oesx-10q_20190630.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 June 30, 2019

OR

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

Commission file number 001-33887

 

Orion Energy Systems, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Wisconsin

 

39-1847269

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification number)

 

2210 Woodland Drive, Manitowoc, Wisconsin

 

54220

(Address of principal executive offices)

 

(Zip code)

Registrant’s telephone number, including area code: (920) 892-9340

 

Securities registered pursuant to Section 12(b) of the act:

 

Title of Each Class

 

Trading Symbol (s)

 

Name of Each Exchange on Which Registered

Common stock, no par value

 

OESX

 

The Nasdaq Stock Market LLC

(NASDAQ Capital Market)

Common stock purchase rights

 

 

 

The Nasdaq Stock Market LLC

(NASDAQ Capital Market)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes      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 30,121,487 shares of the Registrant’s common stock outstanding on July 31, 2019.

 


ORION ENERGY SYSTEMS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

TABLE OF CONTENTS

 

 

 

Page(s)

PART I FINANCIAL INFORMATION

3

ITEM 1.

Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and March 31, 2019

3

 

Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2019 and June 30, 2018

4

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended June 30, 2019 and June 30, 2018

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2019 and June 30, 2018

6

 

Notes to the Condensed Consolidated Financial Statements

7

ITEM 2.

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

23

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

31

ITEM 4.

Controls and Procedures

31

PART II OTHER INFORMATION

32

ITEM 1.

Legal Proceedings

32

ITEM 1A.

Risk Factors

32

ITEM 2.

Unregistered Sale of Equity Securities and Use of Proceeds

32

ITEM 5.

Other Information

32

ITEM 6.

Exhibits

33

SIGNATURE

34

Exhibit 10.2

 

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)

 

 

 

June 30, 2019

 

 

March 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,230

 

 

$

8,729

 

Accounts receivable, net

 

 

24,003

 

 

 

14,804

 

Revenue earned but not billed

 

 

3,508

 

 

 

3,746

 

Inventories, net

 

 

14,933

 

 

 

13,403

 

Prepaid expenses and other current assets

 

 

677

 

 

 

695

 

Total current assets

 

 

53,351

 

 

 

41,377

 

Property and equipment, net

 

 

11,945

 

 

 

12,010

 

Other intangible assets, net

 

 

2,375

 

 

 

2,469

 

Other long-term assets

 

 

262

 

 

 

165

 

Total assets

 

$

67,933

 

 

$

56,021

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

26,862

 

 

$

19,706

 

Accrued expenses and other

 

 

8,332

 

 

 

7,410

 

Deferred revenue, current

 

 

121

 

 

 

123

 

Current maturities of long-term debt

 

 

97

 

 

 

96

 

Total current liabilities

 

 

35,412

 

 

 

27,335

 

Revolving credit facility

 

 

8,972

 

 

 

9,202

 

Long-term debt, less current maturities

 

 

59

 

 

 

81

 

Deferred revenue, long-term

 

 

772

 

 

 

791

 

Other long-term liabilities

 

 

655

 

 

 

642

 

Total liabilities

 

 

45,870

 

 

 

38,051

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

   2019 and March 31, 2019; no shares issued and outstanding at June 30, 2019

   and March 31, 2019

 

 

 

 

 

 

Common stock, no par value: Shares authorized: 200,000,000 at June 30, 2019

   and March 31, 2019; shares issued: 39,583,313 at June 30, 2019 and

   39,037,969 at March 31, 2019; shares outstanding: 30,121,487 at June 30,

   2019 and 29,600,158 at March 31, 2019

 

 

 

 

 

 

Additional paid-in capital

 

 

156,015

 

 

 

155,828

 

Treasury stock, common shares: 9,461,826 at June 30, 2019 and 9,437,811 at

   March 31, 2019

 

 

(36,153

)

 

 

(36,091

)

Retained deficit

 

 

(97,799

)

 

 

(101,767

)

Total shareholders’ equity

 

 

22,063

 

