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(cid:3)(cid:2)
(cid:1)(cid:2)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2010
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-33887
Orion Energy Systems, Inc.
(Exact name of Registrant as specified in its charter)
Wisconsin
(State or other jurisdiction of
incorporation or organization)
2210 Woodland Drive, Manitowoc, WI
(Address of principal executive offices)
39-1847269
(I.R.S. Employer
Identification No.)
54220
(Zip Code)
(920) 892-9340
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the act:
Title of Each Class
Common stock, no par value
Common stock purchase rights
Name of Each Exchange on Which Registered
NYSE AMEX LLC
NYSE AMEX LLC
Securities registered pursuant to Section 12(g) of the act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes (cid:1)(cid:2)No (cid:3)(cid:2)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes (cid:1)(cid:2)No (cid:3)(cid:2)
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 (cid:3)(cid:2)No (cid:1)(cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). (Registrant is not yet required to provide financial disclosure in an Interactive Data File format.). Yes (cid:1)(cid:2)No (cid:1)(cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3)(cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:1)(cid:2) Accelerated filer (cid:1)(cid:2)
Non-accelerated filer (cid:3)(cid:2)
(Do not check if a smaller reporting company)
Smaller reporting company (cid:1)(cid:2)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:1)(cid:2)No (cid:3)(cid:2)
The aggregate market value of shares of the Registrant’s common stock held by non-affiliates as of September 30, 2009, the
last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $67,988,818.
At June 9, 2010, there were 22,591,811 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders are incorporated herein by
reference in Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days of the Registrant’s fiscal year ended March 31, 2010.
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FORWARD-LOOKING STATEMENTS
This Form 10-K includes forward-looking statements that are based on our beliefs and assumptions and on information
currently available to us. When used in this Form 10-K, the words “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions identify forward-
looking statements. Although we believe that our plans, intentions, and expectations reflected in any forward-looking statements
are reasonable, these plans, intentions or expectations are based on assumptions, are subject to risks and uncertainties and may
not be achieved. These statements are based on assumptions made by us based on our experience and perception of historical
trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances.
Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. Our actual results,
performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking
statements contained in this Form 10-K. Important factors could cause actual results to differ materially from our forward-
looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also,
forward-looking statements represent our beliefs and assumptions only as of the date of this Form 10-K. All forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements
set forth in this Form 10-K. Actual events, results and outcomes may differ materially from our expectations due to a variety of
factors. Although it is not possible to identify all of these factors, they include, among others, the following:
•
•
•
•
further deterioration of market conditions, including customer capital expenditure budgets;
our ability to compete in a highly competitive market and our ability to respond successfully to market
competition;
increasing duration of customer sales cycles;
the market acceptance of our products and services, including our Orion Throughput Agreements, or OTAs,
and/or Orion Virtual Power Plant Agreements, or OVPPs;
•
our sales mix as between the relative level of our cash sales and our finance transactions through OTAs and
OVPPs;
•
•
•
•
•
•
•
•
•
•
our ability to internally and/or externally finance a potentially greater volume of OTAs and OVPPs;
price fluctuations, shortages or interruptions of component supplies and raw materials used to manufacture our
products;
loss of one or more key customers or suppliers, including key contacts at such customers;
a reduction in the price of electricity;
the cost to comply with, and the effects of, any current and future government regulations, laws and policies;
increased competition from government subsidies and utility incentive programs;
dependence on customers’ capital budgets for sales of products and services;
our development of, and participation in, new product and technology offerings or applications;
legal proceedings; and
potential warranty claims.
You are urged to carefully consider these factors and the other factors described under Part I. Item 1A. “Risk Factors” when
evaluating any forward-looking statements, and you should not place undue reliance on these forward-looking statements.
Except as required by applicable law, we assume no obligation to update any forward-looking statements publicly or to update
the reasons why actual results could differ materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.
2
ORION ENERGY SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2010
Table of Contents
PART I
Page
Item 1. Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Removed and Reserved
Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
PART II
Securities
Item 6 Selected Financial Data
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
PART III
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
Item 15 Exhibits and Financial Statement Schedules
Signatures
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
PART IV
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4
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27
27
30
32
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ITEM 1. BUSINESS
The following business overview is qualified in its entirety by the more detailed information included elsewhere or incorporated
by reference in this Annual Report on Form 10-K . As used herein, unless otherwise expressly stated or the context otherwise
requires, all references to “Orion,” “we,” “us,” “our,” “the Company” and similar references are to Orion Energy Systems,
Inc. and its consolidated subsidiaries.
Overview
We design, manufacture, market and implement energy management systems consisting primarily of high-performance,
energy efficient lighting systems, controls and related services. Our energy management systems deliver energy savings and
efficiency gains to our commercial and industrial customers without compromising their quantity or quality of light. The core of
our energy management system is our high intensity fluorescent, or HIF, lighting system that we estimate cuts our customers’
lighting-related electricity costs by approximately 50%, while increasing their quantity of light by approximately 50% and
improving lighting quality when replacing traditional high intensity discharge, or HID, fixtures. Our customers typically realize a
two-to three -year payback period from electricity cost savings generated by our HIF lighting systems without considering utility
incentives or government subsidies. We have sold and installed our HIF fixtures in over 5,600 facilities across North America,
representing over 886 million square feet of commercial and industrial building space, including for 120 Fortune 500 companies,
such as Anheuser-Busch Companies, Inc., Coca-Cola Enterprises Inc., General Electric Co., Kraft Foods Inc., Newell
Rubbermaid Inc., OfficeMax, Inc., PepsiAmericas, Inc., and SYSCO Corp.
Our core energy management system is comprised of: our HIF lighting system; our InteLite wireless lighting controls; our
Apollo Solar Light Pipe, which collects and focuses renewable daylight and consumes no electricity; and integrated energy
management services. We believe that the implementation of our complete energy management system enables our customers to
further reduce electricity costs, while permanently reducing base and peak load demand from the electrical grid. From
December 1, 2001 through March 31, 2010, we installed over 1,739,000 HIF lighting systems for our commercial and industrial
customers. We are focused on leveraging this installed base to expand our customer relationships from single-site
implementations of our HIF lighting systems to enterprise-wide roll-outs of our complete energy management system. We are
also attempting to expand our product and service offerings by providing our customers with exterior lighting products and
renewable energy solutions. We generally have focused on selling retrofit projects whereby we replace inefficient HID,
fluorescent or incandescent systems. In fiscal 2010, we generated approximately 58% of our revenue through direct sales
relationships with end users, compared to 60% in fiscal 2009 and 75% in fiscal 2008. We also continue to develop resellers and
partner relationships that utilize our systematized sales process to increase overall market coverage and awareness in regional
and local markets along with electrical contractors that provide installation services for these projects. Reflecting our increased
emphasis on expanding this sales channel, approximately 42% of our revenues in fiscal 2010 were generated from such indirect
sales, compared to 40% in fiscal 2009 and 25% in fiscal 2008.
We estimate that the use of our HIF fixtures has resulted in cumulative electricity cost savings for our customers of
approximately $857 million and has reduced base and peak load electricity demand by approximately 527 megawatts, or MW,
through March 31, 2010. We estimate that this reduced electricity consumption has reduced associated indirect carbon dioxide
emissions by approximately 7.4 million tons over the same period.
For a description of the assumptions behind our calculations of customer kilowatt demand reduction, customer kilowatt
hours and electricity costs saved and reductions in indirect carbon dioxide emissions associated with our products used
throughout this document, see the following table and notes.
Cumulative From December 1, 2001
Through March 31, 2010
(in thousands, unaudited)
HIF lighting systems sold (1)
Total units sold (including HIF lighting systems)
Customer kilowatt demand reduction (2)
Customer kilowatt hours saved (2)(3)
Customer electricity costs saved (4)
Indirect carbon dioxide emission reductions from customers’ energy savings (tons) (5)
Square footage retrofitted (6)
$
1,739
2,252
528
11,128,923
856,927
7,397
886,455
(1) “HIF lighting systems” includes all HIF units sold under the brand name “Compact Modular” and its predecessor,
“Illuminator.”
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(2) A substantial majority of our HIF lighting systems, which generally operate at approximately 224 watts per six-lamp
fixture, are installed in replacement of HID fixtures, which generally operate at approximately 465 watts per fixture in
commercial and industrial applications. We calculate that each six-lamp HIF lighting system we install in replacement of an
HID fixture generally reduces electricity consumption by approximately 241 watts (the difference between 465 watts and
224 watts). In retrofit projects where we replace fixtures other than HID fixtures, or where we replace fixtures with products
other than our HIF lighting systems (which other products generally consist of products with lamps similar to those used in
our HIF systems, but with varying frames, ballasts or power packs), we generally achieve similar wattage reductions (based
on an analysis of the operating wattages of each of our fixtures compared to the operating wattage of the fixtures they
typically replace). We calculate the amount of kilowatt demand reduction by multiplying (i) 0.241 kilowatts per six-lamp
equivalent unit we install by (ii) the number of units we have installed in the period presented, including products other than
our HIF lighting systems (or a total of approximately 2.25 million units).
(3) We calculate the number of kilowatt hours saved on a cumulative basis by assuming the demand (kW) reduction for each
fixture and assuming that each such unit has averaged 7,500 annual operating hours since its installation.
(4) We calculate our customers’ electricity costs saved by multiplying the cumulative total customer kilowatt hours saved
indicated in the table by $0.077 per kilowatt hour. The national average rate for 2009, which is the most current full year for
which this information is available, was $0.0989 per kilowatt hour according to the United States Energy Information
Administration.
(5) We calculate this figure by multiplying (i) the estimated amount of carbon dioxide emissions that result from the generation
of one kilowatt hour of electricity (determined using the Emissions and Generation Resource Integration Database, or
EGrid, prepared by the United States Environmental Protection Agency, or EPA), by (ii) the number of customer kilowatt
hours saved as indicated in the table.
(6) Based on 2.2 million total units sold, which contain a total of approximately 11.0 million lamps. Each lamp illuminates
approximately 75 square feet. The majority of our installed fixtures contain six lamps and typically illuminate
approximately 450 square feet.
Our Industry
As a company focused on providing energy management systems, our market opportunity is created by growing electricity
capacity shortages, underinvestment in transmission and distribution, or T&D infrastructure, high electricity costs and the high
financial and environmental costs associated with adding generation capacity and upgrading the T&D infrastructure. The United
States electricity market is generally characterized by rising demand, increasing electricity costs and power reliability issues due
to continued constraints on generation and T&D capacity. Electricity demand is expected to grow steadily over the coming
decades and significant challenges exist in meeting this increase in demand, including the environmental concerns associated
with generation assets using fossil fuels. These constraints are causing governments, utilities and businesses to focus on demand
reduction initiatives, including energy efficiency and other demand-side management solutions.
Today’s Electricity Market
Growing Demand for Electricity. Demand for electricity in the United States has grown steadily in recent years and is
expected to grow significantly for the foreseeable future. According to the Energy Information Administration, or EIA, $
363.7 billion was spent on electricity in 2009 in the United States, up from $219 billion in 1999, an increase of 66%.
Additionally, the EIA identified that consumption was 3,576 billion kWh in 2009 and predicts it will increase by 40% to
5,021 billion kWh in 2035. According to the North American Electric Reliability Corporation, or NAERC, demand for electricity
is expected to increase over the next 10 years by approximately 19% in the United States, but generation capacity is expected to
increase by only approximately 12% in the United States during that same period. As a result of this rapidly growing demand,
the National Electric Reliability Council, or NERC, expects capacity margins to drop below minimum target levels in Texas,
New England, the Mid-Atlantic, the Midwest and the Rocky Mountain area within the next two to three years. According to the
International Energy Agency, or IEA, North America is expected to add 698,000 MW of additional capacity at a cost of $2.4
trillion between 2008 and 2030 to reliably meet expected annual growth in demand. Worldwide, the IEA, expects 4,799,000 MW
of additional capacity to be required over the same period at a total cost of $13.7 trillion. We believe that meeting this increasing
domestic electricity demand will require either an increase in energy supply through capacity expansion, broader adoption of
demand management programs, or a combination of these solutions.
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Challenges to Capacity Expansion. Based on the forecasted growth in electricity demand, the EIA estimates that the United
States will require 250 gigawatts, or GW, of new generating capacity by 2035 (the equivalent of 500 power plants rated at an
average of 500 MW each). According to data provided by the IEA, we estimate that new generating capacity and associated
T&D investment will cost at least $2.2 million per MW.
In addition to the high financial costs associated with adding power generation capacity, there are environmental concerns
about the effects of emissions from additional power plants, especially coal-fired power plants. According to the IEA in its
Annual Energy Outlook for 2010, “federal and state energy policies recently enacted will stimulate the increased use of
renewable technologies and efficiency improvements, slowing the growth of energy-related carbon dioxide emissions through
2035”. According to the EPA, by 2035, total carbon dioxide emissions will be approximately 6,320 million metric tons, which is
approximately 9% higher than 2008 levels. Of the projected 250 GW of new generating capacity required by 2035, coal-fired
plants, which generate significant emissions of carbon dioxide and other pollutants, are projected to account for only 12% of
added capacity between 2009 and 2035; however, coal fired generation will still power 44% of the country’s electricity
generation in 2035, according to the EIA. We believe that concerns over emissions may make it increasingly difficult for utilities
to add coal-fired generating capacity. Clean coal energy initiatives are characterized by an uncertain legislative and regulatory
framework and would involve substantial infrastructure cost to readily commercialize.
Although the EIA expects clean-burning natural gas-fired plants to account for 46% of total required domestic capacity
additions between 2009 and 2035, natural gas prices are directly tied to technological developments and opportunities to capture
new sources of natural gas, which according to the EIA in its Annual Energy Outlook for 2010 is leading to “a great deal of
uncertainty about the long term trend in natural gas prices”. Additionally, natural gas prices have approximately doubled in the
last decade according to the EIA. Environmentally-friendly renewable energy alternatives, such as solar and wind, generally
require subsidies and rebates to be cost competitive and do not provide continuous electricity generation. Despite these
challenges, the EIA projects that 37% of new capacity additions between 2009 and 2035 will be renewable technologies, due in
large part to regulatory initiatives mandating the use of renewable energy sources. We believe these challenges to expanding
generating capacity will increase the need for energy efficiency initiatives to meet demand growth.
Underinvestment in Electricity Transmission and Distribution. According to the Department of Energy, or DOE, the
majority of United States transmission lines, transformers and circuit breakers — the backbone of the United States T&D system
— is more than 25 years old. The underinvestment in T&D infrastructure has led to well-documented power reliability issues,
such as the August 2003 blackout that affected a number of states in the northeastern United States. To upgrade and maintain the
United States T&D system, the Electric Power Research Institute, or EPRI, estimates that the United States will need to invest
over $110 billion, or $5.5 billion per year, by 2025. This underinvestment is projected to become more pronounced as electricity
demand grows. According to NERC, the growth in electricity demand is expected to outpace the growth in transmission capacity
by a significant amount between now and 2015.
High Electricity Costs. Due to the recent recessionary impact within the U.S., electricity pricing has declined slightly from
prior years due to declining demand charges and lower capacity costs for open market purchases of electricity in deregulated
states. Prior to 2009, the price of one kWh of electricity (in nominal dollars, including the effects of inflation) had reached
historic highs, according to the EIA’s Annual Review of Energy 2007. Based on the most recent EIA electricity rate and
consumption data available (January 2010), we estimate that commercial and industrial electricity expenditures rose 25.2% and
32.7%, respectively, from 1995 to 2009, and fell by 4.7% and 4.4%, respectively, in comparing monthly expenditures in
January 2009 and January 2010. We believe that the recent decline in electricity costs will not be sustained in an economic
upturn or through the aging grid supply system and that electricity costs will return to the rates experienced prior to 2009 and
will continue to increase. As a result, we believe that electricity costs will continue to be an increasingly significant operating
expense for businesses, particularly those with large commercial and industrial facilities.
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Our Market Opportunity
We believe that energy efficiency measures represent permanent, cost-effective and environmentally-friendly alternatives to
expanding electricity capacity in order to meet demand growth. The American Council for an Energy Efficient Economy, or
ACEEE, in a 2004 study estimated that the United States can reduce up to 25% of its estimated electricity usage from 2000 to
2020, the equivalent of approximately $70 billion per year in energy savings, by deploying all currently available cost-effective
energy efficiency products and technologies across commercial, industrial and residential market sectors. As a result, we believe
governments, utilities and businesses are increasingly focused on demand reduction through energy efficiency and demand
management programs. For example:
•
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•
Forty-eight states, through legislation, regulation or voluntarily, have seen their utilities design and fund
programs that promote or deliver energy efficiency. In fact, as of March 31, 2010, only Alaska and West
Virginia, along with the District of Columbia, do not have some form of utility or state energy efficiency
programs for any of their commercial or industrial customers.
According to the ACEEE, 22 states have implemented, or are in the process of implementing, Energy Efficiency
Resource Standards, or EERS, or have an energy efficiency component to their Renewable Portfolio Standard, or
RPS, which generally requires utilities to allocate funds to energy efficiency programs to meet near-term energy
savings targets set by state governments or regulatory authorities.
In recent years, there has also been an increasing focus on “decoupling,” a regulatory initiative designed to break
the linkage between utility kWh sales and revenues, in order to remove the disincentives for utilities to promote
load reducing initiatives. Decoupling aims to encourage utilities to actively promote energy efficiency by
allowing utilities to generate revenues and returns on investment from employing energy management solutions.
According to the Natural Resources Defense Council, or NRDC, as of August 20, 2009, 19 states had adopted or
are considering adopting some form of decoupling for electric utilities.
One method utilities use to reduce demand is the implementation of demand response programs. Demand response is a
method of reducing electricity usage during periods of peak demand in order to promote grid stability, either by temporarily
curtailing end use or by shifting generation to backup sources, typically at customer facilities. While demand response is an
effective tool for addressing peak demand, these programs are called upon to reduce consumption typically for only up to 200
hours per year, based on demand conditions, and require end users to compromise their consumption patterns, for example by
reducing lighting or air conditioning.
We believe that given the costs of adding new capacity and the limited demand time period that is addressed by current
demand response initiatives, there is a significant opportunity for more comprehensive energy efficiency solutions to
permanently reduce electricity demand during both peak and off-peak periods. We believe such solutions are a compelling way
for businesses, utilities and regulators to meet rising demand in a cost-effective and environmentally-friendly manner. We also
believe that, in order to gain acceptance among end users, energy efficiency solutions must offer substantial energy savings and
return on investment, without requiring compromises in energy usage patterns.
The Role of Lighting
Commercial and industrial facilities in the United States employ a variety of lighting technologies, including HID,
traditional fluorescents, LED and incandescent lighting fixtures. Our HIF lighting systems typically replace HID fixtures, which
operate inefficiently and, according to EPRI, only convert approximately 36% of the energy they consume into visible light. We
believe that the U.S. market opportunity for HID retrofits is $9.6 billion. We base this estimate on the most recent EIA
Commercial and Manufacturing Energy Consumption Survey published in September 2008, which states that a total of
81.9 billion commercial and industrial square feet are estimated to exist in the U.S. We estimate that 20.6 billion of these square
feet are eligible for HID retrofits, based upon our analysis of the EIA’s market sector data giving consideration to a building’s
principal activity or purpose and the related square feet. Based on our experience that each HID fixture covers 450 square feet,
approximately 45.7 million HID fixtures would be required to cover the estimated 20.6 billion square feet eligible for HID
retrofits, at an estimated average cost per fixture of approximately $210.
Our Solution
50/50 Value Proposition. We estimate our HIF lighting systems generally reduce lighting-related electricity costs by
approximately 50% compared to HID fixtures, while increasing the quantity of light by approximately 50% and improving
lighting quality. From December 1, 2001 through March 31, 2010, we believe that the use of our HIF fixtures has saved our
customers $857 million in electricity costs and reduced their energy consumption by 11.1 billion kWh.
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Multi-Facility Roll-Out Capability . We offer our customers a single source, turn-key solution for project implementation in
which we manage and maintain responsibility for entire multi-facility roll-outs of our energy management solutions across North
American real estate portfolios. This capability allows us to offer our customers an orderly, timely and scheduled process for
recognizing energy reductions and cost savings.
Rapid Payback Period. In most retrofit projects where we replace HID fixtures, our customers typically realize a two- to
three -year payback period on our HIF lighting systems. These returns are achieved without considering utility incentives or
government subsidies (although subsidies and incentives are increasingly being made available to our customers and us in
connection with the installation of our systems and further shorten payback periods).
