oesx-10q_20181231.htm

 

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, 2018

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

 

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 29,576,944 shares of the Registrant’s common stock outstanding on January 31, 2019.

 

 


 

ORION ENERGY SYSTEMS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2018

TABLE OF CONTENTS

 

 

 

Page(s)

PART I FINANCIAL INFORMATION

3

ITEM 1.

Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets as of December 31, 2018 and March 31, 2018

3

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2018 and December 31, 2017

4

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2018 and December 31, 2017

5

 

Notes to the Condensed Consolidated Financial Statements

6

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

39

ITEM 4.

Controls and Procedures

39

PART II OTHER INFORMATION

42

ITEM 1.

Legal Proceedings

42

ITEM 1A.

Risk Factors

42

ITEM 2.

Unregistered Sale of Equity Securities and Use of Proceeds

42

ITEM 5.

Other Information

42

ITEM 6.

Exhibits

43

SIGNATURES

44

Exhibit 31.1

 

Exhibit 31.2

 

Exhibit 32.1

 

Exhibit 32.2

 

EX-101 INSTANCE DOCUMENT

 

EX-101 SCHEMA DOCUMENT

 

EX-101 CALCULATION LINKBASE DOCUMENT

 

EX-101 LABELS LINKBASE DOCUMENT

 

EX-101 PRESENTATION LINKBASE DOCUMENT

 

 

 

 


 

PART I – FINANCIAL INFORMATION

Item 1: Financial Statements

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

 

 

December 31,

2018

 

 

March 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,596

 

 

$

9,424

 

Accounts receivable, net

 

 

6,096

 

 

 

8,736

 

Revenue earned but not billed

 

 

3,125

 

 

 

 

Inventories, net

 

 

9,024

 

 

 

7,826

 

Deferred contract costs

 

 

 

 

 

1,000

 

Prepaid expenses and other current assets

 

 

627

 

 

 

2,467

 

Total current assets

 

 

25,468

 

 

 

29,453

 

Property and equipment, net

 

 

12,056

 

 

 

12,894

 

Other intangible assets, net

 

 

2,554

 

 

 

2,868

 

Other long-term assets

 

 

255

 

 

 

110

 

Total assets

 

$

40,333

 

 

$

45,325

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,345

 

 

$

11,675

 

Accrued expenses and other

 

 

5,314

 

 

 

4,171

 

Deferred revenue, current

 

 

119

 

 

 

499

 

Current maturities of long-term debt

 

 

82

 

 

 

79

 

Total current liabilities

 

 

16,860

 

 

 

16,424

 

Revolving credit facility

 

 

3,329

 

 

 

3,908

 

Long-term debt, less current maturities

 

 

43

 

 

 

105

 

Deferred revenue, long-term

 

 

810

 

 

 

940

 

Other long-term liabilities

 

 

626

 

 

 

524

 

Total liabilities

 

 

21,668

 

 

 

21,901

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: Shares authorized: 30,000,000 at December 31,

   2018 and March 31, 2018; no shares issued and outstanding at December 31, 2018

   and March 31, 2018

 

 

 

 

 

 

Common stock, no par value: Shares authorized: 200,000,000 at December 31, 2018

   and March 31, 2018; shares issued: 39,011,019 at December 31, 2018 and

   38,384,575 at March 31, 2018; shares outstanding: 29,571,944 at December 31,

   2018 and 28,953,183 at March 31, 2018

 

 

 

 

 

 

Additional paid-in capital

 

 

155,642

 

 

 

155,003

 

Treasury stock, common shares: 9,439,075 at December 31, 2018 and 9,431,392 at

   March 31, 2018

 

 

(36,092

)

 

 

(36,085

)

Retained deficit

 

 

(100,885

)

 

 

(95,494

)

Total shareholders’ equity

 

 

18,665

 

 

 

23,424

 

Total liabilities and shareholders’ equity

 

$

40,333

 

 

$

45,325

 

 

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

 

3


 

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended December 31,

 

 

Nine Months Ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Product revenue

 

$

13,952

 

 

$

15,993

 

 

$

38,350

 

 

$

41,883

 

Service revenue

 

 

2,339

 

 

 

1,270

 

 

 

4,961

 

 

 

3,360

 

Total revenue

 

 

16,291

 

 

 

17,263

 

 

 

43,311

 

 

 

45,243

 

Cost of product revenue

 

 

10,508

 

 

 

11,181

 

 

 

29,599

 

 

 

30,587

 

Cost of service revenue

 

 

1,613

 

 

 

966

 

 

 

3,544

 

 

 

3,209

 

Total cost of revenue

 

 

12,121

 

 

 