 

 

17,970

 

Total liabilities and shareholders’ equity

 

$

67,933

 

 

$

56,021

 

 

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 June 30,

 

 

 

2019

 

 

2018

 

Product revenue

 

$

32,339

 

 

$

12,808

 

Service revenue

 

 

10,039

 

 

 

1,014

 

Total revenue

 

 

42,378

 

 

 

13,822

 

Cost of product revenue

 

 

23,825

 

 

 

9,724

 

Cost of service revenue

 

 

8,270

 

 

 

642

 

Total cost of revenue

 

 

32,095

 

 

 

10,366

 

Gross profit

 

 

10,283

 

 

 

3,456

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative

 

 

3,007

 

 

 

3,076

 

Sales and marketing

 

 

2,706

 

 

 

2,578

 

Research and development

 

 

411

 

 

 

405

 

Total operating expenses

 

 

6,124

 

 

 

6,059

 

Income (loss) from operations

 

 

4,159

 

 

 

(2,603

)

Other income (expense):

 

 

 

 

 

 

 

 

Other income

 

 

12

 

 

 

19

 

Interest expense

 

 

(136

)

 

 

(89

)

Amortization of debt issue costs

 

 

(61

)

 

 

 

Interest income

 

 

2

 

 

 

3

 

Total other expense

 

 

(183

)

 

 

(67

)

Income (loss) before income tax

 

 

3,976

 

 

 

(2,670

)

Income tax expense

 

 

8

 

 

 

22

 

Net income (loss)

 

$

3,968

 

 

$

(2,692

)

Basic net income (loss) per share attributable to common shareholders

 

$

0.13

 

 

$

(0.09

)

Weighted-average common shares outstanding

 

 

29,723,472

 

 

 

29,070,193

 

Diluted net income (loss) per share

 

$

0.13

 

 

$

(0.09

)

Weighted-average common shares and share equivalents

   outstanding

 

 

30,550,892

 

 

 

29,070,193

 

 

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

4


 

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

 

 

 

Shareholders’ Equity

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Additional

Paid-in

Capital

 

 

Treasury

Stock

 

 

Retained

Earnings

(Deficit)

 

 

Total

Shareholders’

Equity

 

Balance, March 31, 2019

 

 

29,600,158

 

 

$

155,828

 

 

$

(36,091

)

 

$

(101,767

)

 

$

17,970

 

Exercise of stock options for cash

 

 

10,000

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

16

 

Shares issued under Employee Stock Purchase

   Plan

 

 

613

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

2

 

Stock-based compensation

 

 

535,344

 

 

 

171

 

 

 

 

 

 

 

 

 

 

 

171

 

Employee tax withholdings on stock-based

   compensation

 

 

(24,628

)

 

 

 

 

 

 

(64

)

 

 

 

 

 

 

(64

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,968

 

 

 

3,968

 

Balance, June 30, 2019

 

 

30,121,487

 

 

$

156,015

 

 

$

(36,153

)

 

$

(97,799

)

 

$

22,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Additional

Paid-in

Capital

 

 

Treasury

Stock

 

 

Retained

Earnings

(Deficit)

 

 

Total

Shareholders’

Equity

 

Balance, March 31, 2018

 

 

28,953,183

 

 

$

155,003

 

 

$

(36,085

)

 

$

(95,494

)

 

$

23,424

 

Shares issued under Employee Stock Purchase

   Plan

 

 

415

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

453,754

 

 

 

228

 

 

 

 

 

 

 

 

 

 

 

228

 

Employee tax withholdings on stock-based

   compensation

 

 

(3,867

)

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

(3

)

Cumulative effect of accounting change due to

   adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401

 

 

 

401

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,692

)

 

 

(2,692

)

Balance, June 30, 2018

 

 

29,403,485

 

 

$

155,231

 

 

$

(36,087

)

 

$

(97,785

)

 

$

21,359

 

 

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

5


 

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,968

 

 

$

(2,692

)