Comprehensive Energy Management System. Our comprehensive energy management system enables us to reduce our
customers’ base and peak load electricity consumption. By replacing existing HID fixtures with our HIF lighting systems, our
customers permanently reduce base load electricity consumption while significantly increasing their quantity and quality of light.
We can also add intelligence to the customer’s lighting system through the implementation of our InteLite wireless controls. This
gives our customers the ability to control and adjust lighting and energy use levels for additional cost savings. Finally, we offer a
further reduction in electricity consumption through the installation and integration of our Apollo Solar Light Pipe, which is a
lens-based device that collects and focuses renewable daylight without consuming electricity. By integrating our Apollo Solar
Light Pipe and HIF lighting system with the intelligence of our InteLite product line, the output and electricity consumption of
our HIF lighting systems can be automatically adjusted based on the level of natural light being provided by our Apollo Light
Pipe and, in certain circumstances, our customers can illuminate their facilities “off the grid” during peak hours of the day.
Easy Installation, Implementation and Maintenance. Our HIF fixtures are designed with a lightweight construction and
modular plug-and-play architecture that allows for fast and easy installation, facilitates maintenance and allows for easy
integration of other components of our energy management system. We believe our system’s design reduces installation time and
expense compared to other lighting solutions, which further improves our customers’ return on investment. We also believe that
our use of standard components reduces our customers’ ongoing maintenance costs.
Expanded Product/Service Offerings . We have expanded our product and service offerings by providing our customers
with alternative renewable energy systems through our new operating division, Orion Engineered Systems, formerly known as
Orion Technology Ventures. We have also recently introduced exterior lighting products for parking lot and roadway
illumination and an LED product offering for freezer and cold storage applications.
Base and Peak Load Relief for Utilities. The implementation of our energy management systems can substantially reduce
our customers’ electricity demand during peak and off-peak periods. Since we believe that commercial and industrial lighting
represents approximately 14% of total energy usage in the United States, our systems can substantially reduce the need for
additional base and peak load generation and distribution capacity, while reducing the impact of peak demand periods on the
electrical grid. We estimate that the HIF fixtures we have installed from December 1, 2001 through March 31, 2010 have had the
effect of reducing base and peak load demand by approximately 528 MW.
Environmental Benefits. By permanently reducing electricity consumption, our energy management systems reduce
associated indirect carbon dioxide emissions that would otherwise have resulted from generation of this energy. We estimate that
one of our HIF lighting systems, when replacing a standard HID fixture, displaces 0.241 kW of electricity, which, based on
information provided by the EPA, reduces a customer’s indirect carbon dioxide emissions by approximately 1.2 tons per year.
Based on these figures, we estimate that the use of our HIF fixtures has reduced indirect carbon dioxide emissions by
approximately 7.4 million tons through March 31, 2010.
Our Competitive Strengths
Compelling Value Proposition. By permanently reducing lighting-related electricity usage, our systems enable our
commercial and industrial customers to achieve significant cost savings, without compromising the quantity or quality of light in
their facilities. As a result, our energy management systems offer our customers a rapid return on their investment, without
relying on government subsidies or utility incentives. We believe our ability to deliver improved lighting quality while reducing
electricity costs differentiates our value proposition from other demand management solutions which require end users to alter
the time, manner or duration of their electricity use to achieve cost savings. We also offer our customers a single source solution
whereby we manage and are responsible for the entire project, including installation and manufacturing across the entire North
American real estate portfolio. Our ability to offer such a turn-key, national solution allows us to deliver energy reductions and
cost savings to our customers in timely, orderly and planned multi-facility roll-outs.
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Large and Growing Customer Base. We have developed a large and growing national customer base, and have installed our
products in over 5,600 commercial and industrial facilities across North America. As of March 31, 2010, we have completed or
are in the process of completing retrofits in over 1,300 facilities for our Fortune 500 customers. We believe that the willingness
of our blue-chip customers to install our products across multiple facilities represents a significant endorsement of our value
proposition, which in turn helps us sell our energy management systems to new customers.
Systematized Sales Process. We have invested substantial resources in the development of our innovative sales process. We
sell directly to our end user customers using a systematized multi-step sales process that focuses on our value proposition and
provides our sales force with specific, identified tasks that govern their interactions with our customers from the point of lead
generation through delivery of our products and services. Management of this process seeks to continually improve salesforce
effectiveness while simultaneously improving salesforce efficiency. We also train select partners and resellers to follow our
systemized sales process, thereby extending our sales reach while making their businesses more effective.
Innovative Technology. We have developed a portfolio of 26 United States patents primarily covering various elements of
our HIF fixtures. We believe these innovations allow our HIF fixtures to produce more light output per unit of input energy
compared to competitive HIF product offerings. We also have 23 patents pending that primarily cover various elements of our
InteLite wireless controls and our Apollo Solar Light Pipe and certain business methods. To complement our innovative energy
management products, we have introduced integrated energy management services to provide our customers with a turnkey
solution either at a single facility or across North American facility footprints. We believe that our demonstrated ability to
innovate provides us with significant competitive advantages. We believe that our HIF solutions offer significantly more light
output as measured in foot-candles of light delivered per watt of electricity consumed when compared to HID, traditional
fluorescent and light emitting diode, or LED, light sources.
Expanded Product/Service Offerings . We have expanded our product and service offerings by providing our customers
with alternative renewable energy systems through our Orion Engineered Systems division. This division continues to conduct
research on various additional renewable energy technologies that we may be able to add to our menu of products, applications
and services offered, making recommendations to our senior management regarding the technologies’ viability and developing
commercialization tactics. If determined commercially viable, we will ultimately add these technologies into our menu of
products, applications and services offered through our distribution channels. In fiscal 2010, we began researching three test
solar photovoltaic electricity generating projects, completing our test analysis on two of the three in the third quarter, and
executed our first cash sale and our first purchase power agreement, or PPA, as a result of the successful testing of these systems.
A PPA is a supply side agreement for the generation of electricity and subsequent sale to the end user. We expect the installation
and customer acceptance of the third test system to be completed during our fiscal 2011 first quarter. These projects are helping
us answer technological, installation and commercial feasibility questions before determining how this technology may fit into
our overall business plan. We have also recently introduced exterior lighting products for parking lot and roadway illumination
and an LED product offering for freezer and cold storage applications.
Expanded Partner Network . In addition to selling directly to commercial and industrial customers, we sell our energy
management products and services indirectly to end users through wholesale sales to electrical contractors and value-added
resellers. In fiscal 2010, we increased our focus on selling through our contractor and value-added reseller channels with the
development of a partner recruitment team that focuses on recruiting and developing partners in key markets with a higher
saturation of commercial and industrial buildings. Additionally, we are developing an elite partner network and have developed
standard operating procedures related to sales and operations. Our elite partners are required to have in-market technology
demonstration centers to showcase our products and are trained to conduct their own energy workshops for their in-market
customers. We now have relationships with more than 100 partners, some of whom are exclusive agents of our product lines. We
intend to continue to build out our partner network in the future and expect an increasing percentage of our total revenue to be
generated from our partners.
Strong, Experienced Leadership Team. We have a strong and experienced senior management team led by our chairman
and chief executive officer, Neal R. Verfuerth, who was the principal founder of our company in 1996 and invented many of the
products that form our energy management system. Our senior executive management team of seven individuals has a combined
53 years of experience with our company and a combined 84 years of experience in the lighting and energy management
industries.
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Innovative Financing Solutions. We have developed patent-pending financing programs called the Orion Throughput
Agreement, or OTA, and Orion Virtual Power Plant, or OVPP. We use the terms OTA and OVPP interchangeably and there are
no differences between the programs. Our OTAs and OVPPs are structured similarly to a supply contract under which we
commit to deliver a set amount of energy savings to the customer at a fixed monthly rate. Our OTA and OVPP programs allow
customers to deploy our energy management systems without having to make upfront investments or capital outlays. After the
pre-determined amount of energy savings are delivered, our customers assume full ownership of the energy management system
and benefit from the entire amount of energy savings over the remaining useful life of the technology. We believe the OTAs and
OVPPs allow us to capture opportunities that otherwise may not have occurred due to capital constraints. Revenue is recognized
on a monthly basis over the life of the contract, typically 12 months with renewable terms ranging from 12 to 48 months, upon
successful installation of the system and customer acknowledgement that the product is operating as specified. All sales and
administrative activities are expensed as incurred, often several months in advance of the contract completion and the recognition
of the related revenues. Direct product costs are amortized on a monthly basis over the life of the asset. Additionally, we may
choose to sell the payment streams to third party finance companies, in which case, the revenue would be recognized at the net
present value of the total future payments from the finance company upon completion of the project.
Efficient, Scalable Manufacturing Process. We have made significant investments in our manufacturing facility since fiscal
2005, including investments in production efficiencies, automated processes and modern production equipment. These
investments have substantially increased our production capacity, which we believe will enable us to support substantially
increased demand from our current level. In addition, these investments, combined with our modular product design and use of
standard components, enable us to reduce our cost of revenue, while better controlling production quality, and allow us to be
responsive to customer needs on a timely basis. We generally are able to deliver standard products within several weeks of
receipt of order which leads to greater energy savings to customers through shorter implementation time frames. We believe the
sales to implementation cycles for our competitors are substantially longer.
Our Growth Strategies
Leverage Existing Customer Base. We are expanding our relationships with our existing customers by transitioning from
single-site facility implementations to comprehensive enterprise-wide roll-outs of our HIF lighting systems. We are also intend
to leveraging our large installed base of HIF lighting systems to implement all aspects of our energy management system, as well
as our additional alternative/renewable energy solutions for our existing customers.
Target Additional Customers. We are expanding our base of commercial and industrial customers by executing our
systematized sales process with our direct sales force and through our existing resellers and partners. In addition, we are
continuing to execute on a sales and marketing program designed to develop new relationships with partners, resellers and their
respective customers.
Develop New Sources of Revenue Through Expanded Product/Service Offerings . We recently introduced our InteLite
wireless controls, Apollo Solar Light Pipe and outdoor lighting products to complement our core HIF lighting systems. We are
continuing to develop new energy management products and services that can be utilized in connection with our current
products, including intelligent HVAC integration controls, renewable energy solutions, exterior parking lot lighting products,
comprehensive lighting management software and controls and additional consulting services. We are also exploring
opportunities to monetize emissions offsets based on our customers’ electricity savings from implementation of our energy
management systems.
Expanded Partner Network . In addition to selling directly to commercial and industrial customers, we sell our energy
management products and services indirectly to end users through wholesale sales to electrical contractors and value-added
resellers. We intend to continue to build out our partner network in the future, including the addition of elite partners. Our elite
partners represent Orion products exclusively, maintain product demonstration areas within their facilities, are offered our lowest
pricing level and follow Orion standard operating procedures related to sales, project management and operational activities. Our
partner expansion team will focus on aggressively recruiting and developing new partners in markets where we currently do not
have representation and markets with high concentrations of commercial and industrial buildings.
Provide Load Relief to Utilities and Grid Operators. Because commercial and industrial lighting represents a significant
percentage of overall electricity usage, we believe that as we increase our market penetration, our systems will, in the aggregate,
have a significant impact on permanently reducing base and peak load electricity demand. We estimate our HIF lighting systems
can generally eliminate demand at a cost of approximately $1.0 million per MW when used in replacement of typical HID
fixtures, as compared to the IEA’s estimate of approximately $2.2 million per MW of capacity for new generation and T&D
assets. We intend to market our energy management systems directly to utilities and grid operators as a lower-cost, permanent
and distributed alternative to capacity expansion. We believe that utilities and grid operators may increasingly view our systems
as a way to help them meet their requirements to provide reliable electric power to their customers in a cost-effective and
environmentally-friendly manner. In addition, we believe that potential regulatory decoupling initiatives could increase the
amount of incentives that utilities and grid operators will be willing to pay us or our customers for the installation of our systems.
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Continue to Improve Operational Efficiencies. We are focused on continually improving the efficiency of our operations to
increase the profitability of our business. In our manufacturing operations, we pursue opportunities to reduce our materials,
component and manufacturing costs through product engineering, manufacturing process improvements, research and
development on alternative materials and components, volume purchasing and investments in manufacturing equipment and
automation. We also seek to reduce our installation costs by training our authorized installers to perform retrofits more
efficiently and cost effectively. We have also undertaken initiatives to achieve operating expense efficiencies by more effectively
executing our systematized multi-step sales process and focusing on geographically-concentrated sales efforts. We believe that
realizing these efficiencies will enhance our profitability potential and allow us to continue to deliver our compelling value
proposition.
Products and Services
We provide a variety of products and services that together comprise our energy management system. The core of our
energy management system is our HIF lighting platform, which we primarily sell under the Compact Modular brand name. We
offer our customers the option to build on our core HIF lighting platform by adding our InteLite wireless controls and Apollo
Solar Light Pipe. Together with these products, we offer our customers a variety of integrated energy management services such
as system design, project management and installation. We refer to the combination of these products and services as our energy
management system.
Products
The following is a description of our primary products:
The Compact Modular. Our primary product is our line of high-performance HIF lighting systems, the Compact Modular,
which includes a variety of fixture configurations to meet customer specifications. The Compact Modular generally operates at
224 watts per six-lamp fixture, compared to approximately 465 watts for the HID fixtures that it typically replaces. This wattage
difference is the primary reason our HIF lighting systems are able to reduce electricity consumption by approximately 50%
compared to HID fixtures. Our Compact Modular has a thermally efficient design that allows it to operate at significantly lower
temperatures than HID fixtures and most other legacy lighting fixtures typically found in commercial and industrial facilities.
Because of the lower operating temperatures of our fixtures, our ballasts and lamps operate more efficiently, allowing more
electricity to be converted to light rather than to heat or vibration, while allowing these components to last longer before needing
replacement. In addition, the heat reduction provided by installing our HIF lighting systems reduces the electricity consumption
required to cool our customers’ facilities, which further reduces their electricity costs. The EPRI estimates that commercial
buildings use 5% to 10% of their electricity consumption for cooling required to offset the heat generated by lighting fixtures.
In addition, our patented optically-efficient reflector increases light quantity by efficiently harvesting and focusing emitted
light. We and some of our customers have conducted tests that generally show that our Compact Modular product line can
increase light quantity in footcandles by approximately 50% when replacing HID fixtures. Further, we believe, based on
customer data, that our Compact Modular products provide a greater quantity of light per watt than competing HIF fixtures.
The Compact Modular product line also includes our modular power pack, which enables us to customize our customers’
lighting systems to help achieve their specified lighting and energy savings goals. Our modular power pack integrates easily into
a wide variety of electrical configurations at our customers’ facilities, allowing for faster and less expensive installation
compared to lighting systems that require customized electrical connections. In addition, our HIF lighting systems are
lightweight and, we believe, easy to handle, which further reduces installation and maintenance costs and helps to build brand
loyalty with electrical contractors and installers.
InteLite Wireless Controls. Our InteLite wireless control products allow customers to remotely communicate with and give
commands to individual light fixtures and other peripheral devices through web-based software, and allow the customer to
configure and easily change the control parameters of each fixture based on a number of inputs and conditions, including motion
and ambient light levels. Our InteLite products can be added to our HIF lighting systems at or after installation on a “plug and
play” basis by coupling the wireless transceivers directly to the modular power pack. Because of their modular design, our
InteLite wireless products can be added to our energy management system easily and at lower cost when compared to lighting
systems that require similar controls to be included at original installation or retrofitted.
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Apollo Solar Light Pipe. Our Apollo Solar Light Pipe is a lens-based device that collects and focuses renewable daylight,
bringing natural light indoors without consuming electricity. Our Apollo Solar Light Pipe is designed and manufactured to
maximize light collection during times of low sun angles, such as those that occur during early morning and late afternoon. The
Apollo Solar Light Pipe produces maximum lighting “power” in peak summer months and during peak daylight hours, when
electricity is most expensive. By integrating our Apollo Solar Light Pipe with our HIF lighting systems and InteLite wireless
controls, the output and associated electricity consumption of our HIF lighting systems can be automatically adjusted based on
the level of natural light being provided by our Apollo Solar Light Pipe to offer further energy savings for our customers. In
certain circumstances, our customers can illuminate their facilities “off the grid” during peak hours of the day through the use of
our integrated energy management system.
Renewable Energy Projects . In fiscal 2010, we began researching three test solar photovoltaic electricity generating
projects, completing our test analysis on two of the three in the third quarter, and executed our first cash sale and our first PPA as
a result of the successful testing of these systems. We expect the installation and customer acceptance of the third system to be
completed during our fiscal 2011 first quarter. These projects are helping us answer technological, installation and commercial
feasibility questions before determining how this technology may fit into our overall business plan. In the near term, we do not
anticipate revenue contributions from these projects to be significant. Our Orion Engineered Systems division is conducting
research on various renewable energy technologies, including those using wind technologies, that we may be able to add to our
menu of products, applications and services offered.
Other Products. We also offer our customers a variety of other HIF fixtures to address their lighting and energy
management needs, including fixtures designed for agribusinesses, parking lots, roadways, outdoor applications, LED freezer
applications and private label resale.
The installation of our products generally requires the services of qualified and licensed professionals trained to deal with
electrical components and systems.
Services
We provide, and derive revenue from, a range of fee-based lighting-related energy management services to our customers,
including:
•
comprehensive site assessment, which includes a review of the current lighting requirements and energy usage at the
customer’s facility;
•
site field verification, where we perform a test implementation of our energy management system at a customer’s
facility upon request;
•
utility incentive and government subsidy management, where we assist our customers in identifying, applying for and
obtaining available utility incentives or government subsidies;
•
•
•
•
engineering design, which involves designing a customized system to suit our customer’s facility lighting and energy
management needs, and providing the customer with a written analysis of the potential energy savings and lighting and
environmental benefits associated with the designed system;
project management, which involves our working with the electrical contractor in overseeing and managing all phases
of implementation from delivery through installation for a single facility or through multi-facility roll-outs tied to a
defined project schedule;
installation services, which we provide through our national network of qualified third-party installers; and
recycling in connection with our retrofit installations, where we remove, dispose of and recycle our customer’s legacy
lighting fixtures.
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Our warranty policy generally provides for a limited one-year warranty on our products. Ballasts, lamps and other electrical
components are excluded from our standard warranty since they are covered by a separate warranty offered by the original
equipment manufacturer. We coordinate and process customer warranty inquiries and claims, including inquiries and claims
relating to ballast and lamp components, through our customer service department.
We are also expanding our offering of other energy management services that we believe will represent additional sources
of revenue for us in the future. Those services primarily include review and management of electricity bills, as well as
management and control of power quality and remote monitoring and control of our installed systems. We are also beginning to
sell and distribute replacement lamps and fixture components into the after-market.
Our Customers
We primarily target commercial and industrial end users who have warehousing and manufacturing facilities. As of
March 31, 2010, we have installed our products in 5,612 commercial and industrial facilities across North America, including for
120 Fortune 500 companies. We have completed or are in the process of completing installations at over 1,300 facilities for these
Fortune 500 customers. Our diversified customer base includes:
American Standard International Inc.
Anheuser-Busch Companies, Inc.
Avery Dennison Corporation
Big Lots Inc.
Coca-Cola Enterprises Inc.
Ecolab, Inc.
Gap, Inc.
General Electric Co.
Kraft Foods Inc.
Miller Coors LLC
Newell Rubbermaid Inc. SYSCO Corp.
OfficeMax, Inc.
PepsiAmericas Inc.
Sealed Air Corp.
Sherwin-Williams Co.
Textron, Inc.
Toyota Motor Corp.
United Stationers Inc.
U.S. Foodservice
For fiscal 2010 and fiscal 2009, no single customer accounted for 10% or more of our total revenue. For fiscal 2008, Coca-
Cola Enterprises Inc. accounted for approximately 17.3% of our total revenue.
Sales and Marketing
We sell our products directly to commercial and industrial customers using a systematized multi-step process that focuses
on our value proposition and provides our sales force with specific, identified tasks that govern their interactions with our
customers from the point of lead generation through delivery of our products and services. In fiscal 2010, we increased our sales
and marketing headcount to further develop opportunities for our exterior lighting products within the utility and governmental
markets, expanded sales and sales support personnel dedicated to our in-market sales programs and added technical expertise for
our wireless controls product lines. Additionally, we upgraded our Customer Relationship Management, or CRM, system to
improve the information and tracking of our customer project pipeline and expanded the CRM system to include our elite
partners, providing visibility into their project pipelines as well.
