817
Liabilities and Shareholders’ Equity
Accounts payable
5,938
9,855
Accrued expenses and other
6,263
8,427
Deferred revenue, current
76
Current maturities of long-term debt
16
Total current liabilities
12,293
18,374
Revolving credit facility
5,000
—
Long-term debt, less current maturities
11
19
Deferred revenue, long-term
526
Other long-term liabilities
2,380
2,760
Total liabilities
20,210
21,717
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.01 par value: Shares authorized: 30,000,000 at September 30, 2022 and March 31, 2022; no shares issued and outstanding at September 30, 2022 and March 31, 2022
Common stock, no par value: Shares authorized: 200,000,000 at September 30, 2022 and March 31, 2022; shares issued: 41,352,020 at September 30, 2022 and 40,570,909 at March 31, 2022; shares outstanding: 31,355,911 at September 30, 2022 and 31,097,872 at March 31, 2022
Additional paid-in capital
159,460
158,419
Treasury stock, common shares: 9,996,109 at September 30, 2022 and 9,473,037 at March 31, 2022
(36,239
)
Retained deficit
(62,246
(57,080
Total shareholders’ equity
60,975
65,100
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these Condensed Consolidated Statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Three Months Ended September 30,
Six Months Ended September 30,
2022
2021
Product revenue
12,833
27,811
26,316
56,057
Service revenue
4,727
8,699
9,150
15,554
Total revenue
17,560
36,510
35,466
71,611
Cost of product revenue
9,287
18,864
19,672
38,297
Cost of service revenue
3,838
6,858
7,805
12,296
Total cost of revenue
13,125
25,722
27,477
50,593
Gross profit
4,435
10,788
7,989
21,018
Operating expenses:
General and administrative
3,945
2,753
7,699
5,864
Acquisition costs
333
347
Sales and marketing
2,649
2,687
5,538
5,932
Research and development
451
317
965
773
Total operating expenses
7,378
5,757
14,549
12,569
(Loss) income from operations
(2,943
5,031
(6,560
8,449
Other income (expense):
Other income
1
Interest expense
(16
(14
(33
Amortization of debt issue costs
(15
(31
Total other expense
(29
(64
(63
(Loss) income before income tax
(2,974
5,002
(6,624
8,386
Income tax (benefit) expense
(643
1,343
(1,458
2,217
Net (loss) income
(2,331
3,659
(5,166
6,169
Basic net (loss) income per share attributable to common shareholders
(0.07
0.12
(0.17
0.20
Weighted-average common shares outstanding
31,330,030
31,031,098
31,240,475
30,946,105
Diluted net (loss) income per share
Weighted-average common shares and share equivalents outstanding
31,287,826
31,310,965
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Shareholders’ Equity
Common Stock
Shares
AdditionalPaid-in Capital
TreasuryStock
RetainedDeficit
TotalShareholders’ Equity
Balance, March 31, 2022
31,097,872
Exercise of stock options for cash
26,646
54
Shares issued under Employee Stock Purchase Plan
443
Stock-based compensation
125,744
254
Employee tax withholdings on stock-based compensation
(634
(2
Net loss
(2,835
Balance, June 30, 2022
31,250,071
158,727
(36,240
(59,915
62,572
648
105,192
733
Balance, September 30, 2022
31,355,911
Retained Deficit
Balance, March 31, 2021
30,805,300
157,485
(63,171
58,074
24,045
101
496
171,470
160
(610
(4
Net income
2,510
Balance, June 30, 2021
31,000,701
157,746
(36,241
(60,661
60,844
7,000
18
327
55,896
211
(294
(1
Balance, September 30, 2021
31,063,630
157,975
(57,002
64,732
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities
Adjustments to reconcile net (loss) income to net cash used inoperating activities:
Depreciation
663
622
Amortization of intangible assets
104
113
987
372
Deferred income tax
(1,620
2,075
Gain (loss) on sale of property and equipment
10
Provision for inventory reserves
175
313
Provision for bad debts
20
8
Other
117
Changes in operating assets and liabilities:
Accounts receivable
233
(9,972
1,075
722
Inventories
2,808
(495
Prepaid expenses and other assets
448
(1,015
(3,954
(633
(2,486
(2,208
Deferred revenue, current and long-term
(40
(43
Net cash used in operating activities
(6,595
(3,956
Investing activities
Cash to fund acquisition
55
Cash paid for investment
(500
Purchases of property and equipment
(442
(312
Additions to patents and licenses
(10
(7
Proceeds from sale of property, plant and equipment
17
Net cash used in investing activities
(397
(802
Financing activities
Payment of long-term debt
(8
Proceeds from revolving credit facility
Payments of revolving credit facility
Payments to settle employee tax withholdings on stock-based compensation
(6
Deferred financing costs
(5
Net proceeds from employee equity exercises
56
123
Net cash provided by financing activities
5,046
105
Net decrease in cash and cash equivalents
(1,946
(4,653
Cash and cash equivalents at beginning of period
19,393
Cash and cash equivalents at end of period
14,740
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF BUSINESS
Orion includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated subsidiaries. Orion is a provider of energy-efficient LED lighting and controls, maintenance services and electrical vehicle (EV) charging station solutions, to commercial and industrial businesses, and federal and local governments, predominantly in North America.
NOTE 2 — IMPACT OF COVID-19
The COVID-19 pandemic has disrupted business, trade, commerce, financial and credit markets, in the U.S. and globally. Orion’s business was adversely impacted by measures taken by customers, suppliers, government entities and others to control the spread of the virus beginning in March 2020, the last few weeks of Orion’s 2020 fiscal year, and continuing most significantly into the second quarter of fiscal 2021. During the third quarter of fiscal 2021, Orion experienced a rebound in business as project installations resumed for its largest customer. However, potential future risks remain due to the COVID-19 pandemic. It is not possible to predict the overall impact, including the economic and regulatory impact, the COVID-19 pandemic will have on Orion’s business, liquidity, capital resources or financial results. If the COVID-19 pandemic becomes more pronounced in Orion’s markets or experiences a resurgence in markets recovering from the spread of COVID-19, Orion’s results of operation would likely be materially adversely affected.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Orion and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements 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 (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 statement have been included. Interim results are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2023 or other interim periods.
The Condensed Consolidated Balance Sheet as of March 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements.
The accompanying unaudited Condensed Consolidated Financial Statements 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, 2022 filed with the SEC on June 10, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make 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, 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 primarily deposited with one financial institution. At times, deposits in this institution exceeds 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 lamps and LED components, from multiple suppliers. For the three and six months ended September 30, 2022, no suppliers accounted for more than 10.0% of total cost of revenue. For the three and six months ended September 30, 2021, no suppliers accounted for more than 10.0% of total cost of revenue.