Adjustments to reconcile net income (loss) to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

315

 

 

 

347

 

Amortization of intangible assets

 

 

94

 

 

 

121

 

Stock-based compensation

 

 

171

 

 

 

228

 

Amortization of debt issue costs

 

 

61

 

 

 

 

Provision for inventory reserves

 

 

80

 

 

 

17

 

Provision for bad debts

 

 

 

 

 

82

 

Other

 

 

21

 

 

 

3

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, current and long-term

 

 

(9,199

)

 

 

1,756

 

Revenue earned but not billed

 

 

238

 

 

 

1,300

 

Inventories

 

 

(1,610

)

 

 

(102

)

Prepaid expenses and other assets

 

 

(5

)

 

 

150

 

Accounts payable

 

 

7,106

 

 

 

(575

)

Accrued expenses and other

 

 

777

 

 

 

(553

)

Deferred revenue, current and long-term

 

 

(21

)

 

 

(21

)

Net cash provided by operating activities

 

 

1,996

 

 

 

61

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(200

)

 

 

(23

)

Net cash used in investing activities

 

 

(200

)

 

 

(23

)

Financing activities

 

 

 

 

 

 

 

 

Payment of long-term debt

 

 

(21

)

 

 

(19

)

Proceeds from revolving credit facility

 

 

31,100

 

 

 

17,188

 

Payments of revolving credit facility

 

 

(31,329

)

 

 

(18,794

)

Payments to settle employee tax withholdings on stock-based compensation

 

 

(63

)

 

 

(3

)

Net proceeds from employee equity exercises

 

 

18

 

 

 

1

 

Net cash used in financing activities

 

 

(295

)

 

 

(1,627

)

Net increase (decrease) in cash and cash equivalents

 

 

1,501

 

 

 

(1,589

)

Cash and cash equivalents at beginning of period

 

 

8,729

 

 

 

9,424

 

Cash and cash equivalents at end of period

 

$

10,230

 

 

$

7,835

 

 

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

 

6


 

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.

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, 2020 or other interim periods.

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

The accompanying unaudited Condensed Consolidated Financial Statements 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, 2019 filed with the SEC on June 5, 2019.

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

Concentration of Credit Risk and Other Risks and Uncertainties

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

7


 

Orion purchases components necessary for its lighting products, including ballasts, lamps and LED components, from multiple suppliers.  For the three months ended June 30, 2019, one supplier accounted for 13.7% of total cost of revenue. For the three months ended June 30, 2018, one supplier accounted for 11.4% of total cost of revenue.

For the three months ended June 30, 2019, one customer accounted for 77.0% of total revenue.  For the three months ended June 30, 2018, no customer accounted for more than 10.0% of total revenue.

As of June 30, 2019, one customer accounted for 74.3% of Accounts receivable. As of March 31, 2019, one customer accounted for 56.2% of Accounts receivable.

Recent Accounting Pronouncements

 

Recently Adopted Standards

On April 1, 2019, Orion adopted Accounting Standards Update 2016-02, and subsequent amendments, which is included in the Accounting Standards Codification (“ASC”) as Topic 842, Leases (“ASC 842”), retrospectively through a cumulative-effect adjustment.  Orion elected the package of practical expedients provided for in ASU 842, which among other things, allows companies to carry forward their historical lease classification.  Previously, Orion followed the guidance set forth in ASC 840, Leases.  

For Orion, the most significant difference between ASC 840 and ASC 842 is the requirement that lessees recognize right-of-use assets and liabilities on the balance sheet for the rights and obligations created by long-term operating leases.  Previously, the financial impact associated with operating leases was recorded only in Orion’s statement of operations.   Determining whether a contract includes a lease, and assessing whether the lease should be accounted for as a finance lease or an operating lease, is a matter of judgment based on whether the risks and rewards, as well as substantive control of the associated assets specified in the contract, have been transferred from the lessor to the lessee.  

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

 

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.

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.