We also sell our products and services indirectly to our customers through their electrical contractors or distributors, or to
electrical contractors and distributors who buy our products and resell them to end users as part of an installed project. We
believe these relationships will allow us to increase penetration into the lighting retrofit market because electrical contractors
often have significant influence over their customers’ lighting product selections. Even in cases where we sell through these
indirect channels, we strive to have our own relationship with the end user customer.
We also sell our products on a wholesale basis to electrical contractors and value-added resellers. We often train our value-
added resellers to implement our systematized sales process to more effectively resell our products to their customers. We
attempt to leverage the customer relationships of these electrical contractors and value-added resellers to further extend the
geographic scope of our selling efforts. In fiscal 2010, we increased our focus on selling through our contractor and value-added
reseller channels through participation in national trade organizations, providing training on our sales methodologies, including
the development and distribution of standard sales partner operating procedures and providing training to our partners to enable
them to conduct their own energy workshops with their customer and prospect bases. We intend to focus on expanding our
partner network, selectively adding new partners in geographic regions where we do not currently have a significant market
presence.
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We have historically focused our marketing efforts on traditional direct advertising, as well as developing brand awareness
through customer education and active participation in trade shows and energy management seminars. In fiscal 2011, we expect
to continue to selectively invest in advertising and marketing campaigns to increase the visibility of our brand name and raise
awareness of our value proposition. In the past, these efforts have included participating in national, regional and local trade
organizations, exhibiting at trade shows, executing targeted direct mail campaigns, advertising in select publications, public
relations campaigns and other lead generation and brand building initiatives. We are also actively training contractors and
partners on how to effectively represent our product offering and have designed an intensive classroom training program, Orion
University, to complement the energy management workshops we conduct in the field.
Competition
The market for energy management products and services is fragmented. We face strong competition primarily from
manufacturers and distributors of energy management products and services as well as electrical contractors. We compete
primarily on the basis of technology, quality, customer relationships, energy efficiency, customer service and marketing support.
There are a number of lighting fixture manufacturers that sell HIF products that compete with our Compact Modular
product line. Some of these manufacturers also sell HID products that compete with our HIF lighting systems, including Cooper
Industries, Ltd., Hubbell Incorporated, Ruud Lighting, Inc. and Acuity Brands, Inc. These companies generally have large,
diverse product lines. Many of these competitors are better capitalized than we are, have strong existing customer relationships,
greater name recognition, and more extensive engineering and marketing capabilities. We also compete for sales of our HIF
lighting systems with manufacturers and suppliers of older fluorescent technology in the retrofit market. Some of the
manufacturers of HIF and HID products that compete with our HIF lighting systems sell their systems at a lower initial capital
cost than the cost at which we sell our systems, although we believe based on our industry experience that these systems
generally do not deliver the light quality and the cost savings that our HIF lighting systems deliver over the long-term.
LED technology is emerging and gaining acceptance for certain types of lighting applications; however, we believe the
performance characteristics and relatively high cost do not make LEDs a cost-effective alternative to HIF for general
illumination applications in the commercial and industrial markets. We are continuing to research this technology and have
introduced LED based products designed to achieve desired light outputs in freezer applications where the optimal performance
for LED lighting fixtures is achieved at 20 degrees below zero.
Many of our competitors market their manufactured lighting and other products primarily to distributors who resell their
products for use in new commercial, residential, and industrial construction. These distributors, such as Graybar Electric
Company, Gexpro (GE Supply) and W.W. Grainger, Inc., generally have large customer bases and wide distribution networks
and supply to electrical contractors.
We also face competition from companies who provide energy management services. Some of these competitors, such as
Johnson Controls, Inc. and Honeywell International, provide basic systems and controls designed to further energy efficiency.
Other competitors provide demand response systems that compete with our energy management systems, such as Comverge, Inc.
and EnerNOC, Inc.
Intellectual Property
We have been issued 26 United States patents, and have applied for 23 additional United States patents. The patented and
patent pending technologies include the following:
•
Portions of our core HIF lighting technology (including our optically efficient reflector and some of our thermally
efficient fixture I-frame constructions) are patented with additional patents pending.
•
•
•
•
Our ballast assembly method is patent pending.
Our light pipe technology and its manufacturing methods are patented with additional patents pending.
Our wireless lighting control system is patent pending.
The technology and methodology of our OVPP financing program is patent pending.
Our 26 United States patents have expiration dates ranging from 2015 to 2028, with more than half of these patents having
expiration dates of 2022 or later.
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We believe that our patent portfolio as a whole is material to our business. We also believe that our patents covering certain
component parts of our Compact Modular, including our thermally efficient I-frame and our optically efficient reflector, are
material to our business, and that the loss of these patents could significantly and adversely affect our business, operating results
and prospects. See “Risk Factors — Risks Related to Our Business — Our inability to protect our intellectual property, or our
involvement in damaging and disruptive intellectual property litigation, could negatively affect our business and results of
operations and financial condition or result in the loss of use of the product or service.”
Manufacturing and Distribution
We own an approximately 266,000 square foot manufacturing and distribution facility located in Manitowoc, Wisconsin.
Since fiscal 2005, we have made significant investments in new equipment and in the development of our workforce to expand
our internal production capabilities and increase production capacity. As a result of these investments, we are generally able to
manufacture and assemble our products internally. We supplement our in-house production with outsourcing contracts as
required to meet short-term production needs. We believe we have sufficient production capacity to support a substantial
expansion of our business.
We generally maintain a significant supply of raw material and purchased and manufactured component inventory. We
manufacture products to order and are typically able to ship most orders within 14 days of our receipt of a purchase order. We
contract with transportation companies to ship our products and we manage all aspects of distribution logistics. We generally
ship our products directly to the end user.
Research and Development
Our research and development efforts are centered on developing new products and technologies, enhancing existing
products, and improving operational and manufacturing efficiencies. The products, technologies and services we are developing
are focused on increasing end user energy efficiency. We are also developing lighting products based on LED technology,
intelligent HVAC integration controls, direct solar solutions and comprehensive lighting management software. Our research and
development expenditures were $1.8 million, $1.9 million and $1.9 million for fiscal years 2008, 2009 and 2010.
Regulation
Our operations are subject to federal, state, and local laws and regulations governing, among other things, emissions to air,
discharge to water, the remediation of contaminated properties and the generation, handling, storage transportation, treatment,
and disposal of, and exposure to, waste and other materials, as well as laws and regulations relating to occupational health and
safety. We believe that our business, operations, and facilities are being operated in compliance in all material respects with
applicable environmental and health and safety laws and regulations.
State, county or municipal statutes often require that a licensed electrician be present and supervise each retrofit project.
Further, all installations of electrical fixtures are subject to compliance with electrical codes in virtually all jurisdictions in the
United States. In cases where we engage independent contractors to perform our retrofit projects, we believe that compliance
with these laws and regulations is the responsibility of the applicable contractor.
Our Corporate and Other Available Information
We were incorporated as a Wisconsin corporation in April 1996 and our corporate headquarters are located at 2210
Woodland Drive, Manitowoc, Wisconsin 54220. Our Internet website address is www.oriones.com . Our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are available
through the investor relations page of our internet website as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission, or the SEC.
Employees
As of March 31, 2010, we had 223 full-time and part-time employees. Our employees are not represented by any labor
union, and we have never experienced a work stoppage or strike. We consider our relations with our employees to be good.
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ITEM 1A. RISK FACTORS
You should carefully consider the risk factors set forth below and in other reports that we file from time to time with the
Securities and Exchange Commission and the other information in this Annual Report on Form 10-K . The matters discussed in
the risk factors, and additional risks and uncertainties not currently known to us or that we currently deem immaterial, could
have a material adverse effect on our business, financial condition, results of operation and future growth prospects and could
cause the trading price of our common stock to decline.
Adverse conditions in the global economy and disruption of financial markets have negatively impacted, and could continue
to negatively impact, our customers, suppliers and business.
Financial markets in the United States, Europe and Asia have experienced extreme disruption, including, among other
things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades, declines in
asset valuations, inflation, reduced consumer spending and fluctuations in foreign currency exchange rates. While currently these
conditions have not impaired our ability to finance our operations, coupled with recessionary type economic conditions, such
conditions have adversely affected our customers’ capital budgets, purchasing decisions and facilities managers and, therefore,
have adversely affected our results of operations. In addition, some of our installer base of contractors have stopped doing
business due to the challenging economic condition, which may increase the cost and delay the timing of installation of our
products and thereby negatively impact our business and results of operations. Our business and results of operations will
continue to be adversely affected to the extent these adverse financial market and general economic conditions continue to
adversely affect our customers’ purchasing decisions and the availability of installers.
Adverse market conditions have led to increasing duration of customer sales cycles, limitations on customer capital budgets,
closure of facilities and the loss of key contacts due to workforce reductions at existing and prospective customers.
The volatility and uncertainty in the financial and credit markets has led many customers to adopt strategies for conserving
cash, including limits on capital spending and expense reductions. Our HIF lighting systems are often purchased as capital assets
and therefore are subject to capital availability. Uncertainty around such availability has led customers to delay purchase
decisions, which has elongated the duration of our sales cycles. Along with limiting capital spending, some customers are
reducing expenses by closing facilities and reducing workforces. As a result, facilities that are considering our HIF lighting
systems have closed or may close. Due to downsizings, key contacts and decision-makers at customers have lost or may lose
their jobs, which requires us to re-initiate the sales cycle with personnel, further elongating the sales cycle. We have experienced,
and may in the future experience, variability in our operating results, on both an annual and a quarterly basis, as a result of these
factors.
The acceptance of our Orion Throughput Agreements and/or Orion Virtual Power Plant Agreements could result in a delay
in revenue realization, a mis-match of expense and revenue recognition, expose us to additional customer credit risk and
impact our financial results.
Our financing programs, the Orion Throughput Agreements, or OTAs, and the Orion Virtual Power Plant, or OVPPs, are
installment based payment plans for our customers in contrast to our traditional cash terms. These new programs may subject us
to additional credit risk as we do not have a long history or experience related to longer term credit decision making. Poor credit
decisions or customer defaults could result in increases to our allowances for doubtful accounts and/or write-offs of accounts
receivable and could have material adverse effects on our results of operations and financial condition.
We recognize all of the selling, general and administrative expenses up front on OTA/OVPP sales while the related revenue
is recognized on a monthly basis over the life of the contract. This mis-match of expense and revenue recognition can impact our
near-term profitability. We do retain the option to sell completed OTA/OVPP projects into the secondary market and recognize
substantially all of the project revenue at the time of sale, but we may choose not to sell completed OTAs/OVPPs to third parties,
which would have the impact of decreasing our near-term revenue, mis-matching expenses and revenues and creating variability
in our operating results both on a quarterly and annual basis.
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We have a limited operating history, and have previously incurred net losses.
We began operating in April 1996 and first achieved a full fiscal year of profitability in fiscal 2003. However, we incurred
net losses attributable to common shareholders of $2.3 million and $1.6 million in fiscal 2005 and 2006, respectively, net income
attributable to common shareholders of $0.4 million, $3.4 million and $0.5 million in fiscal 2007, 2008 and 2009, respectively,
and a net loss attributable to common shareholders of $4.2 million in fiscal 2010. As a result of our limited operating history, we
have limited financial data that can be used to evaluate our business, strategies, performance, prospects, revenue or profitability
potential or an investment in our common stock. Any evaluation of our business and our prospects must be considered in light of
our limited operating history and the risks and uncertainties encountered by companies at our stage of development and in our
market.
Initially, our net losses were principally driven by start-up costs, the costs of developing our technology and research and
development costs. More recently, our net losses were principally driven by increased sales and marketing and general and
administrative expenses, as well as inefficiencies due to excess manufacturing capacity in fiscal 2005 and 2006 and, in fiscal
2010, the recessed state of the global economy, especially as it affected capital equipment manufacturers, the associated
lengthened customer sales cycles and sluggish customer capital spending and the immediate recognition of selling, general and
administrative expenses and delayed realization of revenue under OTA/OVPP sales. We may continue to incur further net losses,
and there can be no assurance that we will be able to increase our revenue, expand our customer base or be profitable.
Furthermore, increased OTA/OVPP sales and the associated delay in revenue realization and immediate recognition of most
related selling, general and administrative expenses, as well as increased cost of revenue, warranty claims, stock-based
compensation costs or interest expense on our outstanding debt and on any debt that we incur in the future could contribute to
further net losses.
Our addition of new renewable energy technologies into our product, application and service offerings involves many risks
and uncertainties. Many technologies do not become commercially profitable products, applications or services despite
extensive development and commercialization efforts.
In fiscal 2010, we began to expand our product and service offerings by providing our customers with alternative renewable
energy systems, such as photovoltaic solar systems and, potentially, wind energy systems through our Orion Engineered Systems
division. This division continues to conduct research on various additional renewable energy technologies that we may be able to
add to our menu of products, applications and services offered, making recommendations to our senior management regarding
the technologies’ viability and developing commercialization tactics.
The process of developing and commercializing new products, applications and services, particularly relating to alternative
renewable energy systems, is expected to be both time-consuming and costly and will involve a high degree of business risk. We
may be unable to successfully develop or commercialize new technologies in the form of new products, applications or services.
This process may involve substantial expenditures in research and development, sourcing and marketing. Commercialization of
new technological products, applications and services often requires a very long lead time. Because it is generally not possible to
predict the amount of time required or the costs involved in achieving new product, application or service introduction
objectives, actual development and commercialization costs may exceed budgeted amounts and estimated development and
commercialization schedules may be extended. Developing new technological products, applications and services, and creating
effective commercialization strategies for new renewable energy technologies, are subject to inherent risks that may include:
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Unanticipated and/or substantial delays;
Unanticipated and/or substantially increased costs;
Unrecoverable and/or substantially increased expenses;
Technical, reliability, durability or quality problems, including potential warranty and/or product liability claims;
Insufficiency of dedicated or budgeted funds;
Inability to meet targeted cost or performance objectives;
Inability to satisfy industry standards or consumer expectations and needs;
Regulatory obstacles;
Competition;
Inability to prove the original concept;
Lack of demand; and
Diversion of our management’s and employees’ focus and/or attention.
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The occurrence of any one or more of these risks could cause us to incur substantial costs and expenses or even to abandon
or substantially delay or change our strategy of exploring the addition of new alternative renewable energy technologies into our
product, application and service offerings.
Orion Engineered Systems may not be able to identify suitable new technologies, we may invest too much in new
technologies, our management could be distracted by new technologies and we could fail to develop any new products,
applications or services successfully.
Identifying suitable new alternative renewable energy technologies for addition into our product, application and service
offerings may be difficult, and the failure to do so could harm our growth strategy. If we make an investment in one or more new
alternative renewable energy technologies, then we could have difficulty developing and commercializing it or integrating it into
our product, application or service offerings. These difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses and/or capital expenditures. As a result, our failure to fully develop and commercialize
potential new alternative renewable energy technologies or to integrate them effectively into our product, application and service
offerings properly could have a material adverse effect on our business, financial condition and operating results.
We may not be able to obtain additional equity capital or debt financing necessary to effectively introduce and
commercialize any new alternative renewable energy technologies identified by Orion Engineered Systems into our product,
application and service offerings.
Our existing capital resources may not be sufficient to effectively introduce and commercialize any new alternative
renewable energy technologies identified by Orion Engineered Systems into our product, application and service offerings. We
may not be able to obtain sufficient additional equity capital and/or debt financing required to do so or we may not be able to
obtain such additional equity capital or debt financing on acceptable terms or conditions. Although we have been successful in
the past in raising equity capital and debt financing, recent trends in the equity and debt markets and our recent financial
performance may pose significant challenges for us. Factors affecting the availability to us of equity capital or debt financing on
acceptable terms and conditions include:
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The price, volatility and trading volume and history of our common stock.
Our current and future financial results and position, including our recent losses generated from operations.
The market’s view of our industry and products.
The perception in the equity and debt markets of our ability to execute our business plan or achieve our operating
results expectations.
We have no significant operating history in the solar photovoltaic or wind energy industries that can be used to evaluate our
potential prospects for success in these industries.
In fiscal 2010, we began to expand our product and service offerings by providing our customers with alternative renewable
energy systems, such as photovoltaic solar systems and, potentially, wind energy systems through our Orion Engineered Systems
division. Our Orion Engineered Systems division began researching three test solar photovoltaic electricity generating projects,
completing our test analysis on two of the three in the third quarter, and we executed our first cash sale and our first PPA as a
result of the successful testing of these systems. Our Orion Engineered Systems division continues to conduct research on solar
photovoltaic and wind energy and various other renewable energy technologies that we may be able to add to our menu of
products, applications and services offered.
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We have no prior history or experience in the solar photovoltaic or wind energy industries. If we continue to further pursue
adding these technologies into our product, application or service offerings, there can be no assurance that our venture into these
industries will prove successful. We have no history or experience in developing or commercializing solar photovoltaic or wind
energy technologies that can be used to evaluate our potential prospects for success. As a result, our prospects for success in
being able to introduce new products, applications or services using these technologies must be considered in the context of a
new company in a developing industry. The risks we face include the possibility that we will not be successful in developing or
commercializing any such technologies, that we will not be able to do so without incurring unexpected and/or substantial costs
and expenses and/or failing to generate any substantial incremental revenues, that we will not be able to rely on third-party
manufacturers or providers of such technologies, and that we will not be able to operate successfully in the competitive
environment of the solar photovoltaic and/or wind energy industries. If we are unable to address all of these risks, our business,
results of operations and financial condition may be materially adversely affected.
Orion Engineered System’s pursuit of solar photovoltaic and/or wind electricity generating technologies is subject to risks
specific to the solar photovoltaic and/or wind industry.
If we elect to continue to pursue expanding our offerings of solar photovoltaic electricity generating technologies and/or
wind electricity generating technologies into our product, application or service offerings, such business pursuits will involve
risks specifically associated with the solar photovoltaic and/or wind industry, including:
•
The market for photovoltaic and wind electricity generating technologies has been adversely affected by the
recessionary economic conditions, and we cannot guarantee that demand will return or increase in the future.
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A variety of solar power, wind power and other renewable energy technologies may be currently under development
by other companies that could result in higher or more effective product performance than the performance expected to
be produced by any technology that we decide to offer.
Our ability to generate revenue and profitability from adding solar photovoltaic and/or wind electricity generating
technologies into our product, application or service offerings will be dependent on consumer acceptance and the
economic feasibility of solar and/or wind generated energy.
A drop in the retail price of conventional energy or other alternate renewable energy sources may negatively impact
our ability to generate revenue and profitability from solar photovoltaic and/or wind generated energy technologies.
The reduction, elimination or expiration of government mandates and subsidies or economic or tax rebates, credits
and/or incentives for alternative renewable energy systems would likely substantially reduce the demand for, and
economic feasibility of, any solar photovoltaic and/or wind electricity generating products, applications or services and
could materially reduce any prospects for our successfully introducing any new products, applications or services
using such technologies.
As our sales mix changes, it may impact our profitability.
If, as we expect, our sales under the OTAs/OVPPs represent a larger portion of our total sales, then our near-term
profitability may continue to be negatively affected. We recognize most of the selling, general and administrative expenses up
front on OTA/OVPP sales while the related revenue is recognized on a monthly basis over the life of the contract. This has
adversely impacted, and may continue to adversely impact our near-term profitability. We do retain the option to sell completed
OTA/OVPP projects into the secondary market and recognize substantially all of the project revenue at the time of sale, but we
may choose not to sell completed OTA/OVPP programs to third parties, which would have the impact of decreasing our near-
term revenue and creating variability in our operating results both on a quarterly and annual basis.
Increasing use of our OTA/OVPP financing programs could expose us to financing risk and additional customer credit risk
and impact our financial results.
If, as we expect, use of our OTA and OVPP financing programs increases, we may be exposed to additional capital and
customer credit risk that could impact our financial results. Our OTAs and OVPPs are structured similarly to a supply contract
under which we commit to deliver a set amount of energy savings to the customer at a fixed monthly rate. Our OTAs and OVPPs
allow customers to deploy our energy management systems without having to make upfront investments or capital outlays. After
the pre-determined amount of energy savings are delivered, our customers assume full ownership of the energy management
system and benefit from the entire amount of energy savings over the remaining useful life of the technology.