For the three and six months ended September 30, 2022, one customer accounted for 16.0% and 14.9% of total revenue, respectively. For the three and six months ended September 30, 2021, one customer accounted for 58.9% and 55.0% of total revenue, respectively.
As of September 30, 2022, two customers accounted for 13.7% and 11.2% of accounts receivable, respectively. As of March 31, 2022, two customers accounted for 11.8% and 10.4% of accounts receivable, respectively.
Recent Accounting Pronouncements
Issued: Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires an entity to assess impairment of its financial instruments based on its estimate of expected credit losses. Since the issuance of ASU 2016-13, the FASB released several amendments to improve and clarify the implementation guidance. The provisions of ASU 2016-13 and the related amendments are effective for Orion for fiscal years (and interim reporting periods within those years) beginning after December 15, 2022. Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Orion is currently evaluating the impact of adoption of this standard on its consolidated statements of operations, cash flows and the related footnote disclosures.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires an entity to use the guidance in ASC 606, Revenue from Contracts with Customers, rather than using fair value, when recognizing and measuring contract assets and contract liabilities related to customer contracts assumed in a business combination. The provisions of ASU 2021-08 are effective for Orion for fiscal years (and interim reporting periods within those years) beginning after December 15, 2022. Orion is currently evaluating the impact of adoption of this standard on its consolidated balance sheet.
NOTE 4 — REVENUE
Orion generates revenue primarily by selling manufactured or sourced commercial lighting fixtures and components, installing these fixtures in customer’s facilities, and providing maintenance services including repairs and replacements for the lighting and related electrical components. Orion recognizes revenue in accordance with the guidance in “Revenue from Contracts with Customers” (Topic 606) (“ASC 606”) when control of the goods or services being provided (which we refer to as a performance obligation) is transferred to a customer at an amount that reflects the consideration Orion expects to receive in exchange for those goods or services.
During the fourth quarter of fiscal 2022, Orion acquired Stay-Lite Lighting, which provides lighting and electrical services. The results of Stay-Lite Lighting are included in the Orion Services Group segment and accelerate the growth of Orion’s maintenance services customer offering. The disaggregated revenue table provides total revenue from the maintenance services offering.
Revenue from the maintenance offering that includes both the sale of Orion manufactured or sourced product and service is allocated between the product and service performance obligations based on relative standalone selling prices, and is recorded in Product revenue and Service revenue, respectively, in the Condensed Consolidated Statement of Operations.
The following tables provide detail of Orion’s total revenue for the three and six months ended September 30, 2022 and September 30, 2021 (dollars in thousands):
Three Months Ended September 30, 2022
Six Months Ended September 30, 2022
Product
Services
Total
Revenue from contracts with customers:
Lighting product and installation
12,059
2,036
14,095
24,463
3,394
27,857
Maintenance services
755
2,691
3,446
1,744
5,756
7,500
Solar energy related revenues
Total revenues from contracts with customers
12,814
17,541
26,207
35,357
Revenue accounted for under other guidance
109
Three Months Ended September 30, 2021
Six Months Ended September 30, 2021
27,432
8,305
35,737
54,875
14,966
69,841
394
68
588
656
12
28
27,498
36,197
54,971
70,525
1,086
From time to time, Orion sells the receivables from one customer to a financing institution. The was no activity during the three and six months ended September 30, 2022. The total amount received from the sales of these receivables during the three and six months ended September 30, 2021 was $0 and $2.4 million, respectively. Orion’s losses on these sales were $1 thousand and $3 thousand, for the three and six months ended September 30, 2021, respectively, and are included in Interest expense in the Condensed Consolidated Statement of Operations.
The following chart shows the balance of Orion’s receivables arising from contracts with customers, contract assets and contract liabilities as of September 30, 2022 and March 31, 2022 (dollars in thousands):
September 30,2022
March 31,2022
Contract assets
1,966
Contract liabilities
There were no significant changes in the contract assets outside of standard reclassifications to accounts receivable, net upon billing. There were no significant changes to contract liabilities.
9
NOTE 5 — ACCOUNTS RECEIVABLE, NET
As of September 30, 2022 and March 31, 2022, Orion's accounts receivable and allowance for doubtful accounts balances were as follows (dollars in thousands):
Accounts receivable, gross
11,632
11,907
Allowance for doubtful accounts
(41
NOTE 6 — INVENTORIES, NET
As of September 30, 2022 and March 31, 2022, Orion's inventory balances were as follows (dollars in thousands):
Cost
Excess andObsolescenceReserve
Net
As of September 30, 2022
Raw materials and components
10,539
(799
9,740
Work in process
1,252
(152
1,100
Finished goods
6,571
(562
6,009
18,362
(1,513
As of March 31, 2022
10,781
(1,140
9,641
1,529
(267
1,262
9,593
(664
8,929
21,903
(2,071
NOTE 7 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of September 30, 2022 and March 31, 2022, prepaid expenses and other current assets include the following (dollars in thousands):
Payroll tax credit
1,587
Other prepaid expenses
906
1,044
NOTE 8 — PROPERTY AND EQUIPMENT, NET
As of September 30, 2022 and March 31, 2022, property and equipment, net, included the following (dollars in thousands):
Land and land improvements
433
Buildings and building improvements
9,491
Furniture, fixtures and office equipment
7,663
7,650
Leasehold improvements
540
490
Equipment leased to customers
4,997
Plant equipment
11,211
11,130
Vehicles
617
796
Construction in Progress
26
Gross property and equipment
34,978
34,990
Less: accumulated depreciation
(24,067
(23,524
Total property and equipment, net
NOTE 9 — LEASES
From time to time, Orion leases assets from third parties. Orion also leases certain assets to third parties.
Orion accounts for leases in accordance with ASC 842. 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. 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.
A summary of Orion’s assets leased from third parties follows (dollars in thousands):
Balance sheet classification
Operating lease assets
2,124
2,440
Liabilities
Current liabilities
Operating lease liabilities
769
768
Non-current liabilities
1,894
2,271
Total lease liabilities
2,663
3,039
Orion had operating lease costs of $0.3 million and $0.6 million for the three and six months ended September 30, 2022. Orion had operating lease costs of $0.2 million and $0.4 million for the three and six months ended September 30, 2021.
The estimated maturity of lease liabilities for each of the next five years is shown below (dollars in thousands):
Maturity of Lease Liabilities
Operating Leases
Fiscal 2023
458
Fiscal 2024
849
Fiscal 2025
828
Fiscal 2026
Fiscal 2027
71
Total lease payments
2,928
Less: Interest
(265
Present value of lease liabilities
Assets Orion Leases to Other Parties
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 under ASC 842. 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.