8


 

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

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

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

Revenue from turnkey projects that is allocated to the sale of the lighting fixtures is recorded at the point in time when management believes the customer obtains control of the product(s) and is reflected in Product revenue.  This point in time is determined separately for each customer contract based upon the terms of the contract and the nature and extent of Orion’s control of the light fixtures during the installation.  Product revenue associated with turnkey projects can be recorded (a) upon shipment or delivery, (b) subsequent to shipment or delivery and upon customer payments for the light fixtures, (c) when an individual light fixture is installed and working correctly, or (d) when the customer acknowledges that the entire installation project is substantially complete.  Determining the point in time when a customer obtains control of the lighting fixtures in a turnkey project can be a complex judgment and is applied separately for each individual light fixture included in a contract.  In making this judgment, management considers the timing of various factors, including, but not limited to, those detailed below:

 

when there is a legal transfer of ownership;

 

when the customer obtains physical possession of the products;

 

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

 

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

 

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

 

when each light fixture is physically installed and working correctly;

 

when the customer formally accepts the product; and

 

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

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

Most products are manufactured in accordance with Orion’s standard specifications.  However, some products are manufactured to a customer’s specific requirements with no alternative use to Orion.  In such cases, and when Orion has an enforceable right to payment, Product revenue is recorded on an over-time basis measured using an input methodology that calculates the costs incurred to date as compared to total expected costs.  There was no over-time revenue related to custom products recognized in the three months ended June 30, 2019 or June 30, 2018.

9


 

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

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

See Note 10, Accrued Expenses and Other for a discussion of Orion’s accounting for the warranty it provides to customers for its products and services.

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

 

Contract Fulfillment Costs

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

 

Disaggregation of Revenue

Orion’s Product revenue includes revenue from contracts with customers accounted for under the scope of ASC 606 and revenue which is accounted for under other guidance.  For the three months ended June 30, 2019, Product revenue included $0.4 million derived from sales-type leases for light fixtures, $64 thousand derived from the sale of tax credits generated from Orion’s legacy operation for distributing solar energy, and $19 thousand 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 Note 17, Segments, for additional discussion concerning Orion’s reportable segments.

10


 

The following table provides detail of Orion’s total revenues for the three months ended June 30, 2019 (dollars in thousands):

 

 

 

Three Months Ended June 30, 2019

 

 

 

Product

 

 

Services

 

 

Total

 

Revenue from contracts with customers:

 

 

 

 

 

 

 

 

 

 

 

 

Lighting revenues, by end user

 

 

 

 

 

 

 

 

 

 

 

 

Federal government

 

$

658

 

 

$

246

 

 

$

904

 

Commercial and industrial

 

 

31,184

 

 

 

9,793

 

 

 

40,977

 

Total lighting

 

 

31,842

 

 

 

10,039

 

 

 

41,881

 

Solar energy related revenues

 

 

19

 

 

 

 

 

 

19

 

Total revenues from contracts with customers

 

 

31,861

 

 

 

10,039

 

 

 

41,900

 

Revenue accounted for under other guidance

 

 

478

 

 

 

 

 

 

478

 

Total revenue

 

$

32,339

 

 

$

10,039

 

 

$

42,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

Product

 

 

Services

 

 

Total

 

Revenue from contracts with customers:

 

 

 

 

 

 

 

 

 

 

 

 

Lighting revenues, by end user

 

 

 

 

 

 

 

 

 

 

 

 

Federal government

 

$

97

 

 

$

 

 

$

97

 

Commercial and industrial

 

 

11,901

 

 

 

1,014

 

 

 

12,915

 

Total lighting

 

 

11,998

 

 

 

1,014

 

 

 

13,012

 

Solar energy related revenues

 

 

20

 

 

 

 

 

 

20

 

Total revenues from contracts with customers

 

 

12,018

 

 

 

1,014

 

 

 

13,032

 

Revenue accounted for under other guidance

 

 

790

 

 

 

 

 

 

790

 

Total revenue

 

$

12,808

 

 

$

1,014

 

 

$

13,822

 

 

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

The payments associated with these transactions that are due during the twelve months subsequent to June 30, 2019 are included in Accounts receivable, net in Orion’s Condensed Consolidated Balance Sheets.  The remaining amounts due that are associated with these transactions are included in Other long-term assets in Orion’s Condensed Consolidated Balance Sheets.