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These agreements and their increased use will require us to make significant investments of capital, whether we finance
them internally or raise debt or additional equity capital to support the expansion. We may not be able to obtain sufficient
additional equity capital and/or debt financing required to expand the OTA/OVPP programs or we may not be able to obtain such
additional equity capital or debt financing on acceptable terms or conditions. Although we have been successful in the past in
raising equity capital and debt financing, recent trends in the equity and debt markets and our recent financial performance may
pose significant challenges for us. Because of our recent net losses, we do not fit traditional credit lending criteria, which, in
particular, could make it difficult for us to obtain loans or to access the capital markets. Any national economic downturn or
disruption of financial markets could reduce our access to capital necessary for these programs. The agreements and their
increased use also may subject us to additional credit risk as we do not have a long history or experience related to longer term
credit decision making. Poor credit decisions or customer defaults could result in increases to our allowances for doubtful
accounts and/or write-offs of accounts receivable and could have material adverse effects on our results of operations and
financial condition.
We operate in a highly competitive industry and if we are unable to compete successfully our revenue and profitability will
be adversely affected.
We face strong competition primarily from manufacturers and distributors of energy management products and services, as
well as from electrical contractors. We compete primarily on the basis of customer relationships, price, quality, energy
efficiency, customer service and marketing support. Our products are in direct competition primarily with high intensity
discharge, or HID, technology, as well as LED, other HIF products and older fluorescent technology in the lighting systems
retrofit market.
Many of our competitors are better capitalized than we are, have strong existing customer relationships, greater name
recognition, and more extensive engineering, manufacturing, sales and marketing capabilities. Competitors could focus their
substantial resources on developing a competing business model or energy management products or services that may be
potentially more attractive to customers than our products or services. In addition, we may face competition from other products
or technologies that reduce demand for electricity. Our competitors may also offer energy management products and services at
reduced prices in order to improve their competitive positions. Any of these competitive factors could make it more difficult for
us to attract and retain customers, require us to lower our prices in order to remain competitive, and reduce our revenue and
profitability, any of which could have a material adverse effect on our results of operations and financial condition.
Our success is largely dependent upon the skills, experience and efforts of our senior management, and the loss of their
services could have a material adverse effect on our ability to expand our business or to maintain profitable operations.
Our continued success depends upon the continued availability, contributions, skills, experience and effort of our senior
management. We are particularly dependent on the services of Neal R. Verfuerth, our chairman, chief executive officer and
principal founder. Mr. Verfuerth has major responsibilities with respect to sales, engineering, product development and executive
administration. We do not have a formal succession plan in place for Mr. Verfuerth. Our current employment agreement with
Mr. Verfuerth does not guarantee his services for a specified period of time. All of the current employment agreements with our
senior management team may be terminated by the employee at any time and without notice. While all such agreements include
noncompetition and confidentiality covenants, there can be no assurance that such provisions will be enforceable or adequately
protect us. The loss of the services of any of these persons might impede our operations or the achievement of our strategic and
financial objectives, and we may not be able to attract and retain individuals with the same or similar level of experience or
expertise. Additionally, while we have key man insurance on the lives of Mr. Verfuerth and other members of our senior
management team, such insurance may not adequately compensate us for the loss of these individuals. The loss or interruption of
the service of members of our senior management, particularly Mr. Verfuerth, or our inability to attract or retain other qualified
personnel could have a material adverse effect on our ability to expand our business, implement our strategy or achieve
profitable operations.
The success of our business depends on the market acceptance of our energy management products and services.
Our future success depends on commercial acceptance of our energy management products and services. If we are unable to
convince current and potential customers of the advantages of our HIF lighting systems and energy management products and
services, then our ability to sell our HIF lighting systems and energy management products and services will be limited. In
addition, because the market for energy management products and services is rapidly evolving, we may not be able to accurately
assess the size of the market, and we may have limited insight into trends that may emerge and affect our business. If the market
for our HIF lighting systems and energy management products and services does not continue to develop, or if the market does
not accept our products, then our ability to grow our business could be limited and we may not be able to increase our revenue or
achieve profitability.
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Our products use components and raw materials that may be subject to price fluctuations, shortages or interruptions of
supply.
We may be vulnerable to price increases for components or raw materials that we require for our products, including
aluminum, ballasts, power supplies and lamps. In particular, our cost of aluminum can be subject to commodity price fluctuation.
Further, suppliers’ inventories of certain components that our products require may be limited and are subject to acquisition by
others. We have had to purchase quantities of certain components that are critical to our product manufacturing and were in
excess of our estimated near-term requirements as a result of supplier delivery constraints and concerns over component
availability, and we may need to do so in the future. As a result, we have had, and may need to continue, to devote additional
working capital to support a large amount of component and raw material inventory that may not be used over a reasonable
period to produce saleable products, and we may be required to increase our excess and obsolete inventory reserves to provide
for these excess quantities, particularly if demand for our products does not meet our expectations. Also, any shortages or
interruptions in supply of our components or raw materials could disrupt our operations. If any of these events occurs, our results
of operations and financial condition could be materially adversely affected.
We depend on a limited number of key suppliers.
We depend on certain key suppliers for the raw materials and key components that we require for our current products,
including sheet, coiled and specialty reflective aluminum, power supplies, ballasts and lamps. In particular, we buy most of our
specialty reflective aluminum from a single supplier and we also purchase most of our ballast and lamp components from a
single supplier. Purchases of components from our current primary ballast and lamp supplier constituted 19% and 27% of our
total cost of revenue in fiscal 2009 and fiscal 2010, respectively. If these components become unavailable, or our relationships
with suppliers become strained, particularly as relates to our primary suppliers, our results of operations and financial condition
could be materially adversely affected.
We experienced component quality problems related to certain suppliers in the past, and our current suppliers may not
deliver satisfactory components in the future.
In fiscal 2003 through fiscal 2005, we experienced higher than normal failure rates with certain components purchased from
two suppliers. These quality issues led to an increase in warranty claims from our customers and we recorded warranty expenses
of approximately $0.1 million and $0.7 million in fiscal 2005 and fiscal 2006, respectively. We may experience quality problems
with suppliers in the future, which could decrease our gross margin and profitability, lengthen our sales cycles, adversely affect
our customer relations and future sales prospects and subject our business to negative publicity. Additionally, we sometimes
satisfy warranty claims even if they are not covered by our general warranty policy as a customer accommodation. If we were to
experience quality problems with the ballasts or lamps purchased from our primary ballast and lamp supplier, these adverse
consequences could be magnified, and our results of operations and financial condition could be materially adversely affected.
We have made a significant investment in inventory related to our wireless controls product offering, which is costly and, if
not properly managed, may result in an inability to provide our products on a timely basis or in unforeseen valuation
adjustments.
Our wireless control inventories are approximately 50% of our total March 31, 2010 inventory balance. The components for
our wireless inventories are manufactured and assembled overseas, require longer delivery lead times, suppliers require deposit
payments at time of purchase order and suppliers also require volume commitments to secure production capacity. We maintain
this significant investment in our wireless controls inventory in order to provide prompt and complete service to our customers.
There can be no guarantees that our customers will purchase our wireless technologies or that unforeseen evolutions in
technologies may render our inventories unsalable. Additionally, price changes or other circumstances could result in unforeseen
valuation adjustments to inventories. Such occurrences could have a negative effect on our results of operations and financial
condition.
We depend upon a limited number of customers in any given period to generate a substantial portion of our revenue.
We do not have long-term contracts with our customers, and our dependence on individual key customers can vary from
period to period as a result of the significant size of some of our retrofit and multi-facility roll-out projects. Our top 10 customers
accounted for approximately 36% and 29%, respectively, of our total revenue for fiscal 2009 and 2010. Coca-Cola Enterprises
Inc. accounted for approximately 17% of our total revenue for fiscal 2008. In fiscal 2009 and fiscal 2010, our top customer
accounted for less than 7% and 6% of our total revenues, respectively. We expect large retrofit and roll-out projects to become a
greater component of our total revenue in the near term. As a result, we may experience more customer concentration in any
given future period. The loss of, or substantial reduction in sales to, any of our significant customers could have a material
adverse effect on our results of operations in any given future period.
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Product liability claims could adversely affect our business, results of operations and financial condition.
We face exposure to product liability claims in the event that our energy management products fail to perform as expected
or cause bodily injury or property damage. Since the majority of our products use electricity, it is possible that our products
could result in injury, whether by product malfunctions, defects, improper installation or other causes. Particularly because our
products often incorporate new technologies or designs, we cannot predict whether or not product liability claims will be brought
against us in the future or result in negative publicity about our business or adversely affect our customer relations. Moreover, we
may not have adequate resources in the event of a successful claim against us. A successful product liability claim against us that
is not covered by insurance or is in excess of our available insurance limits could require us to make significant payments of
damages and could materially adversely affect our results of operations and financial condition.
We depend on our ability to develop new products and services.
The market for our products and services is characterized by rapid market and technological changes, uncertain product life
cycles, changes in customer demands and evolving government, industry and utility standards and regulations. As a result, our
future success will depend, in part, on our ability to continue to design and manufacture new products and services. We may not
be able to successfully develop and market new products or services that keep pace with technological or industry changes,
satisfy changes in customer demands or comply with present or emerging government and industry regulations and technology
standards.
We may pursue acquisitions and investments in new product lines, businesses or technologies that involve numerous risks,
which could disrupt our business or adversely affect our financial condition and results of operations.
In the future, we may make acquisitions of, or investments in, new product lines, businesses or technologies to expand our
current capabilities. We have limited experience in making such acquisitions or investments. Acquisitions present a number of
potential risks and challenges that could disrupt our business operations, increase our operating costs or capital expenditure
requirements and reduce the value of the acquired product line, business or technology. For example, if we identify an
acquisition candidate, we may not be able to successfully negotiate or finance the acquisition on favorable terms. The process of
negotiating acquisitions and integrating acquired products, services, technologies, personnel, or businesses might result in
significant transaction costs, operating difficulties or unexpected expenditures, and might require significant management
attention that would otherwise be available for ongoing development of our business. If we are successful in consummating an
acquisition, we may not be able to integrate the acquired product line, business or technology into our existing business and
products, and we may not achieve the anticipated benefits of any acquisition. Furthermore, potential acquisitions and investments
may divert our management’s attention, require considerable cash outlays and require substantial additional expenses that could
harm our existing operations and adversely affect our results of operations and financial condition. To complete future
acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or incur amortization expenses and write-
downs of acquired assets, which could dilute the interests of our shareholders or adversely affect our profitability.
We are currently subject to securities class action litigation, the unfavorable outcome of which may have a material adverse
effect on our financial condition, results of operations and cash flows.
In February and March 2008, purported class action lawsuits were filed against us, certain of our executive officers, all
members of our then existing Board of Directors and certain underwriters from our December 2007 initial public offering of our
common stock by investors alleging violations of the Securities Act of 1933. In the fourth quarter of fiscal 2010, we reached a
preliminary agreement to settle the class action lawsuits. The preliminary settlement is subject, however, to approval by the
court, as well as other conditions. If the preliminary settlement is not approved or the other conditions are not met, we will
continue to defend the lawsuits and we believe we have substantial legal and factual defenses to each of the claims in the
lawsuits. If not settled, the ultimate outcome of the litigation is difficult to predict and quantify, and the defense against such
claims or actions could be costly. In addition to decreasing sales and profitability, diverting financial and management resources
and general business disruption, we may suffer from adverse publicity that could harm our brand, regardless of whether the
allegations are valid or whether we are ultimately held liable. A judgment significantly in excess of our insurance coverage for
any claims or a judgment which is not covered by insurance could materially and adversely affect our financial condition, results
of operations and cash flows. Additionally, publicity about these claims may harm our reputation or prospects and adversely
affect our results.
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Our inability to protect our intellectual property, or our involvement in damaging and disruptive intellectual property
litigation, could adversely affect our business, results of operations and financial condition or result in the loss of use of the
product or service.
We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret
laws, as well as third-party nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of
our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and
financial condition.
We own United States patents and patent applications for some of our products, systems, business methods and
technologies. We offer no assurance about the degree of protection which existing or future patents may afford us. Likewise, we
offer no assurance that our patent applications will result in issued patents, that our patents will be upheld if challenged, that
competitors will not develop similar or superior business methods or products outside the protection of our patents, that
competitors will not infringe our patents, or that we will have adequate resources to enforce our patents. Because some patent
applications are maintained in secrecy for a period of time, we could adopt a technology without knowledge of a pending patent
application, and such technology could infringe a third party patent.
We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar
technology or otherwise learn of our unpatented technology. To protect our trade secrets and other proprietary information, we
generally require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure
you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary
information. If we are unable to maintain the proprietary nature of our technologies, our business could be materially adversely
affected.
We rely on our trademarks, trade names, and brand names to distinguish our company and our products and services from
our competitors. Some of our trademarks may conflict with trademarks of other companies. Failure to obtain trademark
registrations could limit our ability to protect our trademarks and impede our sales and marketing efforts. Further, we cannot
assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.
In addition, third parties may bring infringement and other claims that could be time-consuming and expensive to defend. In
addition, parties making infringement and other claims may be able to obtain injunctive or other equitable relief that could
effectively block our ability to provide our products, services or business methods and could cause us to pay substantial
damages. In the event of a successful claim of infringement, we may need to obtain one or more licenses from third parties,
which may not be available at a reasonable cost, or at all. It is possible that our intellectual property rights may not be valid or
that we may infringe existing or future proprietary rights of others. Any successful infringement claims could subject us to
significant liabilities, require us to seek licenses on unfavorable terms, prevent us from manufacturing or selling products,
services and business methods and require us to redesign or, in the case of trademark claims, re-brand our company or products,
any of which could have a material adverse effect on our business, results of operations or financial condition.
We may face additional competition if government subsidies and utility incentives for renewable energy increase or if such
sources of energy are mandated.
Many states and the federal government have adopted a variety of government subsidies and utility incentives to allow
renewable energy sources, such as biofuels, wind and solar energy, to compete with currently less expensive conventional
sources of energy, such as fossil fuels. We may face additional competition from providers of renewable energy sources if
government subsidies and utility incentives for those sources of energy increase or if such sources of energy are mandated.
Additionally, the availability of subsidies and other incentives from utilities or government agencies to install alternative
renewable energy sources may negatively impact our customers’ desire to purchase our products and services, or may be utilized
by our existing or new competitors to develop a competing business model or products or services that may be potentially more
attractive to customers than ours, any of which could have a material adverse effect on our results of operations or financial
condition.
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If our information technology systems fail, or if we experience an interruption in their operation, then our business, results
of operations and financial condition could be materially adversely affected.
The efficient operation of our business is dependent on our information technology systems. We rely on those systems
generally to manage the day-to-day operation of our business, manage relationships with our customers, maintain our research
and development data and maintain our financial and accounting records. We are in the process of replacing our existing
enterprise resource planning, or ERP, system. Our ERP implementation project has consumed, and will likely continue to
consume, significant business resources, including personnel and financial resources, and is not yet complete. The failure of our
information technology systems, our inability to successfully maintain, enhance and/or replace our information technology
systems, or any compromise of the integrity or security of the data we generate from our information technology systems, could
adversely affect our results of operations, disrupt our business and product development and make us unable, or severely limit
our ability, to respond to customer demands. In addition, our information technology systems are vulnerable to damage or
interruption from:
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earthquake, fire, flood and other natural disasters;
employee or other theft;
attacks by computer viruses or hackers;
power outages; and
computer systems, internet, telecommunications or data network failure.
Any interruption of our information technology systems could result in decreased revenue, increased expenses, increased
capital expenditures, customer dissatisfaction and potential lawsuits, any of which could have a material adverse effect on our
results of operations or financial condition.
We own and operate an industrial property that we purchased in 2004 and, if any environmental contamination is
discovered, we could be responsible for remediation of the property.
We own our manufacturing and distribution facility located at an industrial site. We purchased this property from an
adjacent aluminum rolling mill and cookware manufacturing facility in 2004. The company that previously owned this facility
has subsequently become insolvent and the facility was sold at a foreclosure sale to a new owner. Accordingly, if environmental
contamination is discovered at our facility and we are required to remediate the property, we would likely have no effective
recourse against the prior owners. Any such potential remediation could be costly and could adversely affect our results of
operations or financial condition.
The cost of compliance with environmental laws and regulations and any related environmental liabilities could adversely
affect our results of operations or financial condition.
Our operations are subject to federal, state, and local laws and regulations governing, among other things, emissions to air,
discharge to water, the remediation of contaminated properties and the generation, handling, storage, transportation, treatment
and disposal of, and exposure to, waste and other materials, as well as laws and regulations relating to occupational health and
safety. These laws and regulations frequently change, and the violation of these laws or regulations can lead to substantial fines,
penalties and other liabilities. The operation of our manufacturing facility entails risks in these areas and there can be no
assurance that we will not incur material costs or liabilities in the future which could adversely affect our results of operations or
financial condition.
Our retrofitting process frequently involves responsibility for the removal and disposal of components containing hazardous
materials.
When we retrofit a customer’s facility, we typically assume responsibility for removing and disposing of its existing
lighting fixtures. Certain components of these fixtures typically contain trace amounts of mercury and other hazardous materials.
Older components may also contain trace amounts of polychlorinated biphenyls, or PCBs. We currently rely on contractors to
remove the components containing such hazardous materials at the customer job site. The contractors then arrange for the
disposal of such components at a licensed disposal facility. Failure by such contractors to remove or dispose of the components
containing these hazardous materials in a safe, effective and lawful manner could give rise to liability for us, or could expose our
workers or other persons to these hazardous materials, which could result in claims against us.
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We expect our quarterly revenue and operating results to fluctuate. If we fail to meet the expectations of market analysts or
investors, the market price of our common stock could decline substantially, and we could become subject to additional
securities litigation.
Our quarterly revenue and operating results have fluctuated in the past and will likely vary from quarter to quarter in the
future. You should not rely upon the results of one quarter as an indication of our future performance. Our revenue and operating
results may fall below the expectations of market analysts or investors in some future quarter or quarters. Our failure to meet
these expectations could cause the market price of our common stock to decline substantially. If the price of our common stock is
volatile or falls significantly below our current price, we may be the target of additional securities litigation. If we become
involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs, management’s attention
could be diverted from the operation of our business, and our reputation could be damaged, which could adversely affect our
business, results of operations or financial condition.
Our ability to use our net operating loss carryforwards will be subject to limitation.
As of March 31, 2010, we had aggregate federal net operating loss carryforwards of approximately $14.5 million and state
net operating loss carryforwards of approximately $8.4 million. Generally, a change of more than 50% in the ownership of a
company’s stock, by value, over a three-year period constitutes an ownership change for federal income tax purposes. An
ownership change may limit a company’s ability to use its net operating loss carryforwards attributable to the period prior to
such change. We believe that past issuances and transfers of our stock caused an ownership change in fiscal 2007 that may affect
the timing of the use of our net operating loss carryforwards, but we do not believe the ownership change affects the use of the
full amount of our net operating loss carryforwards. As a result, our ability to use our net operating loss carryforwards
attributable to the period prior to such ownership change to offset taxable income will be subject to limitations in a particular
year, which could potentially result in increased future tax liability for us. In fiscal 2008, utilization of our net operating loss
carryforwards was limited to $3.0 million. For fiscal 2009 and 2010, utilization of our net operating loss carryforwards was not
limited.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will continue to depend in part on the research and reports that securities or
industry analysts publish about us or our business. If these analysts do not continue to provide adequate research coverage or if
one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our
business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to
publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to
decline.
The market price of our common stock could be adversely affected by future sales of our common stock in the public market
by our executive officers and directors.
Our executive officers and directors may from time to time sell shares of our common stock in the public market or
otherwise. We cannot predict the size or the effect, if any, that future sales of shares of our common stock by our executive
officers and directors, or the perception of such sales, would have on the market price of our common stock.
Anti-takeover provisions included in the Wisconsin Business Corporation Law, provisions in our amended and restated
articles of incorporation or bylaws and the common share purchase rights that accompany shares of our common stock
could delay or prevent a change of control of our company, which could adversely impact the value of our common stock
and may prevent or frustrate attempts by our shareholders to replace or remove our current board of directors or
management.