12,147

 

 

 

33,143

 

 

 

33,796

 

Gross profit

 

 

4,170

 

 

 

5,116

 

 

 

10,168

 

 

 

11,447

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

2,269

 

 

 

2,878

 

 

 

7,681

 

 

 

11,370

 

Impairment of intangible assets

 

 

 

 

 

 

 

 

 

 

 

710

 

Sales and marketing

 

 

2,190

 

 

 

2,981

 

 

 

6,903

 

 

 

9,241

 

Research and development

 

 

298

 

 

 

616

 

 

 

1,057

 

 

 

1,519

 

Total operating expenses

 

 

4,757

 

 

 

6,475

 

 

 

15,641

 

 

 

22,840

 

Loss from operations

 

 

(587

)

 

 

(1,359

)

 

 

(5,473

)

 

 

(11,393

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

31

 

 

 

 

 

 

65

 

 

 

 

Interest expense

 

 

(77

)

 

 

(74

)

 

 

(335

)

 

 

(225

)

Amortization of debt issue costs

 

 

(31

)

 

 

(28

)

 

 

(31

)

 

 

(83

)

Interest income

 

 

2

 

 

 

5

 

 

 

8

 

 

 

12

 

Total other expense

 

 

(75

)

 

 

(97

)

 

 

(293

)

 

 

(296

)

Loss before income tax

 

 

(662

)

 

 

(1,456

)

 

 

(5,766

)

 

 

(11,689

)

Income tax (benefit) expense

 

 

0

 

 

 

(23

)

 

 

26

 

 

 

(23

)

Net loss

 

$

(662

)

 

$

(1,433

)

 

$

(5,792

)

 

$

(11,666

)

Basic net loss per share attributable to common shareholders

 

$

(0.02

)

 

$

(0.05

)

 

$

(0.20

)

 

$

(0.41

)

Weighted-average common shares outstanding

 

 

29,568,986

 

 

 

28,909,847

 

 

 

29,376,959

 

 

 

28,734,394

 

Diluted net loss per share

 

$

(0.02

)

 

$

(0.05

)

 

$

(0.20

)

 

$

(0.41

)

Weighted-average common shares and share equivalents

   outstanding

 

 

29,568,986

 

 

 

28,909,847

 

 

 

29,376,959

 

 

 

28,734,394

 

 

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

 

4


 

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended December 31,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(5,792

)

 

$

(11,666

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,006

 

 

 

1,050

 

Amortization of intangible assets

 

 

343

 

 

 

486

 

Stock-based compensation

 

 

639

 

 

 

868

 

Amortization of debt issue costs

 

 

31

 

 

 

83

 

Impairment of intangible assets

 

 

 

 

 

710

 

Provision for inventory reserves

 

 

(144

)

 

 

701

 

Provision for bad debts

 

 

66

 

 

 

21

 

Other

 

 

8

 

 

 

12

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, current and long-term

 

 

2,857

 

 

 

492

 

Revenue earned but not billed

 

 

(770

)

 

 

 

Inventories

 

 

(367

)

 

 

4,120

 

Deferred contract costs

 

 

 

 

 

(179

)

Prepaid expenses and other assets

 

 

123

 

 

 

1,300

 

Accounts payable

 

 

555

 

 

 

30

 

Accrued expenses and other

 

 

(136

)

 

 

(767

)

Deferred revenue, current and long-term

 

 

(29

)

 

 

(342

)

Net cash used in operating activities

 

 

(1,610

)

 

 

(3,081

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(167

)

 

 

(478

)

Additions to patents and licenses

 

 

(29

)

 

 

(43

)

Net cash used in investing activities

 

 

(196

)

 

 

(521

)

Financing activities

 

 

 

 

 

 

 

 

Payment of long-term debt and capital leases

 

 

(58

)

 

 

(132

)

Proceeds from revolving credit facility

 

 

42,498

 

 

 

51,926

 

Payment of revolving credit facility

 

 

(43,078

)

 

 

(54,933

)

Payments to settle employee tax withholdings on stock-based compensation

 

 

(10

)

 

 

(9

)

Deferred financing costs

 

 

(377

)

 

 

 

Net proceeds from employee equity exercises

 

 

3

 

 

 

6

 

Net cash used in financing activities

 

 

(1,022

)

 

 

(3,142

)

Net decrease in cash and cash equivalents

 

 

(2,828

)

 

 

(6,744

)

Cash and cash equivalents at beginning of period

 

 

9,424

 

 

 

17,307

 

Cash and cash equivalents at end of period

 

$

6,596

 

 

$

10,563

 

 

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

 

5


 

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF BUSINESS

Organization

Orion includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated subsidiaries. Orion is a developer, manufacturer and seller of 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. Orion had leased office space in Chicago, Illinois, and Houston, Texas, but as of June 30, 2018, Orion had vacated these locations. During fiscal 2018, Orion had leased warehouse space in Manitowoc, Wisconsin and Augusta, Georgia, but as of March 31, 2018, Orion had vacated these storage locations.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of Orion Energy Systems, Inc. and its wholly-owned subsidiaries.