11


 

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 months ended June 30, 2019, and June 30, 2018, was $2.8 million and $2.0 million, respectively.  Orion’s losses on these sales were $47 thousand and $54 thousand for the three months ended June 30, 2019, and June 30, 2018, respectively and are 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 June 30, 2019 and March 31, 2019 includes $53 thousand and $0.7 million, respectively, which was not derived from contracts with customers and therefore not classified as a contract asset as defined by the new standards.

Deferred revenue, current as of June 30, 2019, and March 31, 2019 includes $46 thousand and $48 thousand, respectively, of contract liabilities which represented consideration received from customers prior to the point that Orion has fulfilled the promises included in a performance obligation and recorded revenue.

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

12


 

The following chart shows the balance of Orion’s receivables arising from contracts with customers, contract assets and contract liabilities as of June 30, 2019 and March 31, 2019 (dollars in thousands):

 

 

 

June 30,

2019

 

 

March 31,

2019

 

Accounts receivable, net

 

$

24,003

 

 

$

14,804

 

Contract assets

 

$

3,455

 

 

$

3,005

 

Contract liabilities

 

$

46

 

 

$

48

 

 

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.

 

 

NOTE 4 — ACCOUNTS RECEIVABLE, NET

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

 

 

 

June 30,

2019

 

 

March 31,

2019

 

Accounts receivable, gross

 

$

24,119

 

 

$

15,011

 

Allowance for doubtful accounts

 

 

(116

)

 

 

(207

)

Accounts receivable, net

 

$

24,003

 

 

$

14,804

 

 

NOTE 5 — INVENTORIES, NET

As of June 30, 2019, and March 31, 2019, Orion's Inventory balances were as follows (dollars in thousands):

 

 

 

Cost

 

 

Excess and

Obsolescence

Reserve

 

 

Net

 

As of June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Raw materials and components

 

$

10,501

 

 

$

(1,438

)

 

$

9,063

 

Work in process

 

 

1,046

 

 

 

(269

)

 

 

777

 

Finished goods

 

 

6,241

 

 

 

(1,148

)

 

 

5,093

 

Total

 

$

17,788

 

 

$

(2,855

)

 

$

14,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Raw materials and components

 

$

9,161

 

 

$

(1,393

)

 

$

7,768

 

Work in process

 

 

1,010

 

 

 

(269

)

 

 

741

 

Finished goods

 

 

6,056

 

 

 

(1,162

)

 

 

4,894

 

Total

 

$

16,227

 

 

$

(2,824

)

 

$

13,403

 

 

NOTE 6 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

 

13


 

NOTE 7 — PROPERTY AND EQUIPMENT, NET

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

 

 

 

June 30,

2019

 

 

March 31,

2019

 

Land and land improvements

 

$

433

 

 

$

433

 

Buildings and building improvements

 

 

9,271

 

 

 

9,245

 

Furniture, fixtures and office equipment

 

 

7,259

 

 

 

7,238

 

Leasehold improvements

 

 

324

 

 

 

324

 

Equipment leased to customers

 

 

4,997

 

 

 

4,997

 

Plant equipment

 

 

12,321

 

 

 

12,211

 

Construction in Progress

 

 

127

 

 

 

43

 

Gross property and equipment

 

 

34,732

 

 

 

34,491

 

Less: accumulated depreciation

 

 

(22,787

)

 

 

(22,481

)

Total property and equipment, net

 

$

11,945

 

 

$

12,010

 

 

Orion recorded depreciation expense of $0.3 million for the three months ended June 30, 2019 and 2018.