A change of control of our company may be discouraged, delayed or prevented by certain provisions of the Wisconsin
Business Corporation Law. These provisions generally restrict a broad range of business combinations between a Wisconsin
corporation and a shareholder owning 15% or more of our outstanding voting stock. These and other provisions in our amended
and restated articles of incorporation, including our staggered board of directors and our ability to issue “blank check” preferred
stock, as well as the provisions of our amended and restated bylaws and Wisconsin law, could make it more difficult for
shareholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-
current board of directors, including to delay or impede a merger, tender offer or proxy contest involving our company.
Each currently outstanding share of our common stock includes, and each newly issued share of our common stock will
include, a common share purchase right. The rights are attached to and trade with the shares of common stock and generally are
not exercisable. The rights will become exercisable if a person or group acquires, or announces an intention to acquire, 20% or
more of our outstanding common stock. The rights have some anti-takeover effects and generally will cause substantial dilution
to a person or group that attempts to acquire control of us without conditioning the offer on either redemption of the rights or
amendment of the rights to prevent this dilution. The rights could have the effect of delaying, deferring or preventing a change of
control.
In addition, our employment arrangements with senior management provide for severance payments and accelerated vesting
of benefits, including accelerated vesting of stock options, upon a change of control. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock, thereby adversely affecting the market price of
our common stock. These provisions may also discourage or prevent a change of control or result in a lower price per share paid
to our shareholders.
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We may fail to comply with the financial and operating covenants in our credit agreement, which could result in our being
unable to borrow under the agreement and other negative consequences.
The credit agreement that we and one of our subsidiaries entered into with Wells Fargo Bank, National Association,
contains certain financial covenants including minimum net income requirements and requirements that we maintain net worth
ratios at prescribed levels. The credit agreement also contains certain restrictions on our ability to make capital or lease
expenditures over prescribed limits, incur additional indebtedness, consolidate or merge, guarantee obligations of third parties,
make loans or advances, declare or pay any dividend or distribution on our stock, redeem or repurchase shares of our stock, or
pledge assets. The credit agreement also contains other customary covenants. As of March 31, 2010, we had no borrowings
outstanding under the credit agreement.
There can be no assurance that we will be able to comply with the financial and other covenants in the credit agreement.
Our failure to comply with these covenants could cause us to be unable to borrow under the agreement and may constitute an
event of default which, if not cured or waived, could result in the acceleration of the maturity of any indebtedness then
outstanding under the agreement, which would require us to pay all amounts outstanding. Due to our cash and cash equivalent
position and the fact that we have no borrowings currently outstanding, we do not currently anticipate that our failure to comply
with the covenants under the credit agreement would have a significant impact on our ability to meet our financial obligations in
the near term. Our failure to comply with such covenants, however, would be a disclosable event and may be perceived
negatively. Such perception could adversely affect the market price for our common stock and our ability to obtain financing in
the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own our approximately 266,000 square foot manufacturing and distribution facility in Manitowoc, Wisconsin. We own
our newly constructed approximately 70,000 square foot technology center and corporate headquarters adjacent to our
Manitowoc manufacturing and distribution facility. We own our approximately 23,000 square foot sales and operations support
facility in Plymouth, Wisconsin.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and legal proceedings arising in the ordinary course of our business. In addition to
ordinary-course litigation, we are a party to the litigation described below.
In February and March 2008, three class action lawsuits were filed in the United States District Court for the Southern
District of New York against us, several of our officers, all members of our then existing board of directors, and certain
underwriters from our December 2007 IPO. The plaintiffs claimed to represent certain persons who purchased shares of our
common stock from December 18, 2007 through February 6, 2008. The plaintiffs alleged, among other things, that the
defendants made misstatements and failed to disclose material information in our IPO registration statement and prospectus. The
complaints alleged various claims under the Securities Act of 1933, as amended. The complaints sought, among other relief,
class certification, unspecified damages, fees, and such other relief as the court may deem just and proper.
On August 1, 2008, the court-appointed lead plaintiff filed a consolidated amended complaint in the United States District
Court for the Southern District of New York. On September 15, 2008, we and the other director and officer defendants filed a
motion to dismiss the consolidated complaint and the underwriters filed a separate motion to dismiss the consolidated complaint
on January 16, 2009. After oral argument on August 19, 2009, the court granted in part and denied in part the motion to dismiss.
The plaintiff filed a second consolidated amended complaint on September 4, 2009, and the defendants filed an answer to the
complaint on October 9, 2009.
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In the fourth quarter of fiscal 2010, we reached a preliminary agreement to settle the class action lawsuits. Although the
preliminary settlement is subject to approval by the court, as well as other conditions, it is expected to provide for the dismissal
of the consolidated action against all defendants. Substantially all of the proposed preliminary settlement amount will be covered
by our insurance. However, for our share of the proposed preliminary settlement not covered by insurance, we recorded an after-
tax charge in the fourth quarter of fiscal 2010 of approximately $0.02 per share.
If the preliminary settlement is not approved or the other conditions are not met, we will continue to defend against the
lawsuits. We believe that we and the other defendants have substantial legal and factual defenses to the claims and allegations
contained in the consolidated complaint, and if necessary, we would intend to pursue these defenses vigorously. There can be no
assurance, however, that we would be successful, and an adverse resolution of the lawsuits could have a material adverse effect
on our financial condition, results of operations and cash flow. In addition, although we carry insurance for these types of claims,
a judgment significantly in excess of our insurance coverage or any costs, claims or judgment which are disputed or not covered
by insurance could materially and adversely affect our financial condition, results of operations and cash flow. If the preliminary
settlement is not approved or the other conditions are not met, we are not presently able to reasonably estimate potential costs
and/or losses, if any, related to the lawsuits.
ITEM 4. REMOVED AND RESERVED
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of our Common Stock
Our common stock has been listed on the NYSE Amex under the symbol “OESX” since April 6, 2010. Prior to April 6,
2010, our common stock had been listed on The NASDAQ Global Market under the symbol “OESX” since December 19, 2007.
The following table sets forth the range of high and low sales prices per share as reported on the exchange on which our common
stock was then listed for the periods indicated.
Fiscal 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Shareholders
High
Low
$
$
$
$
$
$
$
$
13.35
10.25
5.94
5.67
4.66
3.92
4.76
6.35
$
$
$
$
$
$
$
$
9.01
4.48
2.76
2.94
3.25
2.68
3.05
4.37
The closing sales price of our common stock on the NYSE Amex as of June 9, 2010 was $2.96. As of June 9, 2010 there
were approximately 305 record holders of the 22,591,811 outstanding shares of our common stock. The number of record
holders does not include shareholders for whom shares are held in a “nominee” or “street” name.
Dividend Policy
We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds
and any future earnings to fund the development and expansion of our business, and we do not anticipate any cash dividends in
the foreseeable future. In addition, the terms of our existing credit agreement restrict the payment of cash dividends on our
common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on
our financial condition, results of operations, capital requirements, contractual restrictions (including those under our loan
agreements) and other factors that our board of directors deems relevant.
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Use of Proceeds from our Public Offering
We registered shares of our common stock in connection with our IPO under the Securities Act of 1933, as amended. The
Registration Statement on Form S-1 (Reg. No. 333-145569) filed in connection with our IPO was declared effective by the
Securities and Exchange Commission on December 18, 2007. The IPO commenced on December 18, 2007 and did not terminate
before any securities were sold. As of the date of this filing, the IPO has terminated. Including shares sold pursuant to the
exercise by the underwriters of their over-allotment option, 6,849,092 shares of our common stock were registered and sold in
the IPO by us and an additional 1,997,062 shares of common stock were registered and sold by the selling shareholders named in
the Registration Statement. All shares were sold at a price to the public of $13.00 per share.
The underwriters for our IPO were Thomas Weisel Partners LLC, which acted as the sole book-running manager, and
Canaccord Adams Inc. and Pacific Growth Equities, LLC, which acted as co-managers. We paid the underwriters a commission
of $6.2 million and incurred additional offering expenses of approximately $4.2 million. After deducting the underwriters’
commission and the offering expenses, we received net proceeds of approximately $78.6 million.
No payments for such expenses were paid directly or indirectly to (i) any of our directors, officers or their associates,
(ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.
We invested the net proceeds from our IPO in bank certificates of deposits and money market accounts. Through March 31,
2010, approximately $24.5 million of the net proceeds from the IPO were used for working capital, capital expenditures and
general corporate purposes, along with $29.8 million used to repurchase shares of our common stock into treasury. As of the date
of this filing, we have not entered into any purchase agreements, understandings or commitments with respect to any
acquisitions. Other than for our share repurchases, there has been no material change in the planned use of proceeds from our
IPO as described in our final prospectus filed with the Securities and Exchange Commission on December 18, 2007 pursuant to
Rule 424(b).
Securities Authorized for Issuance under Equity Compensation Plans
The following table represents shares outstanding under the 2003 Stock Option Plan and the 2004 Equity Incentive Plan as
of March 31, 2010.
Equity Compensation Plan Information
Number of Securities
Remaining Available for
Number of Securities to be Weighted-Average Future Issuances Under the
Equity Compensation Plans
Issued Upon Exercise of Exercise Price of
(2)
Outstanding Options
Outstanding Options
3,546,249 $
3.66
569,690
Plan Category
Equity Compensation plans approved by
security holders (1)
(1) Approved before our IPO.
(2) Excludes shares reflected in the column titled “Number of Securities to be Issued Upon Exercise of Outstanding Options”.
Issuer Purchase of Equity Securities
The table below summarizes our repurchases of our common stock during the three-month period ended March 31, 2010.
Total Number
of Shares
Purchased as Part Maximum Dollar Amount that
Period
January 1 – January 31, 2010
February 1 – February 28, 2010
March 1 – March 31, 2010
Total Number Average
of Shares
Purchased
of Publicly
May Yet Be
Price Paid Announced Plans Purchased Under the Plans or
Per Share or Programs (1)
17,084 $
— $
— $
185,000
185,000
185,000
4.39
—
—
Programs
17,084 $
— $
— $
(1) In July 2008, our Board of Directors authorized a stock repurchase plan providing for the repurchase of up to $20 million of
shares of our outstanding common stock and, in December 2008, our Board of Directors authorized the repurchase of up to
an additional $10 million of our outstanding common stock. The plan had no expiration date, but as of March 31, 2010, we
had substantially completed the repurchase of the maximum permitted under the plan.
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Unregistered Sales of Securities
During the fiscal year ended March 31, 2010, we issued 399,364 shares of common stock in connection with the exercise of
outstanding warrants at a weighted average exercise price of $2.30 per share. These warrant exercises resulted in aggregate
proceeds to us of approximately $918,500. These issuances of common stock were not registered under the Securities Act of
1933, as amended, and were exempt from such registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Stock Price Performance Graph
The following graph shows the total shareholder return of an investment of $100 in cash on December 19, 2007, the date we
priced our stock pursuant to our IPO, through March 31, 2010, for (1) our common stock, (2) the Russell 2000 Index and (3) The
NASDAQ Clean Edge Green Energy Index. For the year ended March 31, 2008, we had previously used the NASDAQ Clean
Edge U.S. Index in our stock price performance graph. In May 2008, NASDAQ closed the Clean Edge U.S. Index. In December
2008, The NASDAQ Clean Edge Green Energy Index changed its name, having been previously known as the NASDAQ Clean
Edge U.S. Liquid Series Index. Returns are based upon historical amounts and are not intended to suggest future performance.
Data for the Russell 2000 Index and the NASDAQ Clean Edge Green Energy Index assume reinvestment of dividends. We have
never paid dividends on our common stock and have no present plans to do so.
Orion Energy Systems, Inc.
Russell 2000 Index
NASDAQ Clean Edge Green Energy Index
December 19, March 31, March 31, March 31,
2007
2008
2009
2010
$
$
$
100
100
100
$
$
$
73
91
78
$
$
$
34
57
36
$
$
$
38
93
54
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ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes
included elsewhere in this Form 10-K. The consolidated statements of operations data for the fiscal years ended March 31, 2008,
2009 and 2010 and the consolidated balance sheet data as of March 31, 2009 and 2010 are derived from our audited consolidated
financial statements included elsewhere in this Form 10-K, which have been prepared in accordance with generally accepted
accounting principles in the United States. The consolidated statements of operations data for the years ended March 31, 2006
and 2007, and the consolidated balance sheet data as of March 31, 2006, 2007 and 2008 have been derived from our audited
consolidated financial statements which are not included in this Form 10-K. The selected historical consolidated financial data
are not necessarily indicative of future results.
2006
Fiscal Year Ended March 31,
2008
(in thousands, except per share amounts)
2007
2009
Consolidated statements of operations data:
Product revenue
Service revenue
Total revenue
$
Cost of product revenue(1)
Cost of service revenue
Total cost of revenue
Gross profit
General and administrative expenses(1)
Sales and marketing expenses(1)
Research and development expenses(1)
Income (loss) from operations
Interest expense
Extinguishment of debt
Dividend and interest income
Income (loss) before income tax
Income tax expense (benefit)
Net income (loss)
Accretion of redeemable preferred stock and
preferred stock dividends(2)
Conversion of preferred stock(3)
Participation rights of preferred stock in
undistributed earnings(4)
Net income (loss) attributable to common
29,993 $
3,287
33,280
20,225
2,299
22,524
10,756
4,875
5,991
1,171
(1,281 )
1,051
—
5
(2,327 )
(762 )
(1,565 )
40,201 $
7,982
48,183
26,511
5,976
32,487
15,696
6,162
6,459
1,078
1,997
1,044
—
201
1,154
225
929
65,359 $
15,328
80,687
42,127
10,335
52,462
28,225
10,200
8,832
1,832
7,361
1,390
—
1,189
7,160
2,750
4,410
(3 )
—
(201 )
(83 )
(225 )
—
—
(205 )
(775 )
63,008 $
9,626
72,634
42,235
6,801
49,036
23,598
10,451
11,261
1,942
(56 )
167
—
1,661
1,438
927
511
—
—
—
2010
58,227
7,191
65,418
38,628
5,266
43,894
21,524
12,836
12,596
1,891
(5,799 )
260
250
269
(5,540 )
(1,350 )
(4,190 )
—
—
—
shareholders
$
(1,568 ) $
440 $
3,410 $
511 $
(4,190 )
Net income (loss) per share attributable to common
shareholders:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted
$
$
(0.18 ) $
(0.18 ) $
0.05 $
0.05 $
0.22 $
0.19 $
0.02 $
0.02 $
(0.19 )
(0.19 )
8,524
8,524
9,080
16,433
15,548
23,454
25,352
27,445
21,844
21,844
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Consolidated balance sheet data:
Cash and cash equivalents
Short-term investments
Total assets
Long-term debt, less current maturities
Temporary equity (Series C convertible
redeemable preferred stock)
Series A convertible preferred stock
Series B convertible preferred stock
Shareholder notes receivable
Shareholders’ equity
2006
2007
As of March 31,
2008
(in thousands)
2009
2010
$
$
1,089 $
—
24,738
10,492
285 $
—
33,583
10,603
78,312 $
2,404
130,702
4,473
36,163 $
6,490
103,722
3,647
23,364
1,000
103,621
3,156
—
116
5,591
(398 )
6,622 $
4,953
—
5,959
(2,128 )
9,355 $
—
—
—
—
113,190 $
—
—
—
—
88,695 $
—
—
—
—
87,670
(1) Includes stock-based compensation expense recognized under Financial Accounting Standards Board Accounting Standards
Codification Topic 718, or ASC Topic 718, as follows:
2008
Fiscal Year Ended March 31,
2009
(in thousands)
2010
Cost of product revenue
General and administrative expenses
Sales and marketing expenses
Research and development expenses
Total stock-based compensation expense
$
$
122
852
375
42
1,391
$
$
269
676
587
45
1,577
$
$
222
539
691
39
1,491
(2) For fiscal 2007 and 2008, represents the impact attributable to the accretion of accumulated dividends on our Series C
preferred stock, plus accumulated dividends on our Series A preferred stock prior to its conversion into common stock on
March 31, 2007. The Series C preferred converted automatically into common stock on a one-for-one basis upon the
closing of our IPO and our obligation to pay accumulated dividends was extinguished. For fiscal 2006, represents
accumulated dividends on our Series A preferred stock prior to its conversion into common stock. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Revenue and Expense Components —
Accretion of Preferred Stock and Preferred Stock Dividends.”
(3) Represents the estimated fair market value of the premium paid to holders of Series A preferred stock upon induced
conversion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Revenue and
Expense Components — Conversion of Preferred Stock.”
(4) Represents undistributed earnings allocated to participating preferred shareholders as described under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Revenue and Expense Components —
Participation Rights of Preferred Stock in Undistributed Earnings.” All of our preferred stock converted automatically into
common stock on a one-for-one basis upon the closing of our IPO, thereby ending our requirement to allocate any
undistributed earnings to our preferred shareholders.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion together with our financial statements, including the related notes, and our other
financial information appearing elsewhere in this Annual Report on Form 10-K. See also “Forward-Looking Statements” and
Item 1A. “Risk Factors.”
Overview
We design, manufacture and implement energy management systems consisting primarily of high-performance, energy-
efficient lighting systems, controls and related services.
We currently generate the substantial majority of our revenue from sales of high intensity fluorescent, or HIF, lighting
systems and related services to commercial and industrial customers. We typically sell our HIF lighting systems in replacement
of our customers’ existing high intensity discharge, or HID, fixtures. We call this replacement process a “retrofit.” We frequently
engage our customer’s existing electrical contractor to provide installation and project management services. We also sell our
HIF lighting systems on a wholesale basis, principally to electrical contractors and value-added resellers to sell to their own
customer bases.
We have sold and installed more than 1,739,000 of our HIF lighting systems in over 5,600 facilities from December 1, 2001
through March 31, 2010. We have sold our products to 120 Fortune 500 companies, many of which have installed our HIF
lighting systems in multiple facilities. Our top direct customers by revenue in fiscal 2010 included Coca-Cola Enterprises Inc.,
U.S. Foodservice, SYSCO Corp., Ball Corporation, MillerCoors and Pepsico, Inc. and its affiliates.
Our fiscal year ends on March 31. We call our fiscal years which ended on March 31, 2008, 2009 and 2010, “fiscal 2008,”
“fiscal 2009” and “fiscal 2010,” respectively. We call our current fiscal year, which will end on March 31, 2011, “fiscal 2011”.
Our fiscal first quarter ends on June 30, our fiscal second quarter ends on September 30, our fiscal third quarter ends on
December 31 and our fiscal fourth quarter ends on March 31.
Because of the current recessed state of the global economy, especially as it has affected capital equipment manufacturers,
our fiscal 2010 results continued to be impacted by lengthened customer sales cycles and sluggish customer capital spending. To
address these conditions, we implemented $3.2 million of annualized cost reductions during the first quarter of fiscal 2010.
These cost containment initiatives included reductions related to headcount, work hours and discretionary spending and began to
show results in the second half of fiscal 2010.
In response to the constraints on our customers’ capital spending budgets, we have more aggressively promoted the
advantages to our customers of purchasing our energy management systems through our OVPP finance program as an alternative
to purchasing our systems for cash. We expect that the number of customers who choose to purchase our systems by using our
OVPP financing program to continue to increase in future periods. While our OVPP program creates a recurring revenue stream
over the term of the annually renewable OVPP contract, it results in mis-match between the timing of our recognition of
revenues and expenses. This consequence has negatively impacted our near-term revenue and net income, and will likely
continue to do so. All of our selling and marketing expenses and most of our administrative expenses related to new OVPP
contracts are expensed up front as incurred, while the related OVPP contract revenue is recognized on a monthly basis over the
life of the contract. Our management evaluates the impact of our OVPP contracts on our financial statements by discounting the
future earnings potential of our OVPP contracts at our weighted average cost of capital rate of 7.25%, assuming that our OVPP
customers will exercise all renewal periods through the end of their contract term. We believe that this non-GAAP analysis helps
to provide additional clarity on the financial impact to us of the deferral of revenues and net income from these contracts and, for
comparative purposes, helps to eliminate the mis-matching of revenues and expenses that occurs under generally accepted
accounting principles as a result of our OVPP program. For fiscal 2010, we have evaluated the impact of the $10.0 million of
OVPP contract bookings during fiscal 2010 and determined that the discounted future earnings potential would have provided us
with an additional $0.07 of earnings per share for fiscal 2010, which would have reduced our total loss to $(0.12) per share. We
expect this trend to continue in fiscal 2011.