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.
The following chart shows the amount of revenue and cost of sales arising from sales-type leases during the three and six months ended September 30, 2022 and September 30, 2021 (dollars in thousands):
(25
100
651
583
NOTE 10 — GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Orion has $0.6 million of goodwill related to its purchase of Stay-Light Lighting during fiscal year 2022, which has an indefinite life. The goodwill is assigned to the Orion Services Group reporting unit. Goodwill increased by $0.2 million to $0.6 million as compared to March 31, 2022. This increase was due to updates to purchase accounting within the measurement period. See Note 19 – Acquisition for further discussion of the Stay-Lite Lighting acquisition.
As of September 30, 2022 and March 31, 2022, the components of, and changes in, the carrying amount of other intangible assets, net, were as follows (dollars in thousands):
Gross CarryingAmount
AccumulatedAmortization
Amortized Intangible Assets
Patents
2,604
(1,937
667
2,652
(1,932
720
Licenses
58
(58
Trade name and trademarks
164
139
118
112
Customer relationships
4,109
(3,647
462
4,178
(3,618
560
Developed technology
900
(900
Total Amortized Intangible Assets
7,835
(6,567
1,268
7,906
(6,514
1,392
Indefinite-lived Intangible Assets
1,014
1,012
Amortization expense on intangible assets was $0.1 million for the three and six months ended September 30, 2022, respectively.
Amortization expense on intangible assets was $46 thousand and $0.1 million for the three and six months ended September 30, 2021, respectively.
As of September 30, 2022, the weighted average remaining useful life of intangible assets was 7.8 years.
The estimated amortization expense for the remainder of fiscal 2023, the next five fiscal years and beyond is shown below (dollars in thousands):
Fiscal 2023 (period remaining)
102
202
192
183
162
Fiscal 2028
Thereafter
309
NOTE 11 — ACCRUED EXPENSES AND OTHER
As of September 30, 2022 and March 31, 2022, accrued expenses and other included the following (dollars in thousands):
Other accruals
2,083
2,221
Compensation and benefits
1,386
1,668
Accrued project costs
986
2,215
Credits due to customers
870
1,209
Warranty
559
728
Legal and professional fees
181
106
Sales tax
157
Sales returns reserve
89
Orion generally offers a limited warranty of one to ten years on its lighting products, including the pass through of standard warranties offered by major original equipment component manufacturers. The manufacturers’ warranties cover lamps, power supplies, LED modules, chips and drivers, control devices, and 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 EndedSeptember 30,
For the Six Months EndedSeptember 30,
Beginning of period
811
1,038
860
1,009
Accruals
29
196
205
Warranty claims (net of vendor reimbursements)
(142
(113
(358
(200
End of period
698
13
NOTE 12 — NET (LOSS) INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period and does not consider common stock equivalents.
Diluted net income per common share reflects the dilution that would occur if stock options were exercised and restricted shares vested. In the computation of diluted net income per common share, Orion uses the treasury stock method for outstanding options and restricted shares. For the six months ended September 30, 2022, Orion was in a net loss position; therefore, the Basic and Diluted weighted-average shares outstanding are equal because any increase to the basic shares would be anti-dilutive. Net income per common share is calculated based upon the following shares:
Numerator:
Net (loss) income (in thousands)
Denominator:
Weighted-average common shares and common share equivalents outstanding
Net (loss) income per common share:
Basic
Diluted
The following table indicates the number of potentially dilutive securities excluded from the calculation of Diluted net income per common share because their inclusion would have been anti-dilutive. The number of shares is as of the end of each period:
Common stock options
Restricted shares
26,205
NOTE 13 — LONG-TERM DEBT
Long-term debt consisted of the following (dollars in thousands):
Equipment debt obligations
27
35
Total long-term debt
5,027
Less current maturities
5,011
Revolving Credit Agreement
On December 29, 2020, Orion entered into a new $25 million Loan and Security Agreement with Bank of America, N.A., as lender (the “Credit Agreement”). The Credit Agreement replaced Orion’s prior $20.15 million secured revolving credit and security agreement (the “Prior Credit Agreement”).
The replacement of the Prior Credit Agreement with the Credit Agreement provides Orion with increased financing capacity and liquidity to fund its operations and implement its strategic plans.
14
The Credit Agreement provides for a five-year $25.0 million revolving credit facility (the “Credit Facility”) that matures on December 29, 2025. Borrowings under the Credit Facility are subject to a borrowing base requirement based on eligible receivables, inventory and cash. As of September 30, 2022, the borrowing base supports $16.2 million availability of the Credit Facility. As of September 30, 2022, $5.0 million was borrowed under the Credit Facility.
As of September 30, 2022, Orion was in compliance with all debt covenants.
Equipment Debt Obligations
In February 2019, Orion entered into additional debt agreements with a financing company in the principal amount of $44 thousand and $30 thousand to fund the purchase of certain equipment. The debts are secured by the related equipment. The debts bear interest at a rate of 6.43% and 8.77% per annum, respectively, and both debts mature in January 2024.
NOTE 14 — INCOME TAXES
Orion’s income tax provision was determined by applying an estimated annual effective tax rate, based upon the facts and circumstances known, to book income (loss) before income tax, adjusting for discrete items. Orion’s actual effective tax rate is adjusted each interim period, as appropriate, for changes in facts and circumstances. For the three months ended September 30, 2022 and 2021, Orion recorded income tax (benefit)/expense of $(0.6) million and $1.3 million, respectively, using this methodology. For the six months ended September 30, 2022 and 2021, Orion recorded income tax (benefit)/expense of $(1.5) million and $2.2 million, respectively, using this methodology.
As of September 30, 2022 and March 31, 2022, Orion has a recorded valuation allowance of $1.2 million against its net deferred tax asset balance. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax 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 more or less of its deferred tax assets are able to be realized, an adjustment to the valuation allowance would be reflected in the company’s provision for income taxes.
Uncertain Tax Positions
As of September 30, 2022, Orion’s balance of gross unrecognized tax benefits was approximately $0.2 million, all of which would reduce Orion’s effective tax rate if recognized.
Orion has classified the amounts recorded for uncertain tax benefits in the balance sheet as Other long-term liabilities to the extent that payment is not anticipated within one year. Orion recognizes penalties and interest related to uncertain tax liabilities in income tax (benefit) expense. Penalties and interest are included in the unrecognized tax benefits.
NOTE 15 — COMMITMENTS AND CONTINGENCIES
Litigation
Orion is subject to various claims and legal proceedings arising in the ordinary course of business. Orion does not believe the final resolution of any of such claims or legal proceedings will have a material adverse effect on Orion’s future results of operations or financial condition.