NOTE 8 — LEASES

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

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

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

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

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

14


 

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

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

 

Assets Orion Leases from Other Parties

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

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

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

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

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

 

 

 

Balance sheet classification

 

June 30, 2019

 

Assets

 

 

 

 

 

 

Operating lease assets

 

Other long-term assets

 

$

138

 

Liabilities

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

   Operating lease liabilities

 

Accrued expenses and other

 

 

120

 

Non-current liabilities

 

 

 

 

 

 

   Operating lease liabilities

 

Other long-term liabilities

 

 

9

 

Total lease liabilities

 

 

 

$

129

 

 

Orion had operating lease costs of $0.2 million during the first quarter of fiscal 2020 and fiscal 2019.

 

 

Assets Orion Leases to Other Parties

Orion provides long-term financing to one customer who frequently engages Orion in large turnkey projects that span between three and nine months. The customer executes an agreement providing for monthly payments, at a fixed monthly amount, of the contract price, plus interest, over typically a five-year period. The total transaction price in these contracts is allocated between product and services in the same manner as all other turnkey projects.   The portion of the transaction associated with the installation is accounted for consistently with all other installation related performance obligations under ASC 606.  

15


 

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

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

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

 

 

 

Three Months

Ended

 

 

 

June 30, 2019

 

Product revenue

 

$

395

 

Cost of product revenue

 

$

360

 

 

The Condensed Consolidated Balance Sheets as of April 1, 2019 or June 30, 2019 do not include a net investment in sales-type leases as all amounts due from the customer associated with lighting fixtures that were acknowledged to be installed and working correctly prior to period end were transferred to the financing institution prior to the respective balance sheet dates.  

 

Other Agreements where Orion is the Lessor

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

 

 

NOTE 9 — OTHER INTANGIBLE ASSETS, NET

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

 

 

 

June 30, 2019

 

 

March 31, 2019

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

Patents

 

$

2,667

 

 

$

(1,572

)

 

$

1,095

 

 

$

2,667

 

 

$

(1,529

)

 

$

1,138

 

Licenses

 

 

58

 

 

 

(58

)

 

 

 

 

 

58

 

 

 

(58

)

 

 

 

Trade name and trademarks

 

 

1,007

 

 

 

 

 

 

1,007

 

 

 

1,007

 

 

 

 

 

 

1,007

 

Customer relationships

 

 

3,600

 

 

 

(3,482

)

 

 

118

 

 

 

3,600

 

 

 

(3,459

)

 

 

141

 

Developed technology

 

 

900

 

 

 

(745

)

 

 

155

 

 

 

900

 

 

 

(717

)

 

 

183

 

Total

 

$

8,232

 

 

$

(5,857

)

 

$

2,375

 

 

$

8,232

 

 

$

(5,763

)

 

$

2,469

 

 

Amortization expense on intangible assets was $0.1 million for the three months ended June 30, 2019 and 2018.

As of June 30, 2019, the weighted average remaining useful life of intangible assets was 4.86 years.

16


 

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

 

Fiscal 2020 (period remaining)

 

$

269

 

Fiscal 2021

 

 

288

 

Fiscal 2022

 

 

191

 

Fiscal 2023

 

 

100

 

Fiscal 2024

 

 

96

 

Fiscal 2025

 

 

86

 

Thereafter

 

 

338

 

Total

 

$

1,368

 

 

NOTE 10 — ACCRUED EXPENSES AND OTHER

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

 

 

 

June  30,

2019

 

 

March 31,

2019

 

Compensation and benefits

 

$

1,638

 

 

$

1,212

 

Sales tax

 

 

1,101

 

 

 

713

 

Accrued project costs

 

 

3,209

 

 

 

3,293

 

Legal and professional fees

 

 

276

 

 

 

356

 

Warranty

 

 

309

 

 

 

282

 

Sales returns reserve

 

 

257

 

 

 

141

 

Credits due to customers

 

 

962

 

 

 

987

 

Other accruals

 

 

580

 

 

 

426

 

Total

 

$

8,332