In August 2009, we created Orion Engineered Systems, formerly known as Orion Technology Ventures, a new operating
division which has been offering our customers additional alternative renewable energy systems. In fiscal 2010, we sold and
installed three solar photovoltaic electricity generating projects, completing our test analysis on two of the three in the third
quarter, and executed our first cash sale and our first PPA as a result of the successful testing of these systems. We expect the
installation and customer acceptance of the third system to be completed during our fiscal 2011 first quarter. These projects are
helping us answer technological, installation and commercial feasibility questions before determining how this technology may
fit into our overall business plan. In the near-term, we do not anticipate revenue contributions from these projects to be
significant.
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Despite near-term economic challenges, we remain optimistic about our long-term financial performance. Our long-term
optimism is based upon the considerable size of the existing market opportunity for lighting retrofits, the continued development
of our new products and product enhancements, the opportunity for our participation in the replacement part aftermarket and the
increasing national recognition of the importance of environmental stewardship, including the recent State of Wisconsin
legislation recognizing our solar Apollo Light Pipe as a renewable product offering and qualifying it for incentives currently
offered to other renewable technologies.
Revenue and Expense Components
Revenue . We sell our energy management products and services directly to commercial and industrial customers, and
indirectly to end users through wholesale sales to electrical contractors and value-added resellers. We currently generate the
substantial majority of our revenue from sales of HIF lighting systems and related services to commercial and industrial
customers. While our services include comprehensive site assessment, site field verification, utility incentive and government
subsidy management, engineering design, project management, installation and recycling in connection with our retrofit
installations, we separately recognize service revenue only for our installation and recycling services. Except for our installation
and recycling services, all other services are completed prior to product shipment and revenue from such services is included in
product revenue because evidence of fair value for these services does not exist. In fiscal 2010, we increased our efforts to
expand our value-added reseller channel with the development of a partner standard operating procedural kit, marketing through
mass mailings, participating in national trade organizations and providing training to channel partners on our sales
methodologies. These wholesale channels accounted for approximately 42% of our total revenue in fiscal 2010, which was an
increase from the 40% of total revenues contributed in fiscal 2009. We believe that this growth trend in our wholesale mix of
total revenues will continue in fiscal 2011.
In October 2008, we introduced to the market a financing program called the Orion Virtual Power Plant, or OVPP, or Orion
Throughput Agreement, or OTA, for our customers’ purchase of our energy management systems without an up-front capital
outlay. OVPP and OTA are interchangeable terms. The OVPP is structured as a supply agreement in which we receive monthly
rental payments over the life of the contract, typically 12 months, with an annual renewable agreement with a maximum term
between two and five years. This program creates an ongoing recurring revenue stream, but reduces near-term revenues as the
payments are recognized as revenue on a monthly basis over the life of the contract versus upfront upon product shipment or
project completion. However, we do retain the option to sell the payment stream to a third party finance company, as we have
done under the terms of our OTA financing program, in which case the revenue is recognized at the net present value of the total
future payments from the finance company upon completion of the sale transaction. The OVPP program was established to assist
customers who are interested in purchasing our energy management systems but who have capital expenditure budget
limitations. For fiscal 2009, we recognized $33,000 of revenue from completed OVPP contracts. For fiscal 2010, we recognized
$3.4 million of revenue from completed OVPP contracts, including $2.5 million from the sale of contracts to a third party
finance company. As of March 31, 2010, we had signed 75 customers to OVPP contracts representing future gross revenue
streams of $6.7 million. In the future, we expect an increase in the volume of OVPP contracts as our customers take advantage of
our value proposition without incurring up-front capital cost. Our gross margins on OVPP revenues are similar to gross margins
achieved on cash sales.
Other than OVPP sales, we recognize revenue on product only sales at the time of shipment. For projects consisting of
multiple elements of revenue, such as a combination of product sales and services, we separate the project into separate units of
accounting based on their relative fair values for revenue recognition purposes. Additionally, the deferral of revenue on a
delivered element may be required if such revenue is contingent upon the delivery of the remaining undelivered elements. We
recognize revenue at the time of product shipment on product sales and on services completed prior to product shipment. We
recognize revenue associated with services provided after product shipment, based on their fair value, when the services are
completed and customer acceptance has been received. When other significant obligations or acceptance terms remain after
products are delivered, revenue is recognized only after such obligations are fulfilled or acceptance by the customer has
occurred.
Our dependence on individual key customers can vary from period to period as a result of the significant size of some of
our retrofit and multi-facility roll-out projects. Our top 10 customers accounted for approximately 46%, 36% and 29% of our
total revenue for fiscal 2008, 2009 and 2010, respectively. One customer accounted for approximately 17% of our total revenue
for fiscal 2008 while no customers accounted for more than 10% of revenue in either fiscal 2009 and fiscal 2010. If large retrofit
and roll-out projects become a greater component of our total revenue, we may experience more customer concentration in given
periods. The loss of, or substantial reduction in sales volume to, any of our significant customers could have a material adverse
effect on our total revenue in any given period and may result in significant annual and quarterly revenue variations.
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Our level of total revenue for any given period is dependent upon a number of factors, including (i) the demand for our
products and systems, including our OVPP program and any new products, applications and services that we may introduce
through our new Orion Engineered Systems division; (ii) the number and timing of large retrofit and multi-facility retrofit, or
“roll-out,” projects; (iii) the level of our wholesale sales; (iv) our ability to realize revenue from our services and our OVPP
program, including whether we decide to retain or resell the expected future cash flows under our OVPP program and the
relative timing of the resultant revenue recognition; (v) market conditions; (vi) our execution of our sales process; (vii) our
ability to compete in a highly competitive market and our ability to respond successfully to market competition; (viii) the selling
price of our products and services; (ix) changes in capital investment levels by our customers and prospects; and (x) customer
sales cycles. As a result, our total revenue may be subject to quarterly variations and our total revenue for any particular fiscal
quarter may not be indicative of future results.
Bookings . Although bookings is not a term recognized under generally accepted accounting principles, as the volume of
our OVPP business is expected to continue to increase and because of the deferred revenue recognition of our retained OVPP
projects, we believe bookings provides our management and investors with an informative measure of our relative order activity
for any particular period. We define bookings as the total contractual value of all firm purchase orders received for our products
and services and the gross revenue streams for all OVPP contracts upon the execution of the contract. We define bookings for
PPA agreements as the discounted value of revenues from energy generation over the life of the agreement along with the
discounted value of revenues for renewable energy credits (REC) for as long as the REC programs are currently defined to be in
existence with the governing body. For fiscal 2009, total bookings were $71.6 million, which included $1.5 million of future
revenue streams associated with OVPP contracts. For fiscal 2010, total bookings were $73.9 million, which included
$10.0 million of future revenue streams associated with OVPP contracts and $1.7 million of discounted revenue streams from
PPA contracts.
Backlog . We define backlog as the total contractual value of all firm orders received for our lighting products and services
where delivery of product or completion of services has not yet occurred as of the end of any particular reporting period. Such
orders must be evidenced by a signed proposal acceptance or purchase order from the customer. Our backlog does not include
OVPP contracts, PPA contracts or national contracts that have been negotiated, but we have not yet received a purchase order for
the specific location. As of March 31, 2009, we had a backlog of firm purchase orders of approximately $2.8 million. As of
March 31, 2010, we had a backlog of firm purchase orders of approximately $3.2 million. We generally expect this level of firm
purchase order backlog to be converted into revenue within the following quarter. Principally as a result of the continued
lengthening of our customer’s purchasing decisions because of current recessed economic conditions and related factors, the
continued shortening of our installation cycles and the number of projects sold through national and OVPP contracts, a
comparison of backlog from period to period is not necessarily meaningful and may not be indicative of actual revenue
recognized in future periods.
Cost of Revenue. Our total cost of revenue consists of costs for: (i) raw materials, including sheet, coiled and specialty
reflective aluminum; (ii) electrical components, including ballasts, power supplies and lamps; (iii) wages and related personnel
expenses, including stock-based compensation charges, for our fabricating, coating, assembly, logistics and project installation
service organizations; (iv) manufacturing facilities, including depreciation on our manufacturing facilities and equipment, taxes,
insurance and utilities; (v) warranty expenses; (vi) installation and integration; and (vii) shipping and handling. Our cost of
aluminum can be subject to commodity price fluctuations, which we attempt to mitigate with forward fixed-price, minimum
quantity purchase commitments with our suppliers. We also purchase many of our electrical components through forward
purchase contracts. We buy most of our specialty reflective aluminum from a single supplier, and most of our ballast and lamp
components from a single supplier, although we believe we could obtain sufficient quantities of these raw materials and
components on a price and quality competitive basis from other suppliers if necessary. Purchases from our current primary
supplier of ballast and lamp components constituted 19% and 27% of our total cost of revenue for fiscal 2009 and fiscal 2010.
Our cost of revenue from OVPP projects is recorded as an asset on our balance sheet with the related costs amortized monthly
over the life of the asset. Our production labor force is non-union and, as a result, our production labor costs have been relatively
stable. We have been expanding our network of qualified third-party installers to realize efficiencies in the installation process.
Toward the end of fiscal 2008, we began to vertically integrate some of our processes performed at outside suppliers to help us
better manage delivery lead time, control process quality and inventory supply. We installed a coating line and acquired
production fabrication equipment. Each of these production items provides us with additional capacity to continue to support our
potential future revenue growth. We expect that these processes will help to reduce overall unit costs as the equipment becomes
more fully utilized. During fiscal 2010, we reengineered our manufacturing production product flow, consolidating product
assembly stations, eliminating redundant material handling activities and improving production efficiencies. These design
improvements helped reduce manufacturing direct and indirect labor costs.
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Gross Margin. Our gross profit has been and will continue to be, affected by the relative levels of our total revenue and our
total cost of revenue, and as a result, our gross profit may be subject to quarterly variation. Our gross profit as a percentage of
total revenue, or gross margin, is affected by a number of factors, including: (i) our mix of large retrofit and multi-facility roll-
out projects with national accounts; (ii) the level of our wholesale sales; (iii) our realization rate on our billable services; (iv) our
project pricing; (v) our level of warranty claims; (vi) our level of utilization of our manufacturing facilities and production
equipment and related absorption of our manufacturing overhead costs; (vii) our level of efficiencies in our manufacturing
operations; and (viii) our level of efficiencies from our subcontracted installation service providers.
Operating Expenses. Our operating expenses consist of: (i) general and administrative expenses; (ii) sales and marketing
expenses; and (iii) research and development expenses. Personnel related costs are our largest operating expense. Up-front costs
related to our OVPP business, including most related sales activities and contract administration costs, are expensed as incurred
resulting in a mis-match of operating expense recognition and the related revenue recognition from OVPP contracts. This mis-
match of OVPP revenue and expense recognition reduces near-term profitability as revenue and gross profit are recorded under
GAAP in future periods. While we have recently focused on reducing our personnel costs and headcount in certain functional
areas, we do nonetheless believe that future opportunities within our business remain strong. As a result, we may choose to
continue to selectively add to our sales, marketing and research and development staff based upon opportunities that may arise.
Our general and administrative expenses consist primarily of costs for: (i) salaries and related personnel expenses, including
stock-based compensation charges, related to our executive, finance, human resource, information technology and operations
organizations; (ii) public company costs, including investor relations and audit; (iii) occupancy expenses; (iv) professional
services fees; (v) technology related costs and amortization; and (vi) corporate-related travel.
Our sales and marketing expenses consist primarily of costs for: (i) salaries and related personnel expenses, including stock-
based compensation charges, related to our sales and marketing organization; (ii) internal and external sales commissions and
bonuses; (iii) travel, lodging and other out-of-pocket expenses associated with our selling efforts; (iv) marketing programs; (v)
pre-sales costs; and (vi) other related overhead.
Our research and development expenses consist primarily of costs for: (i) salaries and related personnel expenses, including
stock-based compensation charges, related to our engineering organization; (ii) payments to consultants; (iii) the design and
development of new energy management products and enhancements to our existing energy management system; (iv) quality
assurance and testing; and (v) other related overhead. We expense research and development costs as incurred.
We have incurred increased general and administrative expenses in connection with our becoming a public company,
including increased accounting, audit, investor relations, legal and support services and Sarbanes-Oxley compliance fees and
expenses. In fiscal 2010, our operating expenses increased as a result of the completion of our new technology center and the
related building occupancy costs. We expense all pre-sale costs incurred in connection with our sales process prior to obtaining a
purchase order. These pre-sale costs may reduce our net income in a given period prior to recognizing any corresponding
revenue. We also intend to continue to invest in our research and development of new and enhanced energy management
products and services.
We recognize compensation expense for the fair value of our stock option awards granted over their related vesting period
using the modified prospective method of adoption under the provisions of ASC 718, Compensation — Stock Compensation. We
recognized $1.4 million, $1.6 million and $1.5 million of stock-based compensation expense in fiscal 2008, fiscal 2009 and fiscal
2010. As a result of prior option grants, including option grants in fiscal 2010, we expect to recognize an additional $4.5 million
of stock-based compensation over a weighted average period of approximately seven years. These charges have been, and will
continue to be, allocated to cost of product revenue, general and administrative expenses, sales and marketing expenses and
research and development expenses based on the departments in which the personnel receiving such awards have primary
responsibility. A substantial majority of these charges have been, and likely will continue to be, allocated to general and
administrative expenses and sales and marketing expenses.
Interest Expense. Our interest expense is comprised primarily of interest expense on outstanding borrowings under long-
term debt obligations described under “— Liquidity and Capital Resources — Indebtedness” below, including the amortization
of previously incurred financing costs. We amortize deferred financing costs to interest expense over the life of the related debt
instrument, ranging from six to fifteen years.
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Dividend and Interest Income. Our dividend income consisted of dividends paid on preferred shares that we acquired in
July 2006. The terms of these preferred shares provided for annual dividend payments to us of $0.1 million. We sold the
preferred shares back to the issuer in June 2008 and all dividends accrued were paid upon sale. We also report interest income
earned on our cash and cash equivalents and short term investments. For fiscal 2009, our interest income increased as a result of
our investment of the net proceeds from our initial public offering in short-term, interest-bearing, money market funds, bank
certificate of deposits and investment-grade securities. For fiscal 2010, our interest income declined as a result of the decrease in
our cash and cash equivalents and declining market rates.
Income Taxes. As of March 31, 2010, we had net operating loss carryforwards of approximately $14.5 million for federal
tax purposes and $8.4 million for state tax purposes. Included in these loss carryforwards were $6.1 million for federal and
$3.1 million for state tax purposes of compensation expenses that were associated with the exercise of nonqualified stock
options. The benefit from our net operating losses created from these compensation expenses has not yet been recognized in our
financial statements and will be accounted for in our shareholders’ equity as a credit to additional paid-in capital as the deduction
reduces our income taxes payable. We also had federal tax credit carryforwards of approximately $499,000 and state tax credit
carryforwards of $120,000, which is net of the valuation allowance of $408,000. Management believes it is more likely than not
that we will realize the benefits of most of these assets and has reserved for an allowance due to our state apportioned income
and the potential expiration of the state tax credits due to the carryforwards period. These federal and state net operating losses
and credit carryforwards are available, subject to the discussion in the following paragraph, to offset future taxable income and,
if not utilized, will begin to expire in varying amounts between 2014 and 2030.
Generally, a change of more than 50% in the ownership of a company’s stock, by value, over a three year period constitutes
an ownership change for federal income tax purposes. An ownership change may limit a company’s ability to use its net
operating loss carryforwards attributable to the period prior to such change. In fiscal 2007 and prior to our IPO, past issuances
and transfers of stock caused an ownership change for certain tax purposes. When certain ownership changes occur, tax laws
require that a calculation be made to establish a limitation on the use of net operating loss carryforwards created in periods prior
to such ownership change. For fiscal year 2008, utilization of our federal loss carryforwards was limited to $3.0 million. There
was no limitation that occurred for fiscal 2009 or 2010.
Accretion of Preferred Stock and Preferred Stock Dividends. Our accretion of redeemable preferred stock and preferred
stock dividends consisted of accumulated unpaid dividends on our Series A and Series C preferred stock during the periods that
such shares were outstanding. The terms of our Series C preferred stock provided for a 6% per annum cumulative dividend
unless we completed a qualified initial public offering or sale. As a result, the carrying amount of our Series C preferred stock
were increased each period to reflect the accretion of accumulated unpaid dividends. The obligation to pay these accumulated
unpaid dividends was extinguished upon conversion of the Series C preferred stock because our IPO constituted a qualified
initial public offering under the terms of our Series C preferred stock. The Series C preferred stock automatically converted into
common stock upon closing of our IPO, and the carrying amount of our Series C preferred stock, along with accumulated unpaid
dividends, was credited to additional paid-in capital at that time. Our Series A preferred stock was issued beginning in fiscal
2000 and provided for a 12% per annum cumulative dividend. Our Series A preferred stock was converted into shares of our
common stock in fiscal 2005 and fiscal 2007 as described under “— Conversion of Preferred Stock.”
Conversion of Preferred Stock. In fiscal 2005, we offered our holders of then outstanding Series A preferred stock the
opportunity to convert each of their Series A preferred shares, together with the accumulated unpaid dividends thereon and their
other rights and preferences related thereto, into three shares of our common stock. Since the Series A preferred shareholders had
the existing right to convert each of their Series A preferred shares into two shares of common stock, we determined that the
increase in the conversion ratio from two to three shares of common stock was an inducement offer. As a result, we accounted
for the value of the change in this conversion ratio as an increase to additional paid-in capital and a charge to our accumulated
deficit at the time of conversion. In fiscal 2005, 648,010 outstanding Series A preferred shares were converted into shares of our
common stock. The remaining 20,000 outstanding Series A preferred shares were converted into shares of our common stock on
March 31, 2007. The premium amount recorded for the inducement, calculated using the number of additional common shares
offered multiplied by the estimated fair market value of our common stock at the time of conversion, was $1.0 million for fiscal
2005 and $83,000 for fiscal 2007.
Participation Rights of Preferred Stock in Undistributed Earnings. Because all series of our preferred stock participate in
all undistributed earnings with the common stock, we allocated earnings to the common shareholders and participating preferred
shareholders under the two-class method as required under the provisions of ASC 260, Earnings Per Share . The two-class
method is an earnings allocation method under which basic net income per share is calculated for our common stock and
participating preferred stock considering both accrued preferred stock dividends and participation rights in undistributed earnings
as if all such earnings had been distributed during the year. Because our participating preferred stock was not contractually
required to share in our losses, in applying the two-class method to compute basic net income per common share, we did not
make any allocation to our preferred stock if a net loss existed or if an undistributed net loss resulted from reducing net income
by the accrued preferred stock dividends. All of our preferred stock was converted automatically into common stock on a one-
for-one basis upon the closing of our IPO and we are no longer required to allocate any undistributed earnings to our preferred
shareholders.