State Tax Assessment
During fiscal year 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. This sales and use tax audit was settled during the quarter ended June 30, 2022 with no tax adjustment.
15
NOTE 16 — SHAREHOLDERS’ EQUITY
Employee Stock Purchase Plan
In August 2010, Orion’s Board of Directors approved a non-compensatory employee stock purchase plan, or “ESPP”. In the three months ended September 30, 2022, Orion issued 648 shares under the ESPP plan at a closing market price of $1.56.
Shares IssuedUnder ESPPPlan
Closing MarketPrice
Quarter Ended June 30, 2022
2.01
Quarter Ended September 30, 2022
1.56
Total issued in fiscal 2022
1,091
$ 1.56 - 2.01
Sale of shares
In March 2020, Orion filed a universal shelf registration statement with the Securities and Exchange Commission. Under the shelf registration statement, Orion currently has the flexibility to publicly offer and sell from time to time up to $100 million of debt and/or equity securities. The filing of the shelf registration statement may help facilitate Orion’s ability to raise public equity or debt capital to expand existing businesses, fund potential acquisitions, invest in other growth opportunities, repay existing debt, or for other general corporate purposes.
In March 2021, Orion entered into an At Market Issuance Sales Agreement to undertake an “at the market” (ATM) public equity capital raising program pursuant to which Orion may offer and sell shares of common stock from time to time, having an aggregate offering price of up to $50 million. No share sales have been effected pursuant to the ATM program through September 30, 2022.
NOTE 17 — STOCK OPTIONS AND RESTRICTED SHARES
At Orion’s 2019 annual meeting of shareholders held on August 7, 2019, Orion’s shareholders approved the Orion Energy Systems, Inc. 2016 Omnibus Incentive Plan, as amended and restated (the “Amended 2016 Plan”). 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 the 2016 Omnibus Incentive Plan, Orion maintained its 2004 Stock and Incentive Awards Plan, as amended, which authorized the grant of cash and equity awards to employees (the “2004 Plan”). No new awards are being granted under the 2004 Plan; however, all awards granted under the 2004 Plan that are outstanding will continue to be governed by the 2004 Plan. Forfeited awards originally issued under the 2004 Plan are canceled and are not available for subsequent issuance under the 2004 Plan or under the Amended 2016 Plan. The Amended 2016 Plan and the 2004 Plan also permit accelerated vesting in the event of certain changes of control of Orion as well as under other special circumstances.
Certain non-employee directors have from time to time elected to receive stock awards in lieu of cash compensation pursuant to elections made under Orion’s non-employee director compensation program.
The following amounts of stock-based compensation were recorded (dollars in thousands):
2
729
979
360
During the first three months of fiscal 2022, Orion had the following activity related to its stock-based compensation:
Restricted Shares
Stock Options
Awards outstanding at March 31, 2022
450,458
142,428
Awards granted
806,738
Awards vested or exercised
(231,602
(26,646
Awards forfeited
(1,280
(30,646
Awards outstanding at September 30, 2022
1,024,314
85,136
Per share weighted average price on grant date
2.18
As of September 30, 2022, the amount of deferred stock-based compensation expense to be recognized, over a remaining period of 2.9 years, was approximately $1.4 million.
NOTE 18 — SEGMENTS
Orion has the following business segments: Orion Services Group Division ("OSG"), 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 Services Group Division
The OSG segment develops and sells lighting products and provides construction, engineering along with installation and maintenance services for Orion's commercial lighting and energy management systems. OSG provides engineering, design, lighting products and in many cases turnkey solutions for large national accounts, governments, municipalities, schools and other customers.
Orion Distribution Services Division
The ODS segment sells lighting products through manufacturer representative agencies and a network of North American broadline electrical distributors and contractors.
Orion U.S. Markets Division
The USM segment sells commercial lighting systems and energy management systems to contractors and energy service companies ("ESCOs").
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)
Segments:
Orion Services Group
9,747
26,952
(1,543
4,281
Orion Distribution Services
4,309
4,036
134
Orion U.S. Markets
3,504
5,522
310
1,297
(1,844
(1,107
18,782
48,940
(3,772
6,145
9,135
13,322
83
2,682
7,549
9,349
1,948
(3,367
(2,326
NOTE 19 — ACQUISITION
Effective on January 1, 2022, Orion acquired all of the issued and outstanding capital stock of Stay-Lite Lighting, Inc. (“Stay-Lite Lighting”), a nationwide lighting and electrical maintenance service provider, for $4.3 million (the “Stay-Lite Acquisition”). Stay-Lite Lighting will operate as Stay-Lite Lighting, an Orion Energy Systems business. The acquisition accelerates the growth of Orion's maintenance services offerings through its Orion Services Group, which provides lighting and electrical services to customers.
Orion has accounted for this transaction as a business combination. Orion has preliminarily allocated the purchase price of approximately $4.3 million, which includes an estimate of the earn-out liability of $0.2 million and $0.1 million for the working capital adjustment received in the first quarter fiscal 2023, to the assets acquired and liabilities assumed at estimated fair values, and the excess of the purchase price over the aggregate fair values is recorded as goodwill. Orion could pay up to $0.7 million in earnout related purchase price, which is based on performance during the current and following calendar years. Any accretion of the earnout liability above $0.2 million recorded as part of the opening balance sheet will be recognized as expense in the Consolidated Statement of Operations. Orion is in the process of finalizing related tax impacts.
The preliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed as of January 1, 2022, is as follows (dollars in thousands):
Cash
95
2,690
342
Inventory
504
41
Property and equipment
725
Other intangible assets
673
537
(965
(492
(411
Net purchase consideration
4,303
Goodwill recorded from the acquisition of Stay-Lite Lighting is attributable to the expected synergies from the business combination. The goodwill resulting from the acquisition is deductible for tax purposes. The intangible assets include amounts recognized for the fair value of the trade name and customer relationships. The fair value of the intangible assets was determined based upon the income (discounted cash flow) approach.
The following table presents the details of the intangible assets acquired at the date of acquisition (dollars in thousands):
EstimatedFair Value
Estimated Useful Life (Years)
Tradename
509
Stay-Lite Lighting’s post-acquisition results of operations since January 1, 2022 are included in Orion’s Consolidated Statements of Operations. The operating results of Stay-Lite Lighting are included in the Orion Services Group segment.
Transaction costs related to the acquisition of Stay-Lite Lighting and Voltrek LLC (see Note 20 - Subsequent Events) are recorded in acquisition costs in the consolidated statements of operations. Transaction costs totaled $0.5 million in fiscal 2022 and $0.3 million in the three and six months ended September 30, 2022, respectively.