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 presentation have been included. Interim results are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2019 or other interim periods.

The Condensed Consolidated Balance Sheets at March 31, 2018 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, 2018 filed with the SEC on June 13, 2018.

In the warranty rollforward in Note 9 – Accrued Expenses and Other, certain prior period balances have been reclassified to conform to current period presentation.  The reclassifications were immaterial to the financial statements.

Use of Estimates

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

6


 

Concentration of Credit Risk and Other Risks and Uncertainties

Orion's cash is deposited with three 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 ballasts, lamps and LED components, from multiple suppliers.  For the three months ended December 31, 2018, one supplier accounted for 11.7% of total cost of revenue. For the nine months ended December 31, 2018, no supplier accounted for more than 10% of total cost of revenue. For the three months ended December 31, 2017, one supplier accounted for 13.9% of total cost of revenue. For the nine months ended December 31, 2017, no supplier accounted for more than 10.0% of total cost of revenue.

For the three months ended December 31, 2018, one customer accounted for 11.6% of total revenue.  For the nine months ended December 31, 2018, no customers accounted for more than 10.0% of total revenue.  For the three months ended December 31, 2017, one customer accounted for 13.4% of total revenue.  For the nine months ended December 31, 2017, one customer accounted for 11.1% of total revenue.

As of December 31, 2018, no customer accounted for more than 10.0% of Accounts receivable. As of March 31, 2018, one customer accounted for 13.2% of Accounts receivable.

Recent Accounting Pronouncements

Issued: Not Yet Adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases" (Subtopic 842).  The pronouncement, and subsequent amendments, which is included in the Accounting Standards Codification as Subtopic 842 (“ASC 842”), requires that lessees recognize right-of-use assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and disclose additional quantitative and qualitative information about leasing arrangements. Under ASU 842, leases will be classified as either finance or operating, with classification affecting the timing of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating leases, with classification affecting the timing of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards, as well as substantive control, have been transferred through the lease contract. ASU 842 also provides guidance on the presentation of the effects of leases in the income statement and statement of cash flows. Orion will adopt ASU 842 on April 1, 2019 and expects to elect certain practical expedients permitted under the transition guidance.  Additionally, Orion expects to elect the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods.  Orion has completed an initial assessment of potential leases but has not yet completed its review of the full provisions of ASU 842 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 condensed consolidated balance sheets upon adoption of ASU 842.  In addition, the Company is in the process of identifying and implementing the appropriate changes to business processes and controls to support recognition and disclosure under the new standard.  Management continues to assess the impact of adoption of ASU 842 on its condensed consolidated statements of operations, cash flows, and the related footnote disclosures.

 

Recently Adopted Standards

On April 1, 2018, Orion adopted ASU 2014-09 and subsequent amendments, which is included in the Accounting Standards Codification as "Revenue from Contracts with Customers" (Topic 606) (“ASC 606”) and Sub-Topic 340-40 (“ASC 340-40”), using the modified retrospective approach. ASC 606 superseded the revenue recognition requirements in “Revenue Recognition” (Topic 605) ("ASC 605") and provides guidance on the accounting for other assets and deferred costs associated with contracts with customers.   ASC 606 requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.  ASC 340-40 limits the circumstances that an entity can recognize an asset from the costs incurred to obtain or fulfill a contract that are not subject to the guidance in other portions in the Accounting Standards Codification, such as those related to

7


 

inventory.   The provisions of ASC 606 and ASC 340-40 require entities to use more judgments and estimates than under previous guidance when allocating the total consideration in a contract to the individual promises to customers (“performance obligations”) and determining when a performance obligation has been satisfied and revenue can be recognized. Orion’s adoption of ASC 606 did not have a material effect on Orion's financial statements. Orion has updated its processes and controls necessary for implementing ASC 606, including the increased footnote disclosure requirements.

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments," which provided clarification and additional guidance as to the presentation and classification of certain cash receipts and cash payments in the statement of cash flows.  This ASU provided guidance as to the classification of a number of transactions including:  contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees.  This new ASU was effective for Orion in the first quarter of fiscal 2019 and has been applied through retrospective adjustment to all periods presented.  The adoption of this ASU did not have a material impact on Orion’s condensed consolidated financial statements.