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Results of Operations
The following table sets forth the line items of our consolidated statements of operations on an absolute dollar basis and as a
relative percentage of our total revenue for each applicable period, together with the relative percentage change in such line item
between applicable comparable periods set forth below:
2008
2009
Fiscal Year Ended March 31,
(Dollars in thousands)
% of
%
Change
2010
% of
%
Change
% of
Amount Revenue
Amount Revenue
81.0 % $ 63,008
19.0 % 9,626
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Amount Revenue
86.7 %
$ 65,359
15,328
13.3 %
80,687 100.0 % 72,634 100.0 %
0.3 % 38,628
58.1 %
42,127
(34.2 )% 5,266
9.4 %
10,335
(6.5 )% 43,894
67.5 %
52,462
(16.4 )% 21,524
32.5 %
Gross profit
28,225
2.5 % 12,836
14.4 %
General and administrative expenses 10,200
27.5 % 12,596
15.5 %
Sales and marketing expenses
8,832
2.7 %
Research and development expenses 1,832
6.0 % 1,891
(0.1 )% (100.8 )% (5,799 )
7,361
Income (loss) from operations
(260 )
(88.0 )%
0.2 %
(1,390 )
Interest expense
250
0.0 %
0.0 %
Extinguishment of debt
—
39.7 %
2.3 %
1,189
Dividend and interest income
269
(79.9 )% (5,540 )
2.0 %
7,160
Income (loss) before income tax
(66.3 )% (1,350 )
1.3 %
2,750
Income tax expense (benefit)
(88.4 )% (4,190 )
0.7 %
4,410
Net income (loss)
Accretion of redeemable preferred
89.0 %
(3.6 )% $ 58,227
(7.6 )%
(37.2 )% 7,191
11.0 %
(25.3 )%
(10.0 )% 65,418 100.0 %
(9.9 )%
59.1 %
(8.5 )%
8.0 %
(22.6 )%
67.1 %
(10.5 )%
32.9 %
(8.8 )%
19.6 %
22.8 %
19.3 %
11.9 %
2.9 %
(2.6 )%
(8.9 )%
NM
55.7 %
0.4 %
0.4 % 100.0 %
0.4 %
(83.8 )%
(8.5 )% (485.3 )%
(2.1 )% (245.6 )%
(6.4 )% (920.0 )%
52.2 % 42,235
12.8 % 6,801
65.0 % 49,036
35.0 % 23,598
12.6 % 10,451
10.9 % 11,261
2.3 % 1,942
(56 )
9.1 %
(167 )
1.7 %
0.0 %
—
1.5 % 1,661
8.9 % 1,438
927
3.4 %
511
5.5 %
stock and preferred stock
dividends
Participation rights of preferred
stock in undistributed earnings
Net income (loss) attributable to
(225 )
(0.3 )%
—
0.0 % 100.0 %
—
0.0 %
0.0 %
(775 )
(1.0 )%
—
0.0 % 100.0 %
—
0.0 %
0.0 %
common shareholders
$ 3,410
4.2 % $
511
0.7 %
(85.0 )% $ (4,190 )
(6.4 )% (920.0 )%
NM = Not meaningful
Fiscal 2010 Compared to Fiscal 2009
Bookings. Total bookings increased from $71.6 million, which included $1.5 million of future revenue streams associated
with OVPP contracts, for fiscal 2009 to $73.9 million, which included $10.0 million of future revenue streams associated with
OVPP contracts and $1.7 million of discounted revenue streams from PPA contracts, for fiscal 2010, an increase of $2.3 million
or 3%.
Revenue. Product revenue decreased from $63.0 million for fiscal 2009 to $58.2 million for fiscal 2010, a decrease of
$4.8 million or 8%. The decrease was a result of decreased sales of our HIF lighting systems and an increase in the number of
projects sold under our OVPP financing terms, which reduced revenue in the near term, but provides recurring revenue into
future fiscal periods. Service revenue decreased from $9.6 million for fiscal 2009 to $7.2 million for fiscal 2010, a decrease of
$2.4 million, or 25%. The decrease in service revenue was a result of the decreased sales of our HIF lighting systems and the
continued percentage increase of total revenues to our wholesale channels where services are not provided. We believe that our
fiscal 2010 revenues continued to be impacted by a general conservatism in the marketplace concerning capital spending and
purchase decisions due to continuing adverse economic and credit market conditions. In the second half of fiscal 2010, we
realized a slight improvement in our order volumes in relation to the first half of our fiscal 2010. In the fourth quarter of fiscal
2010, we recorded $2.5 million of product revenue due to the sale of a portion of our OVPP finance contracts to a third party
equipment finance company. We believe that the significant increase in our OVPP finance bookings, $10.0 million for fiscal
2010 compared to $1.5 million for fiscal 2009, has helped to address capital spending constraints by providing an alternative to
the up-front capital requirements of a cash purchase. Accordingly, we believe that our OVPP financed business will continue to
increase during fiscal 2011, accounting for approximately 20 to 25% of our anticipated total bookings. This increase in our
financed business and the deferral of revenue recognition into future periods, may result in reduced product revenues in the near-
term.
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Cost of Revenue and Gross Margin. Our cost of product revenue decreased from $42.2 million for fiscal 2009 to
$38.6 million for fiscal 2010, a decrease of $3.6 million, or 9%. Our cost of service revenue decreased from $6.8 million for
fiscal 2009 to $5.3 million for fiscal 2010, a decrease of $1.5 million, or 23%. Total gross margin remained substantially
unchanged at 32.5% for fiscal 2009 and 32.9% for fiscal 2010. During fiscal 2010, we maintained improvements in our product
gross margins, in spite of the volume decline, resulting from our efforts to reengineer our assembly processes, including the
implementation of cell manufacturing stations, a reduction in headcount and a reduction in work hours, and reductions in
discretionary spending and premium costs, like overtime.
Operating Expenses
General and Administrative. Our general and administrative expenses increased from $10.5 million for fiscal 2009 to
$12.8 million for fiscal 2010, an increase of $2.3 million or 23%. The increase was a result of : (i) $1.2 million increase for
occupancy costs related to the completion of our new technology center, including approximately $0.1 million for one-time start-
up charges; (ii) $0.7 million for legal costs related to the defense and preliminary settlement of our securities class action
litigation; (iii) $0.6 million in severance compensation costs and headcount additions related to staff support in information
technology and executive support staff in human resources and administrative functions; (iv) $0.3 million in costs related to the
write down of a long-term note receivable and bad debt charges on aged accounts receivable; and (v) $0.4 million as a result of a
one-time gain on asset disposal in the fiscal 2009 that did not recur in fiscal 2010. These cost increases were partially offset by
$0.9 million in decreased compensation costs resulting from headcount reductions and other discretionary spending reductions.
Sales and Marketing. Our sales and marketing expenses increased from $11.2 million for fiscal 2009 to $12.6 million for
fiscal 2010, an increase of $1.4 million, or 12%. The increase was a result of the mismatch of expenses incurred to sell and
market the growth in our OVPP finance program and compensation and benefit costs for additional sales and marketing
personnel. We increased our sales and marketing headcount to further develop opportunities for our exterior lighting products
within the utility and governmental markets, expanded sales and sales support personnel dedicated to our in-market sales
programs and added technical expertise for our wireless controls product lines and our renewable technology initiatives.
Research and Development. Our research and development expenses were substantially unchanged in fiscal 2010 from
fiscal 2009, at approximately $1.9 million. Expenses incurred in fiscal 2010 related to compensation costs for the development
and support of new products, depreciation expenses for lab and research equipment and testing costs related to our new wireless
controls, exterior lighting and LED product initiatives.
Interest Expense. Our interest expense increased from $167,000 in fiscal 2009 to $260,000 in fiscal 2010, an increase of
$93,000 or 56%. The increase in interest expense was due to the elimination of capitalized interest resulting from the completion
of our corporate technology center. For fiscal 2009 and fiscal 2010, we capitalized $215,000 and $21,000 of interest for
construction in progress, respectively.
Extinguishment of Debt. In fiscal 2010, $250,000 of debt under equipment loans from our local government was forgiven
related to our creation and retention of certain types and numbers of jobs at our manufacturing facility.
Dividend and Interest Income. Our dividend and interest income decreased from fiscal 2009 to fiscal 2010 as a result of
declining market interest rates and the reduction in our cash balances year over year due to cash used to finance our OVPP
programs and our investment in wireless control inventory components.
Income Taxes. Our income tax expense decreased in fiscal 2010 from fiscal 2009 due to the reduction in our taxable
income. Our effective income tax rate for fiscal 2009 was 64.5% compared to a benefit rate of (24.4)% for fiscal 2010. The
change in our effective rate was due to a reduction of benefits for non-deductible stock compensation expense from prior
incentive stock options grants and the impact of an increase in our state valuation allowance reserve.
Fiscal 2009 Compared to Fiscal 2008
Bookings. Our fiscal 2009 bookings were $71.6 million, including $1.5 million of future revenue streams associated with
OVPP contracts. We do not have reliable bookings data for periods prior to fiscal 2009.
Revenue. Our fiscal 2009 product revenue of $63.0 million decreased 3.6% compared to our fiscal 2008 product revenue of
$65.4 million. This decrease was a result of decreased capital spending and delayed purchase decisions within our customer base
due to adverse economic and credit market conditions. Our fiscal 2009 service revenue of $9.6 million decreased 37.2%
compared to our fiscal 2008 service revenue of $15.3 million. This decrease was a result of our increased revenues to our
wholesale channels where services are not provided and decreased capital spending and delayed purchase decisions within our
direct customer base.
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Cost of Revenue. Our fiscal 2009 cost of product revenue of $42.2 million increased 0.3% compared to our fiscal 2008 cost
of product revenue of $42.1 million. This increase was a result of new equipment and operating costs for product coating and
fabrication, and additional assembly labor personnel costs, including stock compensation expense, for the manufacturing
production of our enclosure product lines and wet-rated fixtures. These enclosure products are more labor intensive than our
standard compact modular products. Our fiscal 2009 cost of service revenue of $6.8 million decreased 34.2% compared to our
fiscal 2008 cost of service revenue of $10.3 million. This decrease was a result of our increased revenues to our wholesale
channels where services are not provided.
Gross Margin. Our fiscal 2009 gross profit of $23.6 million decreased 16.4% on an absolute dollar basis compared to our
fiscal 2008 gross profit of $28.2 million. Our fiscal 2009 gross margin percentage of 32.5% decreased from our fiscal 2008 gross
margin percentage of 35.0%. The decrease in both gross profit dollars and gross margin percentage was due to underabsorbed
manufacturing capacity costs related to reduced product volumes, added costs for additional production capabilities in our
coating and forming departments and additional costs for labor personnel, including overtime, to assemble and produce our
enclosure and wet-rated product lines.
Operating Expenses
General and Administrative. Our fiscal 2009 general and administrative expenses of $10.5 million increased 2.5%
compared to our fiscal 2008 general and administrative expenses of $10.2 million. The increase was due to: (i) compensation
cost increases of $0.5 million, including stock option compensation, related to additional staff support in our human resources,
accounting, information technology and administrative functions; (ii) legal expenses of $0.4 million resulting from our defense
of our securities class action litigation; (iii) additional public company costs, including additional expenses for accounting,
investor relations and legal services; and (iv) increased consulting costs for technology and for Sarbanes-Oxley compliance.
These cost increases were offset by decreases in bonus compensation costs of $1.5 million. These decreases in bonus expense
were due to $0.8 million of one-time bonus expense in fiscal 2008 related to the completion of our IPO and our incurring no
expense in fiscal 2009 related to our executive bonus compensation plan compared with $0.7 million in such expenses in fiscal
2008.
Sales and Marketing. Our fiscal 2009 sales and marketing expense of $11.3 million increased 27.5% on an absolute dollar
basis and as a percentage of revenues compared to fiscal 2008 selling and marketing expenses of $8.8 million. This increase was
a result of increased employee compensation expenses, including stock option compensation, of $2.5 million resulting from our
hiring of additional sales and sales support personnel and a $0.7 million increase in marketing costs as a result of efforts to
increase our brand awareness through direct mail into the wholesale channel and our participation in national trade shows. These
increases were partially offset by reductions in commission payments and employee bonus compensation of $0.8 million as a
result of our lower revenue volumes.
Research and Development. Our fiscal 2009 research and development expense of $1.9 million increased 6.0% compared to
our fiscal 2008 research and development expense of $1.8 million. This increase was due to investment in the continued
development of our wireless control product, technology and process improvements in our coating operation and sample and
material costs for the development of new products.
Interest Expense. Our fiscal 2009 interest expense of $0.2 million decreased 88.0% compared to our fiscal 2008 interest
expense of $1.4 million. This decrease was a result of a reduction in expense on our revolving line of credit due to minimal
borrowing activity in fiscal 2009, the conversion of our convertible debt into common stock as a result of the completion of our
IPO and the subsequent elimination of $0.5 million of interest recorded in fiscal 2008 and capitalization of $0.2 million of
interest expense in fiscal 2009 for construction related to our corporate technology center.
Dividend and Interest Income. Our fiscal 2009 dividend and interest income of $1.7 million increased 39.7% compared to
our fiscal 2008 dividend and interest income of $1.2 million. This increase was a result of the full year impact of interest income
earned on the invested proceeds from our IPO completed in December 2007.
Income Taxes. Our fiscal 2009 income tax expense of $0.9 million decreased 66.3% compared to our fiscal 2008 income
tax expense of $2.8 million due to our decreased pre-tax income. Our fiscal 2009 effective income tax rate was 64.5% compared
to 38.1% for our fiscal 2008. The increase in our effective rate was due to the impact of non-deductible stock compensation
expense related to prior issuances of incentive stock options.
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Table of Contents
Quarterly Results of Operations
The following tables present our unaudited quarterly results of operations for the last eight fiscal quarters in the period
ended March 31, 2010 (i) on an absolute dollar basis (in thousands) and (ii) as a percentage of total revenue for the applicable
fiscal quarter. You should read the following tables in conjunction with our consolidated financial statements and related notes
contained elsewhere in this Form 10-K. In our opinion, the unaudited financial information presented below has been prepared
on the same basis as our audited consolidated financial statements, and includes all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of our operating results for the fiscal quarters presented.
Operating results for any fiscal quarter are not necessarily indicative of the results for any future fiscal quarters or for a full fiscal
year.
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
General and administrative
expenses
Sales and marketing expenses
Research and development
expenses
Income (loss) from operations
Interest expense
Extinguishment of debt
Dividend and interest income
Income (loss) before income tax
Income tax expense (benefit)
Net income (loss)
2008
2008
2009
For the Three Months Ended
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
2008
2009
(in thousands, unaudited)
$ 12,889 $ 17,280 $ 20,671 $ 12,168 $ 10,677 $ 13,763 $ 17,205 $ 16,582
856 2,090 2,294
3,217 1,480 1,704 3,225 1,951
16,106 18,760 22,375 15,393 12,628 14,619 19,295 18,876
8,613 11,467 13,644 8,511 7,872 9,222 10,633 10,901
2,296
632 1,568 1,811
10,909 12,425 14,955 10,747 9,127 9,854 12,201 12,712
5,197 6,335 7,420 4,646 3,501 4,765 7,094 6,164
958 1,311 2,236 1,255
2009
2010
2009
2,615 2,893 2,438 2,505 3,163 3,143 3,051 3,479
2,652 2,771 2,741 3,097 3,152 2,962 3,063 3,420
418
(488 )
67
—
617
62
28
34 $
$
347
419
373
491
804
298 1,894 (1,760 ) (3,233 ) (1,831 )
74
26
41
—
—
—
550
76
169
807 2,186 (1,617 ) (3,166 ) (1,829 )
354 1,032
(430 )
(487 )
453 $ 1,154 $ (1,130 ) $ (2,773 ) $ (1,399 ) $
56
—
123
33
—
325
(393 )
67
—
49
404
576
576 (1,311 )
63
250
21
558 (1,103 )
(278 )
(249 )
(825 )
807 $
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross margin
General and administrative
expenses
Sales and marketing expenses
Research and development
expenses
Income (loss) from operations
Interest expense
Extinguishment of debt
Dividend and interest income
Income (loss) before income
tax
Income tax expense (benefit)
Net income (loss)
June 30,
2008
Sept. 30, Dec. 31, Mar. 31,
2008
2008 2009
June 30,
2009
Sept. 30,
2009
Dec. 31,
2009
Mar. 31,
2010
(unaudited)
79.0 %
21.0 %
92.4 %
7.6 %
92.1 %
7.9 %
80.0 %
20.0 %
87.8 %
12.2 %
100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
57.8 %
9.6 %
67.3 %
32.7 %
55.1 %
8.1 %
63.2 %
36.8 %
63.1 %
4.3 %
67.4 %
32.6 %
62.3 %
9.9 %
72.3 %
27.7 %
55.3 %
14.5 %
69.8 %
30.2 %
53.5 %
14.3 %
67.7 %
32.3 %
61.0 %
5.9 %
66.8 %
33.2 %
61.1 %
5.1 %
66.2 %
33.8 %
89.2 %
10.8 %
94.1 %
5.9 %
84.6 %
15.4 %
16.2 %
16.5 %
15.4 %
14.8 %
10.9 %
12.3 %
16.3 %
20.1 %
25.0 %
25.0 %
21.5 %
20.3 %
15.8 %
15.9 %
18.4 %
18.1 %
2.6 %
(3.0 )%
0.4 %
0.0 %
3.8 %
0.4 %
0.2 %
0.2 %
2.0 %
1.6 %
0.2 %
0.0 %
2.9 %
4.3 %
1.9 %
2.4 %
1.6 %
8.4 %
0.1 %
0.0 %
1.5 %
9.8 %
4.6 %
5.2 %
5.2 %
(11.4 )%
0.2 %
0.0 %
1.1 %
3.3 %
(25.6 )%
0.4 %
0.0 %
1.0 %
3.4 %
(12.5 )%
0.5 %
0.0 %
0.5 %
2.1 %
3.0 %
0.3 %
0.0 %
0.3 %
(10.5 )%
(3.2 )%
(7.3 )%
(25.1 )%
(3.1 )%
(22.0 )%
(12.5 )%
(2.9 )%
(9.6 )%
2.9 %
(1.3 )%
4.2 %
3.1 %
(6.9 )%
0.3 %
1.3 %
0.1 %
(5.8 )%
(1.5 )%
(4.4 )%
Our total revenue can fluctuate from quarter to quarter depending on the purchasing decisions of our customers and our
overall level of sales activity. Additionally, our quarterly revenues can be impacted by the mix of our bookings between cash
sales and OTA/OVPP contracts, as OTA/OVPP revenues are deferred into future periods over the term of the agreements.
Historically, our customers have tended to increase their purchases near the beginning or end of their capital budget cycles,
which tend to correspond to the beginning or end of the calendar year. As a result, we have in the past experienced lower relative
total revenue in our fiscal first and second quarters and higher relative total revenue in our fiscal third quarter. These seasonal
fluctuations have been largely offset by our customers’ decisions to initiate multiple facility roll-outs. We expect that there may
be future variations in our quarterly total revenue depending on our level of national account roll-out projects and wholesale
sales. Our results for any particular fiscal quarter may not be indicative of results for other fiscal quarters or an entire fiscal year.
40
Table of Contents
Liquidity and Capital Resources
Overview
On December 24, 2007, we completed our initial public offering, or IPO. Net proceeds to us from our IPO were
approximately $82.8 million (net of underwriting discounts and commissions but before the deduction of offering expenses). We
invested the net proceeds from our IPO in money market funds and short-term government agency bonds.
We had approximately $23.4 million in cash and cash equivalents and $1.0 million in short-term investments as of
March 31, 2010 compared to $36.2 million in cash and cash equivalents and $6.5 million in short-term investments as of
March 31, 2009. Our cash equivalents are invested in money market accounts and bank certificates of deposits with maturities of
less than 90 days and an average yield of 0.2%. Our short-term investment account consists of a bank certificate of deposit in the
amount of $1.0 million with an expiration date of June 2010 and a yield of 1.7%.
We currently have been using our cash-on-hand, including $4.8 million during fiscal 2010, to fund our investment of
company owned equipment under our OTA/OVPP and PPA projects. We expect that our volume of financed projects will
continue to increase in the future and that the cash required to fund these projects will continue to increase as well. We also
recognize that our ability to grow revenues through these programs will continue to deplete our cash resources if we do not
secure additional funding sources. We are exploring potential financing alternatives to support the expected growth of our
OTA/OVPP contract volumes.
The current recessionary state of the global economy could potentially have negative effects on our near-term liquidity and
capital resources, including slower collections of receivables, delays of existing order deliveries and postponements of incoming
orders. However, we believe that our existing cash and cash equivalents, our anticipated cash flows from operating activities and
our borrowing capacity under our revolving credit facility will be sufficient to meet our anticipated cash needs for the next
12 months. As of March 31, 2010, we were in a strong financial position with $24.4 million in cash and short-term investments.
For that reason, we do not anticipate drawing on our $25.0 million line of credit nor do we expect to use significant amounts of
our cash balances for operating activities during fiscal 2011. Our future working capital requirements thereafter will depend on
many factors, including our rate of revenue, our rate of OVPP and OTA growth, our rate of investment into our financed sales
programs, our introduction of new products and services and enhancements to our existing energy management system, the
timing and extent of expansions of our sales force and other administrative and production personnel, the timing and extent of
advertising and promotional campaigns, and our research and development activities.
Cash Flows
The following table summarizes our cash flows for our fiscal 2008, fiscal 2009 and fiscal 2010:
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
$
$
2008
Fiscal Year Ended March 31,
2009
(in thousands)
3,239
$
(17,873 )
(27,515 )
(42,149 )
(1,362 )
(7,437 )
86,826
78,027
$
$
$
2010
(8,574 )
(5,214 )
989
(12,799 )
Cash Flows Related to Operating Activities. Cash used in operating activities primarily consists of net income
(loss) adjusted for certain non-cash items including depreciation and amortization, stock-based compensation expenses, income
taxes and the effect of changes in working capital and other activities.