NOTE 20 — SUBSEQUENT EVENTS
Acquisition of Voltrek
Effective on October 5, 2022, Orion acquired all the membership interests of Voltrek LLC (“Voltrek”), an electric vehicle charging station solutions provider, for a purchase price of $5.0 million in cash and $1.0 million of shares of common stock of Orion, subject to normal and customary closing adjustments (the “Voltrek Acquisition”). In addition, depending upon the relative EBITDA growth of Voltrek’s business in fiscal 2023, 2024 and 2025, Orion could pay up to an additional $3.0 million, $3.5 million and $7.15 million, respectively, in earnout payments. Those compensatory payments do not fall within the scope of ASC 805, Business Combinations, and will be expensed over the course of the earnout periods to the extent they are earned. The acquisition was funded from existing cash resources and Orion shares. Voltrek will operate as Voltrek, an Orion Energy Systems business. The Voltrek Acquisition leverages Orion’s project management and maintenance expertise into a rapidly growing sector.
No amounts relating to Voltrek or the Voltrek Acquisition, other than acquisition costs, are recognized in the accompanying financial statements because the acquisition date occurred subsequent to September 30, 2022. The accounting for the acquisition and the purchase price allocation is not determinable at this time, as Orion is still in the process of determining acquisition date fair values of certain working capital amounts and estimating the fair value of identifiable intangible assets associated with this acquisition.
Amendment to Loan Security Agreement
Effective November 4, 2022, Orion, with Bank of America, N.A. as lender, executed Amendment No. 1 to its Loan Security Agreement (“LSA”) dated December 29, 2020. The primary purpose of the amendment is to include the assets of the acquired subsidiaries, Stay-Lite Lighting, Inc. and Voltrek LLC, as security interests of the LSA. Accordingly, eligible assets of Stay-Lite and Voltrek will be included in the borrowing base calculation for the purpose of establishing the monthly borrowing availability under the LSA. The amendment also clarifies that the earnout liabilities associated with the Stay-Lite and Voltrek transaction are permitted under the LSA and that the expenses recognized in connection with those earnouts should be added back in the computation of EBITDA, as defined.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited Condensed Consolidated Financial Statements and related notes included in this Form 10-Q, as well as our audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
Cautionary Note Regarding Forward-Looking Statements
Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are “forward-looking statements” as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “believe”, “anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”, “positioned”, “strategy”, “outlook” and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to several 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, 2022. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We provide energy-efficient LED lighting and controls, maintenance services and electrical vehicle (EV) charging station solutions. We help our customers achieve their sustainability, energy savings and carbon footprint reduction goals through innovative technology and exceptional service. We research, design, develop, manufacture, market, sell, install, and implement energy management systems consisting primarily of high-performance, energy-efficient commercial and industrial interior and exterior LED 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. Our services consist of turnkey installation and system maintenance. Virtually all our sales occur within North America.
Our lighting products consist primarily of LED lighting fixtures, many of which include IoT enabled control systems. Our principal customers include large national account end-users, federal and state government facilities, large regional account end-users, electrical distributors, electrical contractors and energy service companies ("ESCOs"). Currently, most of our products are manufactured at our leased production facility located in Manitowoc, Wisconsin, although as the LED and related IoT market continues to evolve, we are increasingly sourcing products and components from third parties in order to provide versatility in our product development.
We differentiate ourselves from our competitors through offering 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. In addition, we began to offer lighting and electrical maintenance services in fiscal 2021 which enables us to support a lifetime business relationship with our customer. We completed the acquisition of Stay-Lite Lighting on January 1, 2022, which is intended to further expand our maintenance services capabilities.
We believe the market for LED lighting products and related controls continues to 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 other lighting technologies. Our LED lighting technologies have become the primary component of our revenue as we continue to strive to be a leader in the LED market.
In fiscal 2022, we continued to successfully capitalize on our capability of being a full service, turn-key provider of LED lighting and controls systems with design, build, installation and project management services, as we continued a very large project for a major national account which was substantially complete by the end of the fiscal year. As a result of this success, we have begun to evolve our business strategy to focus on further expanding the nature and scope of our products and services offered to our customers. This further expansion of our products and services includes pursuing projects to develop recurring revenue streams, including providing lighting and electrical maintenance services and utilizing control sensor technology to collect data and assisting customers in the digitization of this data, along with other potential services. We also plan to pursue the expansion of our IoT, “smart-building” and “connected ceiling” and other related technology, software and controls products and services that we offer to our customers. We currently plan on investing significant time, resources and capital into expanding our offerings in these areas with no expectation that they will result in us realizing material revenue in the near term and without any assurance they will succeed or be profitable. In fact, it is likely that these efforts will reduce our profitability, at least in the near term as we invest resources and incur expenses to develop these offerings. While we intend to pursue these expansion strategies organically, we also are actively exploring potential business acquisitions, like our acquisition of Stay-Lite Lighting and Voltrek, which would more quickly add these types of expanded and different capabilities to our product and services offerings. It is possible that the acquisitions of Stay-Lite Lighting and Voltrek, or other potential acquisitions, if successfully completed, could significantly change, and potentially transform, the nature and extent of our business.
We generally do not have long-term contracts with our customers for product or turnkey services that provide us with recurring annual revenue. However, some of our maintenance services contracts consist of multi-year arrangements. We typically generate substantially all our revenue from sales of lighting and control systems and related services to governmental, commercial and industrial customers on a project-by-project basis. We also perform work under master services or product purchasing agreements with major customers with sales completed on a purchase order basis. In addition, in order to provide quality and timely service under our multi-location master retrofit agreements we are required to make substantial working capital expenditures and advance inventory purchases that we may not be able to recoup if the agreements or a substantial volume of purchase orders under the agreements are delayed or terminated. The loss of, or substantial reduction in sales to, any of our significant customers, or our current single largest customer, or the termination or delay of a significant volume of purchase orders by one or more key customers, could have a material adverse effect on our results of operations in any given future period.
We typically sell our lighting systems in replacement of our customers’ existing fixtures. We call this replacement process a "retrofit". We frequently engage our customer’s existing electrical contractor to provide installation and project management services. We also sell our lighting systems on a wholesale basis, principally to 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 margins typically ranging from 10% to 50%. As a result, a change in the total mix of our sales among higher or lower margin products can cause our profitability to fluctuate from period to period.
Our fiscal year ends on March 31. Our current fiscal year ends on March 31, 2023 and is referred to as “fiscal 2023”. We refer to our just completed fiscal year, which ended on March 31, 2022, as "fiscal 2022", and our prior fiscal year which ended on March 31, 2021 as "fiscal 2021". Our fiscal first quarter of each fiscal year ends on June 30, our fiscal second quarter ends on September 30, our fiscal third quarter ends on December 31 and our fiscal fourth quarter ends on March 31.