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

NOTE 3 — REVENUE

Changes in Accounting Policies

Orion adopted ASC 606 and ASC 340-40 (the “new standards”) as of April 1, 2018 for contracts with customers that were not fully complete as of April 1, 2018 using the modified retrospective transition method. The cumulative effect of initially applying the new standards was recorded as an immaterial adjustment to the opening balance of retained deficit within Orion’s Condensed Consolidated Statement of Shareholders’ Equity.

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

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

For all adjustments and changes as a result of adopting the new standards for the current period, refer to the section “Impacts on Financial Statements” below.  In accordance with the modified retrospective transition method, the historical information within Orion’s financial statements has not been restated and continues to be reported under the accounting standard in effect for those periods. As a result, Orion has disclosed the accounting policies in effect prior to April 1, 2018, as well as the policies applied starting April 1, 2018.

 

Revenue Recognition

 

8


 

Periods prior to April 1, 2018

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

 

1.

persuasive evidence of an arrangement exists;

 

2.

delivery has occurred and title has passed to the customer;

 

3.

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

 

4.

collectability is reasonably assured.

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

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

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

 

Period Commencing April 1, 2018

General Information

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

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

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

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

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

9


 

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

 

 

when there is a legal transfer of ownership;

 

when the customer obtains physical possession of the products;

 

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

 

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

 

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

 

when each light fixture is physically installed and working correctly;

 

when the customer formally accepts the product; and

 

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

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

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

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

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

See Note 9, Accrued Expenses and Other for a discussion of Orion’s accounting 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.

 

10


 

Disaggregation of Revenue

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

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

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

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

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

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

 

 

 

Three Months Ended December 31, 2018

 

 

Nine Months Ended December 31, 2018

 

 

 

Product

 

 

Services

 

 

Total

 

 

Product

 

 

Services

 

 

Total

 

Revenue from contracts with customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lighting revenues, by end user

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal government

 

$

894

 

 

$

396

 

 

$

1,290

 

 

$

1,009

 

 

$

396

 

 

$

1,405

 

Commercial and industrial

 

 

11,976

 

 

 

1,943

 

 

 

13,919

 

 

 

34,987

 

 

 

4,565

 

 

 

39,552

 

Total lighting

 

 

12,870

 

 

 

2,339

 

 

 

15,209

 

 

 

35,996

 

 

 

4,961

 

 

 

40,957

 

Solar energy related revenues

 

 

8

 

 

 

 

 

 

8

 

 

 

46

 

 

 

 

 

 

46

 

Total revenues from contracts with customers

 

 

12,878

 

 

 

2,339

 

 

 

15,217

 

 

 

36,042

 

 

 

4,961

 

 

 

41,003

 

Revenue accounted for under other guidance

 

 

1,074

 

 

 

 

 

 

1,074

 

 

 

2,308

 

 

 

 

 

 

2,308

 

Total revenue

 

$

13,952

 

 

$

2,339

 

 

$

16,291

 

 

$

38,350

 

 

$

4,961

 

 

$

43,311

 

 

Cash Flow Considerations

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

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

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

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

11


 

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

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

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

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

 

Practical Expedients and Exemptions

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

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

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

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

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

 

Contract Balances

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

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

12


 

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

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

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

 

 

 

December 31, 2018

 

 

April 1, 2018

 

Accounts receivable, net

 

$

6,096

 

 

$

9,020

 

Contract assets

 

$

2,538

 

 

$

1,773

 

Contract liabilities

 

$

43

 

 

$

13

 

 

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

13


 

Impact on Financial Statements

 

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

 

 

As Reported

December 31,

2018

 

 

Adjustments

 

 

Balances

without

application of

ASC 606

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,596

 

 

$

 

 

$

6,596

 

Accounts receivable, net

 

 

6,096

 

 

 

(6

)

 

 

6,090

 

Revenue earned but not billed

 

 

3,125

 

 

 

(3,125

)

 

 

 

Inventories, net

 

 

9,024

 

 

 

(709

)

 

 

8,315

 

Deferred contract costs

 

 

 

 

 

1,510

 

 

 

1,510

 

Prepaid expenses and other current assets

 

 

627

 

 

 

2,036

 

 

 

2,663

 

Total current assets

 

 

25,468

 

 

 

(294

)

 

 

25,174

 

Property and equipment, net

 

 

12,056

 

 

 

 

 

 

12,056

 

Other intangible assets, net

 

 

2,554

 

 

 

 

 

 

2,554

 

Other long-term assets

 

 

255

 

 

 

 

 

 

255

 

Total assets

 