Reportable segments are components of an entity that have separate financial data that the entity's chief operating decision maker ("CODM") regularly reviews when allocating resources and assessing performance. Our CODM is our chief executive officer. Orion has three reportable segments: Orion Services Group Division ("OSG"), and Orion Distribution Services Division ("ODS"), and Orion U.S. Markets Division (“USM”).
22
Impact of COVID-19
The COVID-19 pandemic has disrupted business, trade, commerce, financial and credit markets, in the U.S. and globally. Our business was adversely impacted by measures taken by customers, suppliers, government entities and others to control the spread of the virus beginning in March 2020, the last few weeks of our 2020 fiscal year, and continuing most significantly into the second quarter of fiscal 2021. During the third quarter of fiscal 2021, we experienced a rebound in business as project installations resumed for our largest customer. However, potential future risks remain due to the COVID-19 pandemic. It is not possible to predict the overall impact, including the economic and regulatory impact, the COVID-19 pandemic will have on put business, liquidity, capital resources or financial results. If the COVID-19 pandemic becomes more pronounced in our markets or experiences a resurgence in markets recovering from the spread of COVID-19, our results of operation would likely be materially adversely affected.
Acquisitions
Acquisition of Stay-Lite Lighting
Effective on January 1, 2022, we acquired all of the issued and outstanding capital stock of Stay-Lite Lighting, a nationwide lighting and electrical maintenance service provider, for a cash purchase price of $4.0 million. In addition, depending upon the performance during the current and following calendar years, Orion could pay up to an additional $0.7 million in earn out related purchase price. The acquisition was funded from existing cash resources. Stay-Lite Lighting will operate as Stay-Lite, an Orion Energy Systems business. The acquisition accelerates the growth of our maintenance services offerings through our Orion Services Group, which provides lighting and electrical services to customers.
Effective on October 5, 2022, we acquired all the membership interests of Voltrek LLC, an electric vehicle charging station solutions provider, for a purchase price of $5.0 million in cash and $1.0 million of shares of common stock of Orion, subject to normal and customary closing adjustments. In addition, depending upon the relative EBITDA growth of Voltrek’s business in fiscal 2023, 2024 and 2025, we could pay up to an additional $3.0 million, $3.5 million and $7.15 million, respectively, in earnout payments. Those compensatory payments do not fall within the scope of ASC 805, Business Combinations, and will be expensed over the course of the earnout periods to the extent they are earned. The acquisition was funded from existing cash resources and our common stock. Voltrek will operate as Voltrek, an Orion Energy Systems business. The acquisition leverages our project management and maintenance expertise into a rapidly growing sector.
Recent Developments
During the fourth quarter of fiscal 2022, we substantially completed a significant project rollout for our large national retail customer and future sales to this customer are expected to be at substantially lower amounts. During fiscal 2023, we continue to support this customer, but at lower revenue levels than in the comparative prior year. Despite the reduction experienced from the large national retail customer and a global online retailer, revenue for the balance of our business grew in the three and six months ended September 30, 2022.
23
Results of Operations - Three Months Ended September 30, 2022 versus Three Months Ended September 30, 2021
The following table sets forth the line items of our Condensed Consolidated Statements of Operations and as a relative percentage of our total revenue for each applicable period, together with the relative percentage change in such line item between applicable comparable periods (dollars in thousands, except percentages):
Amount
%Change
% of Revenue
(53.9
)%
73.1
%
76.2
(45.7
26.9
23.8
(51.9
100.0
(50.8
52.9
51.7
(44.0
21.9
18.8
(49.0
74.7
70.5
(58.9
25.3
29.5
General and administrative expenses
43.3
22.5
7.5
NM
1.9
Sales and marketing expenses
(1.4
15.1
7.4
Research and development expenses
42.3
2.6
0.9
(158.5
(16.8
13.8
0.0
14.3
(0.1
(0.0
6.7
(16.9
13.7
(3.7
3.7
(13.3
10.0
* NM - Not Meaningful
Revenue, Cost of Revenue and Gross Margin. Product revenue decreased 53.9%, or $15.0 million, for the second quarter of fiscal 2023 versus the second quarter of fiscal 2022. Service revenue decreased 45.7%, or $4.0 million, for the second quarter of fiscal 2023 versus the second quarter of fiscal 2022. The decrease in product and service revenue was due to significantly lower revenues from our largest customer and comparatively lower project volume from other customers, primarily caused by the response of customers to supply chain disruptions and other delays. The installations from our existing large national retail customer represented 16.0% of total revenue in the second quarter of fiscal 2023 compared to 58.9% in the second quarter of fiscal 2022. This decrease in revenue is partially offset by revenues due to the acquisition of Stay-Lite Lighting. Cost of product revenue decreased by 50.8%, or $9.6 million, in the second quarter of fiscal 2023 versus the comparable period in fiscal 2022. Cost of service revenue decreased by 44.0%, or $3.0 million, in the second quarter of fiscal 2023 versus the comparable period in fiscal 2022. The decrease in product and service costs was primarily due to the decrease in revenue. Gross margin decreased from 29.5% of revenue in the second quarter of fiscal 2022 to 25.3% in the second quarter of fiscal 2023, due primarily to reduced sales decreasing the absorption of fixed costs.
Operating Expenses
General and Administrative. General and administrative expenses increased 43.3%, or $1.2 million, in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022. This comparative increase was primarily due to the acquisition of Stay-Lite Lighting and an acceleration of stock-based compensation expense due to retirement modifications of existing restricted stock awards.
Sales and Marketing. Sales and marketing expenses were relatively flat, in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022, reflecting a reduction in commission expense on lower sales, partially offset by higher employment costs.
24
Research and Development. Research and development expenses increased 42.3%, or $0.1 million, in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022, as a result of higher employment costs.
Our OSG segment develops and sells lighting products and provides construction, engineering along with installation and maintenance services for our commercial lighting and energy management systems. OSG provides engineering, design, lighting products and in many cases turnkey solutions for large national accounts, governments, municipalities, schools and other customers.
The following table summarizes our OSG segment operating results (dollars in thousands):
(63.8
Operating (loss) income
Operating margin
(15.8
15.9
OSG segment revenue in the second quarter of fiscal 2023 decreased by 63.8%, or $17.2 million compared to the second quarter of fiscal 2022. The decrease in OSG segment revenue was due to a significant reduction of project volume from our largest customer and comparatively lower project volume from other customers, primarily caused by the response of customers to supply chain disruptions and other delays. This revenue decrease was partially offset by the added revenue from Stay-Lite Lighting. This decrease led to a corresponding operating loss in this segment, as a result of decreased absorption of fixed costs.
Our ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of North American broadline and electrical distributors and contractors.
The following table summarizes our ODS segment operating results (dollars in thousands):
6.8
Operating income
(76.1
3.1
13.9
ODS segment revenue in the second quarter of fiscal 2023 increased by 6.8%, or $0.3 million, compared to the second quarter of fiscal 2022. Operating income in this segment decreased as a result of increased allocation of corporate costs.
Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and contractors.
The following table summarizes our USM segment operating results (dollars in thousands):
(36.5
8.8
23.5
25
USM segment revenue in the second quarter of fiscal 2023 decreased by 36.5%, or $2.0 million, compared to the second quarter of fiscal 2022, primarily due to a less diversified customer base. Operating income in this segment decreased as a result of lower revenue and increased allocation of corporate costs.
Results of Operations - Six Months Ended September 30, 2022 versus Six Months Ended September 30, 2021
% ofRevenue
(53.1
74.2
78.3
(41.2
25.8
21.7
(50.5
(48.6
55.5
53.5
22.0
17.2
77.5
70.6
(62.0
29.4
31.3
8.2
1.0
(6.6
15.6
8.3
24.8
2.7
1.1
(177.6
(18.5
11.8
(100.0
(18.7
11.7
(4.1
(14.6
8.6
Revenue, Cost of Revenue and Gross Margin. Product revenue decreased 53.1%, or $29.7 million, for the first six months of fiscal 2023 versus the first six months of fiscal 2022. Service revenue decreased 41.2%, or $6.4 million, for the first six months of fiscal 2023 versus the first six months of fiscal 2022. The decrease in product and service revenue was due to significantly lower project revenues from our largest customer and comparatively lower project volume from other customers, primarily caused by the response of customers to supply chain disruptions and other delays. The installations from our existing large national retail customer represented 14.9% of total revenue in the first six months of fiscal 2023 compared to 55.0% in the first six months of fiscal 2022. This decrease in revenue was partially offset by revenues due to the acquisition of Stay-Lite Lighting. Cost of product revenue decreased by 48.6%, or $18.6 million, in the first six months of fiscal 2023 versus the comparable period in fiscal 2022. Cost of service revenue decreased by 36.5%, or $4.5 million, in the first six months of fiscal 2023 versus the comparable period in fiscal 2022. The decrease in product and service costs was primarily due to the decrease in revenue. Gross margin decreased from 29.4% in the first six months of fiscal 2022 to 22.5% in the first six months of fiscal 2023, due primarily to reduced sales decreasing the absorption of fixed costs.
General and Administrative. General and administrative expenses increased 31.3%, or $1.8 million, in the first six months of fiscal 2023 compared to the first six months of fiscal 2022. This comparative increase was primarily due to the acquisition of Stay-Lite Lighting and an acceleration of stock-based compensation expense due to retirement modifications of existing restricted stock awards.
Sales and Marketing. Sales and marketing expenses decreased 6.6%, or $0.4 million, in the first six months of fiscal 2023 compared to the first six months of fiscal 2022, reflecting a reduction in commission expense on lower sales, partially offset by increased employment costs.
Research and Development. Research and development expenses increased 24.8%, or $0.2 million, in the first six months of fiscal 2023 compared to the first six months of fiscal 2022, as a result of increased employment costs and testing.
(61.6
(20.1
12.6
OSG segment revenue in the first six months of fiscal 2023 decreased by 61.6%, or $30.2 million, compared to the first six months of fiscal 2022. The decrease in revenue was due to a significant reduction of project volume from our largest customer and comparatively lower project volume from other customers, primarily caused by the response of customers to supply chain disruptions and other delays. This revenue decrease is partially offset by the added revenue from Stay-Lite Lighting. This decrease led to a corresponding operating loss in this segment, as a result of revenue decreased absorption of fixed costs.
(31.4
(96.9
20.1
ODS segment revenue in the first six months of fiscal 2023 decreased by 31.4%, or $4.2 million, compared to the first six months of fiscal 2022, primarily due to a decrease in sales to one customer. The decrease in sales resulted in a corresponding operating loss in this segment based on operating leverage.
(19.3
(74.5
6.6
20.8
USM segment revenue in the first six months of fiscal 2023 decreased by 19.3%, or $1.8 million, compared to the first six months of fiscal 2022, primarily due to a less diversified customer base. Operating income in this segment decreased as a result of increased allocation of corporate costs.
Liquidity and Capital Resources
We believe our existing cash and operating cash flow provide us with the financial flexibility needed to meet our capital requirements, including to fund targeted capital expenditures, acquisitions and working capital for one year from the date of this report, as well as our longer-term capital requirements for periods beyond at least one year from the date of this report.
We had approximately $12.5 million in cash and cash equivalents as of September 30, 2022, compared to $14.5 million at March 31, 2022. Our cash position decreased as a result of an EBITDA loss and an overall use of working capital during the first six months of fiscal 2023.
Our future liquidity needs and forecasted cash flows are dependent upon many factors, including our relative revenue, gross margins, cash management practices, cost containment, working capital management, capital expenditures. While we believe that we will likely have adequate available cash and equivalents and credit availability under our Credit Agreement to satisfy our currently anticipated working capital and liquidity requirements during the next 12 months based on our current cash flow forecast, there can be no assurance to that effect. If we experience significant liquidity constraints, we may be required to issue equity or debt securities, reduce our sales efforts, implement additional cost savings initiatives or undertake other efforts to conserve our cash.
Cash Flows
The following table summarizes our cash flows for the six months ended September 30, 2022 and 2021 (in thousands):
Decrease in cash and cash equivalents
Cash Flows Related to Operating Activities. Cash used in operating activities primarily consists of net loss adjusted for certain non-cash items, including depreciation, amortization of intangible assets, stock-based compensation, amortization of debt issue costs, provisions for reserves, and the effect of changes in working capital and other activities.
Cash used in operating activities for the first six months of fiscal 2023 was $6.6 million and consisted of our net loss of $5.2 million adjusted for non-cash expense items and net cash used in changes in working capital of $1.3 million, the largest of which was a $4.0 million decrease in accounts payable.
Cash used in operating activities for the first six months of fiscal 2022 was $4.0 million and consisted of our net income of $6.2 million adjusted for non-cash expense items of $3.5 million offset by working capital uses of $13.7 million, the largest of which was a $10.0 million increase in accounts receivable.
Cash Flows Related to Investing Activities. Cash used in investing activities of $0.4 million in the first six months of fiscal 2022 consisted primarily of purchases of property and equipment.
Cash used in investing activities of $0.8 million in the first six months of fiscal 2022 consisted primarily of cash paid for a non-controlling equity stake in ndustrial, Inc. of $0.5 million and purchases of property and equipment.