$

40,333

 

 

$

(294

)

 

$

40,039

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,345

 

 

$

980

 

 

$

12,325

 

Accrued expenses and other

 

 

5,314

 

 

 

(1,200

)

 

 

4,114

 

Deferred revenue, current

 

 

119

 

 

 

492

 

 

 

611

 

Current maturities of long-term debt

 

 

82

 

 

 

 

 

 

82

 

Total current liabilities

 

 

16,860

 

 

 

272

 

 

 

17,132

 

Revolving credit facility

 

 

3,329

 

 

 

 

 

 

3,329

 

Long-term debt, less current maturities

 

 

43

 

 

 

 

 

 

43

 

Deferred revenue, long-term

 

 

810

 

 

 

97

 

 

 

907

 

Other long-term liabilities

 

 

626

 

 

 

(97

)

 

 

529

 

Total liabilities

 

 

21,668

 

 

 

272

 

 

 

21,940

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: Shares authorized: 30,000,000 at

   December 31, 2018 and March 31, 2018; no shares issued and

   outstanding at December 31, 2018 and March 31, 2018

 

 

 

 

 

 

 

 

 

Common stock, no par value: Shares authorized: 200,000,000 at

   December 31, 2018 and March 31, 2018; shares issued: 39,011,019 at

   December 31, 2018 and 38,384,575 at March 31, 2018; shares

   outstanding: 29,571,944 at December 31, 2018 and 28,953,183 at

   March 31, 2018

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

155,642

 

 

 

 

 

 

155,642

 

Treasury stock, common shares: 9,439,075 at December 31, 2018 and

   9,431,392 at March 31, 2018

 

 

(36,092

)

 

 

 

 

 

(36,092

)

Retained deficit

 

 

(100,885

)

 

 

(566

)

 

 

(101,451

)

Total shareholders’ equity

 

 

18,665

 

 

 

(566

)

 

 

18,099

 

Total liabilities and shareholders’ equity

 

$

40,333

 

 

$

(294

)

 

$

40,039

 

 

14


 

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

 

 

Three months ended December 31, 2018

 

 

Nine Months Ended December 31, 2018

 

 

 

As Reported

 

 

Adjustments

 

 

Balances

without

application of

ASC 606

 

 

As Reported

 

 

Adjustments

 

 

Balances

without

application of

ASC 606

 

Product revenue

 

$

13,952

 

 

$

467

 

 

$

14,419

 

 

$

38,350

 

 

$

1,531

 

 

$

39,881

 

Service revenue

 

 

2,339

 

 

 

(1,476

)

 

 

863

 

 

 

4,961

 

 

 

(2,607

)

 

 

2,354

 

Total revenue

 

 

16,291

 

 

 

(1,009

)

 

 

15,282

 

 

 

43,311

 

 

 

(1,076

)

 

 

42,235

 

Cost of product revenue

 

 

10,508

 

 

 

 

 

 

10,508

 

 

 

29,599

 

 

 

1

 

 

 

29,600

 

Cost of service revenue

 

 

1,613

 

 

 

(954

)

 

 

659

 

 

 

3,544

 

 

 

(1,692

)

 

 

1,852

 

Total cost of revenue

 

 

12,121

 

 

 

(954

)

 

 

11,167

 

 

 

33,143

 

 

 

(1,691

)

 

 

31,452

 

Gross profit

 

 

4,170

 

 

 

(55

)

 

 

4,115

 

 

 

10,168

 

 

 

615

 

 

 

10,783

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

2,269

 

 

 

 

 

 

2,269

 

 

 

7,681

 

 

 

 

 

 

7,681

 

Sales and marketing

 

 

2,190

 

 

 

352

 

 

 

2,542

 

 

 

6,903

 

 

 

922

 

 

 

7,825

 

Research and development

 

 

298

 

 

 

 

 

 

298

 

 

 

1,057

 

 

 

 

 

 

1,057

 

Total operating expenses

 

 

4,757

 

 

 

352

 

 

 

5,109

 

 

 

15,641

 

 

 

922

 

 

 

16,563

 

Loss from operations

 

 

(587

)

 

 

(407

)

 

 

(994

)

 

 

(5,473

)

 

 

(307

)

 

 

(5,780

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

31

 

 

 

 

 

 

31

 

 

 

65

 

 

 

 

 

 

65

 

Interest expense

 

 

(77

)

 

 

12

 

 

 

(65

)

 

 

(335

)

 

 

13

 

 

 

(322

)

Amortization of debt issue cost

 

 

(31

)

 

 

 

 

 

 

(31

)

 

 

(31

)

 

 

 

 

 

 

(31

)