Cash Flows Related to Financing Activities. Cash provided by financing activities of $5.0 million in the first six months of fiscal 2023 consisted primarily of proceeds from our revolving credit facility, which was drawn down to subsequently pay the cash purchase price to acquire Voltrek.
Cash provided by financing activities of $0.1 million in the first six months of fiscal 2022 consisted primarily of proceeds from employee equity exercises.
Working Capital
Our net working capital as of September 30, 2022 was $32.5 million, consisting of $44.8 million in current assets and $12.3 million in current liabilities. Our net working capital as of March 31, 2022 was $32.9 million, consisting of $51.2 million in current assets and $18.4 million in current liabilities.
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. Because of recent supply chain challenges, we have been making additional incremental inventory purchases. Our accounts receivables, inventory and payables may increase to the extent our revenue and order levels increase.
Indebtedness
On December 29, 2020, we entered into a new $25 million Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A., as lender (the “Lender”). The Credit Agreement replaced our prior $20.15 million secured revolving credit and security agreement (the “Prior Credit Agreement”).
The replacement of the Prior Credit Agreement with the Credit Agreement provides us with increased financing capacity and liquidity to fund our operations and implement our strategic plans.
The Credit Agreement is secured by a first lien security interest in substantially all of our assets.
Effective November 4, 2022, we, along with Bank of America, N.A. as lender, executed Amendment No. 1 to the Loan Security Agreement (“LSA”) dated December 29, 2020. The primary purpose of the amendment is to include the assets of the acquired subsidiaries, Stay-Lite Lighting, Inc. and Voltrek LLC, as security interests of the LSA. Accordingly, eligible assets of Stay-Lite and Voltrek will be included in the borrowing base calculation for the purpose of establishing the monthly borrowing availability under the LSA. The amendment also clarifies that the earnout liabilities associated with the Stay-Lite and Voltrek transaction are permitted under the LSA and that the expenses recognized in connection with those earnouts should be added back in the computation of EBITDA, as defined.
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 $11.2 million and $10.1 million as of September 30, 2022 and March 31, 2022, respectively. We generally expect our backlog to be recognized as revenue within one year, although the COVID-19 pandemic may extend this time period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation
We have experienced increases in various input costs including labor, components and transportation in the past year. In response, we have implemented multiple price increases, and we have substantially mitigated the inflationary pressures, such that our results from operations have not been materially affected by inflation. We are monitoring input costs and cannot currently predict the future impact to our operations by inflation.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make certain estimates and judgments that affect our reported assets, liabilities, revenue and expenses, and our related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an ongoing basis, including those related to revenue recognition, inventory valuation, collectability of receivables, stock-based compensation, warranty reserves and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. A summary of our critical accounting policies is set forth in the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended March 31, 2022. For the six months ended September 30, 2022, there were no material changes in our accounting policies.
For a complete discussion of recent accounting pronouncements, refer to Note 3 in the Condensed Consolidated Financial Statements included elsewhere in this report.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk was discussed in the “Quantitative and Qualitative Disclosures About Market Risk” section contained in our Annual Report on Form 10-K for the year ended March 31, 2022. There have been no material changes to such exposures since March 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2022, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based on this evaluation, such officers have concluded that our disclosure controls and procedures were effective as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) for the quarter ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various claims and legal proceedings arising in the ordinary course of business. As of the date of this report, we do not believe that the final resolution of any of such claims or legal proceedings will have a material adverse effect on our future results of operations.
See Note 15 – Commitments and Contingencies, to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I - Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, which we filed with the SEC on June 10, 2022 and in Part 1 - Item 2 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 5. OTHER INFORMATION
Effective November 4, 2022, Orion, with Bank of America, N.A. as lender, entered into Amendment No. 1 to Loan and Security Agreement (the “Amendment”) to the Credit Agreement (as amended by the Amendment, the “Amended Credit Agreement”), which provides for a five-year $25.0 million revolving credit facility that matures on December 29, 2025. The Amendment amended the Credit Agreement to, among other things: (i) add Stay-Lite Lighting and Voltrek as additional borrowers under the Amended Credit Agreement; (ii) clarify that the obligations related to the earn out payments associated with the acquisitions of Stay-Lite Lighting and Voltrek are permitted under the Amended Credit Agreement; and (iii) add expenses recognized in connection with the potential earnouts payable in the Stay-Lite Lighting and Voltrek acquisitions to the computation of EBITDA as defined under the Amended Credit Agreement.
Pursuant to the terms and conditions of the Amended Credit Agreement, future borrowing base calculations will incorporate the applicable assets of Stay-Lite Lighting and Voltrek.
The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Credit Agreement, a copy of which is filed as Exhibit 10.4 to this Quarterly Report.
ITEM 6. EXHIBITS
10.1
Voluntary Retirement and Consulting Agreement, dated as of August 2, 2022 and effective as of November 10, 2022, between Orion Energy Systems, Inc. and Michael W. Altschaefl, filed as Exhibit 10.1 to the Registrant's Form 8-K filed on August 3, 2022, is hereby incorporated by reference.*
10.2
Amended Executive Employment and Severance Agreement, effective as of November 10, 2022, by and between Orion Energy Systems, Inc. and Michael H. Jenkins, filed as Exhibit 10.2 to the Registrant's Form 8-K filed on August 3, 2022, is hereby incorporated by reference.*
10.3
Consulting Agreement, dated as of August 2, 2022 and effective as of August 4, 2022, between Orion Energy Systems, Inc. and Alan Howe, filed as Exhibit 10.3 to the Registrant's Form 8-K filed on August 3, 2022, is hereby incorporated by reference.*
10.4
Agreement No. 1 to Loan and Security Agreement, dated effective as of November 4, 2022, among Orion Energy Systems, Inc., Bank of America, N.A., as lender, and the subsidiary borrowers party thereto. +^
31.1
Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.+
31.2
Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.+
32.1
Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+
32.2
Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+
101.INS
Inline XBRL Instance Document+
101.SCH
Inline XBRL Taxonomy extension schema document+
101.CAL
Inline XBRL Taxonomy extension calculation linkbase document+
101.DEF
Inline XBRL Taxonomy extension definition linkbase document+
101.LAB
Inline XBRL Taxonomy extension label linkbase document+
101.PRE
Inline XBRL Taxonomy extension presentation linkbase document+
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, has been formatted in Inline XBRL.
+ Filed herewith
* Management contract or compensatory plan or arrangement
^ The schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request; provided, however, that the Registrant may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act, as amended, for any schedule so furnished.
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 November 8, 2022.
By
/s/ J. Per Brodin
J. Per Brodin
Chief Financial Officer
(Principal Financial Officer and Authorized Signatory)