Cash used in operating activities for fiscal 2010 was $8.6 million and consisted of net cash of $7.9 million used for working
capital purposes and net loss adjusted non-cash expenses of $0.7 million, compared to net cash provided by operating activities
in fiscal 2009 of $3.2 million. The $4.6 million increase in cash provided from operating activities in fiscal 2009 compared to
fiscal 2008 was primarily due to improved collections of our accounts receivable.
41
Table of Contents
Cash Flows Related to Investing Activities. Cash used in investing activities was $7.4 million, $17.9 million and
$5.2 million for fiscal 2008, 2009 and 2010, respectively. In fiscal 2010, we invested $5.6 million in capital expenditures related
to the completion of our new corporate technology center, operating and customer relationship software systems, a photovoltaic
solar generated power system and for purchases of manufacturing equipment and tooling. Additionally, we invested $4.8 million
in equipment related to our OVPP and PPA finance programs and $0.3 million for the development of our intellectual property.
We generated cash flow from investing activities of $5.5 million from the sale of short-term investments. In fiscal 2009, we
invested $13.1 million in capital expenditures in our new corporate technology center, operating software systems, improvements
in our manufacturing facility and for purchases of equipment and tooling. We also invested $4.1 million in short term certificate
of deposits and spent $1.0 million for the purchase of intellectual property rights from an executive, partially offset by net
proceeds from the sale of an investment of $0.5 million. In fiscal 2008, our principal cash investments were for purchases of
processing equipment, construction costs for our new technology center and other improvements to our facility, short term
government investment securities and continued development of our intellectual property.
Cash Flows Related to Financing Activities. Cash provided by financing activities was $1.0 million for fiscal 2010. This
included proceeds of $2.0 million received from stock option and warrant exercises, $0.2 million for proceeds from long-term
debt and $80,000 for excess tax benefits from stock based compensation. Cash used in financing activities included $0.8 million
for debt principal payments and $0.5 million used for common share repurchases.
Cash used in financing activities was $27.5 million for fiscal 2009. The use of cash was due to $29.3 million used for
common share repurchases and $0.9 million of debt principal payments, offset by $1.5 million in proceeds from the exercise of
common stock options and warrants and $1.1 million for the impact of deferred taxes on our stock based compensation.
Cash provided by financing activities was $86.8 million for fiscal 2008. This increase in cash provided was due to
$78.6 million of net proceeds from our initial public offering, $10.6 million of gross proceeds raised from the issuance of our
convertible notes, $2.0 million from stock option and warrant exercises, $0.8 million from shareholder note payments and
$0.8 million from debt proceeds, offset by payments on our line of credit of $6.1 million and debt principal payments of
$0.7 million.
Working Capital
Our net working capital as of March 31, 2010 was $55.7 million, consisting of $67.9 million in current assets and
$12.2 million in current liabilities. Our net working capital as of March 31, 2009 was $67.5 million, consisting of $78.4 million
in current assets and $10.9 million in current liabilities. Our inventories have increased from our prior year by $6.4 million due to
an increase in the level of our wireless control inventories and an increase in ballast component inventories. The vast majority of
our wireless components are assembled overseas, require longer delivery lead times and supplies require deposit payments at
time of purchase order. We increased our inventory levels of ballasts due to concerns over supply availability resulting from
extended lead times for product shipping out of Asia. We generally attempt to maintain a three-month supply of on-hand
inventory of purchased components and raw materials to meet anticipated demand, as well as to reduce our risk of unexpected
raw material or component shortages or supply interruptions. Recently, we increased our inventory levels of key electrical
components to avoid shortages and customer service issues as a result of lengthening supply lead times and product availability
issues. Our accounts receivables, inventory and payables may increase to the extent our revenue and order levels increase.
Indebtedness
On March 18, 2008, we entered into a credit agreement to replace a previous agreement between us and Wells Fargo Bank,
N.A. The credit agreement provides for a revolving credit facility that matures on August 31, 2010. The initial maximum
aggregate amount of availability under the line of credit is $25.0 million. In December 2008, we briefly drew $4.0 million on the
line of credit due to the timing of treasury repurchases and funds available in our operating account. In May 2009, we completed
an amendment to the credit agreement, effective as of March 31, 2009, which formalized Wells Fargo’s prior consent to our
treasury repurchase program, increased the capital expenditures covenant for fiscal 2009 and revised certain financial covenants
by adding a minimum requirement for unencumbered liquid assets, increasing the quarterly rolling net income requirement and
modifying the merger and acquisition covenant exemption. In December 2009, we completed a second amendment to the credit
agreement which formalized Wells Fargo’s prior consent to our prior failure to meet our net earnings and fixed charge coverage
ratio covenants, limited borrowings to a percentage of eligible money market funds held in a Wells Fargo account, revised
certain financial covenants by removing the minimum requirement for unencumbered assets and removing the fixed charge
coverage ratio, decreased the quarterly rolling net income requirement, removed the first lien security interest in all of our
accounts receivable, general intangibles and inventory, and removed the second lien priority in all of our equipment and fixtures
and reduced the fee rate of the unused amounts on the line of credit. As of March 31, 2009 and 2010, there was no outstanding
balance due on the line of credit.
We must pay a fee of 0.15% on the average daily unused amount of the line of credit and fees upon the issuance of each
letter of credit equal to 1.25% per annum of the principal amount thereof.
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Table of Contents
The credit agreement provides that we have the option to select the interest rate applicable to all or a portion of the
outstanding principal balance of the line of credit either (i) at a fluctuating rate per annum 1.00% below the prime rate in effect
from time to time, or (ii) at a fixed rate per annum determined by Wells Fargo to be 1.25% above LIBOR. Interest is payable on
the last day of each month. The credit agreement contains certain financial covenants including minimum net income
requirements and requirements that we maintain a net worth ratio at prescribed levels. The credit agreement also contains certain
restrictions on our ability to make capital or lease expenditures over prescribed limits, incur additional indebtedness, consolidate
or merge, guarantee obligations of third parties, make loans or advances, declare or pay any dividend or distribution on our stock,
redeem or repurchase shares of our stock, or pledge assets.
In addition to our line of credit, we also have other existing long-term indebtedness and obligations under various debt
instruments and capital lease obligations, including pursuant to a bank term note, a bank first mortgage, a debenture to a
community development organization, a federal block grant loan, two city industrial revolving loans and various capital leases
and equipment purchase notes. As of March 31, 2010, the total amount of principal outstanding on these various obligations was
$3.7 million. These obligations have varying maturity dates between 2011 and 2024 and bear interest at annual rates of between
2.0% and 12.1%. The weighted average annual interest rate of such obligations as of March 31, 2010 was 5.6%. Based on
interest rates in effect as of March 31, 2010, we expect that our total debt service payments on such obligations for fiscal 2011,
including scheduled principal, lease and interest payments, but excluding any repayment of borrowings on our line of credit, will
approximate $0.7 million. All of these obligations are subject to security interests on our assets. Several of these obligations have
covenants, such as customary financial and restrictive covenants, including maintenance of a minimum debt service coverage
ratio; a minimum current ratio; quarterly rolling net income requirement; limitations on executive compensation and advances;
limits on capital expenditures per year; limits on distributions; and restrictions on our ability to make loans, advances, extensions
of credit, investments, capital contributions, incur additional indebtedness, create liens, guaranty obligations, merge or
consolidate or undergo a change in control. As of March 31, 2010, we were in compliance with all such covenants, as amended.
Capital Spending
We have made capital expenditures primarily for general corporate purposes for our corporate headquarters and technology
center, production equipment and tooling and for information technology systems. Our capital expenditures totaled $5.6 million,
$13.1 million and $5.0 million in fiscal 2010, 2009 and 2008, respectively. We plan to incur approximately $3.2 million in
capital expenditures in fiscal 2011. Our capital expenditures will be used to complete our ERP system, originally undertaken
during fiscal 2010, and which we consider critical to our operations, renewable energy-related expenditures, new product
development and for manufacturing and tooling improvements. We expect to finance these capital expenditures primarily
through our existing cash, equipment secured loans and leases, to the extent needed, or by using our available capacity under our
revolving credit facility.
Contractual Obligations
Information regarding our known contractual obligations of the types described below as of March 31, 2010 is set forth in
the following table:
Payments Due By Period
Bank debt obligations
Capital lease obligations
Cash interest payments on debt and
$
3,711
7
$
963
2,760
capital leases
Operating lease obligations
Purchase order and cap-ex
commitments(1)
Total
Total
Less than
1 Year
1-3 Years
(in thousands)
1,163
$
1
More than
3-5 Years
5 Years
$
856
—
$
1,136
—
284
1,437
164
262
326
108
556
6
189
953
13,013
20,454
$
12,719
14,423
$
$
294
3,179
$
—
1,282
$
—
1,570
(1) Reflects non-cancellable purchase commitments in the amount of $12.4 million for certain inventory items entered into in
order to secure better pricing and ensure materials on hand and capital expenditure commitments in the amount of
$0.6 million for the completion of improvements to information technology systems.
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Table of Contents
The table of contractual obligations and commitments does not include our unrecognized tax benefits which were
$0.4 million at March 31, 2010. We have a high degree of uncertainty regarding the timing of any adjustments to these
unrecognized benefits. Furthermore, we believe that any negative impact from future tax audits would result in a minimal cash
liability due to our net operating loss carryforwards.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation
Our results from operations have not been, and we do not expect them to be, materially affected by inflation.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of our consolidated financial statements requires us to make certain estimates and judgments that affect our reported
assets, liabilities, revenue and expenses, and our related disclosure of contingent assets and liabilities. We re-evaluate our
estimates on an ongoing basis, including those related to revenue recognition, inventory valuation, the collectability of
receivables, stock-based compensation, warranty reserves and income taxes. We base our estimates on historical experience and
on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
A summary of our critical accounting policies is set forth below.
Revenue Recognition. We recognize revenue when the following criteria have been met: there is persuasive evidence of an
arrangement; delivery has occurred and title has passed to the customer; the sales price is fixed and determinable and no further
obligation exists; and collectability is reasonably assured. The majority of our revenue is recognized when products are shipped
to a customer or when services are completed and acceptance provisions, if any, have been met. In certain of our contracts, we
provide multiple deliverables. We record the revenue associated with each element of these arrangements based on its fair value,
which is generally the price charged for the element when sold on a standalone basis. Since we contract with vendors for
installation services to our customers, which includes recycling of old fixtures, we determine the fair value of our installation
services based on negotiated pricing with such vendors. Additionally, we offer our OVPP sales-type financing program under
which we finance the customer’s purchase. Our OVPP contracts under this sales-type financing program are typically one year in
duration and, at the completion of the initial one-year term, provide for (i) one to four automatic one-year renewals at agreed
upon pricing; (ii) an early buyout for cash; or (iii) the return of the equipment at the customer’s expense. The monthly revenue
that we are entitled to receive from the sale of our lighting fixtures under our OVPP financing program is fixed and is based on
the cost of the lighting fixtures and applicable profit margin. Our revenue from agreements entered into under this program is not
dependent upon our customers’ actual energy savings. Upon completion of the installation, we may choose to sell the future cash
flows and residual rights to the equipment on a non-recourse basis to an unrelated third party finance company in exchange for
cash and future payments. In the event that we do sell the future revenue streams, we recognize revenue based on the net present
value of the future payments from the third party finance company upon completion of the project.
Deferred revenue or deferred costs are recorded for project sales consisting of multiple elements, where the criteria for
revenue recognition have not been met. The majority of our deferred revenue relates to advance customer billings or to prepaid
services to be provided at determined future dates. As of March 31, 2009 and 2010, our deferred revenue was $0.1 million and
$0.5 million, respectively. In the event that a customer project contains multiple elements that are not sold on a standalone basis,
we defer all related revenue and costs until the project is complete. Deferred costs on product are recorded as a current asset as
project completions occur within a few months. As of March 31, 2009 and 2010, our deferred costs were $0.3 million and
$0.4 million, respectively.
Inventories. Inventories are stated at the lower of cost or market value and include raw materials, work in process and
finished goods. Items are removed from inventory using the first-in, first-out method. Work in process inventories are comprised
of raw materials that have been converted into components for final assembly. Inventory amounts include the cost to
manufacture the item, such as the cost of raw materials and related freight, labor and other applied overhead costs. We review
our inventory for obsolescence and marketability. If the estimated market value, which is based upon assumptions about future
demand and market conditions, falls below cost, then the inventory value is reduced to its market value. Our inventory
obsolescence reserves at March 31, 2009 and 2010 were $0.7 million and $0.8 million.
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Table of Contents
Allowance for Doubtful Accounts. We perform ongoing evaluations of our customers and continuously monitor collections
and payments and estimate an allowance for doubtful accounts based upon the aging of the underlying receivables, our historical
experience with write-offs and specific customer collection issues that we have identified. While such credit losses have
historically been within our expectations, and we believe appropriate reserves have been established, we may not adequately
predict future credit losses. If the financial condition of our customers were to deteriorate and result in an impairment of their
ability to make payments, additional allowances might be required which would result in additional general and administrative
expense in the period such determination is made. Our allowance for doubtful accounts was $0.2 million and $0.4 million at
March 31, 2009 and March 31, 2010.
Investments. Our accounting and disclosures for short-term investments are in accordance with the requirements of the Fair
Value Measurements and Disclosure, Financial Instrument, and Investments: Debt and Security Topics of the FASB Accounting
Standards Codification. The Fair Value Measurements and Disclosure Topic defines fair value, establishes a framework for
measuring fair value under GAAP and requires certain disclosures about fair value measurements. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
GAAP describes a fair value hierarchy based on the following three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
As of March 31, 2009 and 2010, our financial assets were measured at fair value employing level 1 inputs.
Stock-Based Compensation. We have historically issued stock options to our employees, executive officers and directors.
Effective April 1, 2006, we adopted the provisions of ASC 718, Compensation — Stock Compensation , which requires us to
expense the estimated fair value of employee stock options and similar awards based on the fair value of the award on the date of
grant. We adopted ASC 718 using the modified prospective method. Under this transition method, compensation cost recognized
for fiscal 2007 included the current period’s cost for all stock options granted prior to, but not yet vested as of, April 1, 2006.
This cost was based on the grant-date fair value estimated in accordance with the original provisions of ASC 718. The cost for all
stock options granted subsequent to March 31, 2006 represented the grant date fair value that was estimated in accordance with
the provisions of ASC 718. Results for prior periods have not been restated. Compensation cost for options granted after
March 31, 2006 has been and will be recognized in earnings, net of estimated forfeitures, on a straight-line basis over the
requisite service period.
Both prior to and following our April 1, 2006 adoption of ASC 718, the fair value of each option for financial reporting
purposes was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used
for grants:
Fiscal Year Ended March 31,
2009
2008
2010
Weighted average expected term
Risk-free interest rate
Expected volatility
Expected forfeiture rate
Expected dividend yield
4.0 years
3.92 %
60 %
6 %
0 %
5.7 years
3.01 %
60 %
2 %
0 %
6.6 years
2.68 %
60 %
3 %
0 %
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Table of Contents
The Black-Scholes option-pricing model requires the use of certain assumptions, including fair value, expected term, risk-
free interest rate, expected volatility, expected dividends, and expected forfeiture rate to calculate the fair value of stock-based
payment awards.
We estimated the expected term of our stock options based on the vesting term of our options and expected exercise
behavior.
Our risk-free interest rate was based on the implied yield available on United States treasury zero-coupon issues as of the
option grant date with a remaining term approximately equal to the expected life of the option.
For fiscal 2008, 2009 and 2010, we determined volatility based on an analysis of a peer group of public companies. We
intend to continue to consistently use the same methodology and group of publicly traded peer companies as we used in fiscal
2010 to determine volatility in the future until sufficient information regarding the volatility of our share price becomes available
or the selected companies are no longer suitable for this purpose.
As required by our 2004 Stock and Incentive Awards Plan, since the closing of our initial public offering in
December 2007, we have solely used the closing sale price of our common shares on the NYSE Amex or the NASDAQ Global
Market on the date of grant to establish the exercise price of our stock options.
We recognized stock-based compensation expense under ASC 718 of $1.6 million for fiscal 2009 and $1.5 million for fiscal
2010. As of March 31, 2010, $4.5 million of total stock option compensation cost was expected to be recognized by us over a
weighted average period of 6.9 years. We expect to recognize $1.4 million of stock-based compensation expense in fiscal 2011
based on our stock options outstanding as of March 31, 2010. This expense will increase further to the extent we have granted, or
will grant, additional stock options in fiscal 2011.
Common Stock Warrants. We issued common stock warrants to placement agents in connection with our various stock
offerings and services rendered in fiscal 2006 and 2007. The value of warrants recorded as offering costs was $30,000 and
$18,000 in fiscal 2006 and fiscal 2007. The value of warrants recorded for services was $6,000 in fiscal 2006. As of March 31,
2010, warrants were outstanding to purchase a total of 76,240 shares of our common stock at weighted average exercise prices of
$2.37 per share. These warrants were valued using a Black-Scholes option pricing model with the following assumptions:
(i) contractual terms of five years; (ii) weighted average risk-free interest rates of 4.35% to 4.62%; (iii) expected volatility
ranging between 50% and 60%; and (iv) dividend yields of 0%.
Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to
determine our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current
tax expenses, together with assessing temporary differences resulting from recognition of items for income tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.
We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent
we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowance or
increase this allowance in a period, we must reflect this increase as an expense within the tax provision in our statements of
operations.
Our judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any
valuation allowance recorded against our net deferred tax assets. We continue to monitor the realizability of our deferred tax
assets and adjust the valuation allowance accordingly. For fiscal 2010, we have determined that a valuation allowance against
our net state deferred tax assets was necessary in the amount of $408,000 due to our state apportioned income and the potential
expiration of state tax credits due to the carryforward periods. In making this determination, we considered all available positive
and negative evidence, including projected future taxable income, tax planning strategies, recent financial performance and
ownership changes.
We believe that past issuances and transfers of our stock caused an ownership change in fiscal 2007 that affected the timing
of the use of our net operating loss carryforwards, but we do not believe the ownership change affects the use of the full amount
of the net operating loss carryforwards. As a result, our ability to use our net operating loss carryforwards attributable to the
period prior to such ownership change to offset taxable income will be subject to limitations in a particular year, which could
potentially result in increased future tax liability for us.
46
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As of March 31, 2010, we had net operating loss carryforwards of approximately $14.5 million for federal tax purposes and
$8.4 million for state tax purposes. Included in these loss carryforwards were $6.1 million for federal and $3.1 million for state
tax expenses that were associated with the exercise of non-qualified stock options. The benefit from our net operating losses
created from these compensation expenses has not yet been recognized in our financial statements and will be accounted for in
our shareholders’ equity as a credit to additional paid-in-capital as the deduction reduces our income taxes payable. We first
recognize tax benefits from current period stock option expenses against current period income. The remaining current period
income is offset by net operating losses under the tax law ordering approach. Under this approach, we will utilize the net
operating losses from stock option expenses last.
We also had federal tax credit carryforwards of $0.5 million and state tax credit carryforwards of $120,000, which is net of
a $408,000 valuation allowance. Both the net operating losses and tax credit carryforwards will begin to expire in varying
amounts between 2014 and 2030. We recognize penalties and interest related to uncertain tax liabilities in income tax expense.
Penalties and interest were immaterial as of the date of adoption and are included in unrecognized tax benefits. Due to the
existence of net operating loss and credit carryforwards, all years since 2002 are open to examination by tax authorities.
By their nature, tax laws are often subject to interpretation. Further complicating matters is that in those cases where a tax
position is open to interpretation, differences of opinion can result in differing conclusions as to the amount of tax benefits to be
recognized under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes .
ASC 740 utilizes a two-step approach for evaluating tax positions. Recognition (Step 1) occurs when an enterprise concludes that
a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step
2) is only addressed if Step 1 has been satisfied. Under Step 2, the tax benefit is measured as the largest amount of benefit,
determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. Consequently,
the level of evidence and documentation necessary to support a position prior to being given recognition and measurement within
the financial statements is a matter of judgment that depends on all available evidence. As of March 31, 2010, the balance of
gross unrecognized tax benefits was approximately $0.4 million, all of which would reduce the Company’s effective tax rate if
recognized. We believe that the estimates and judgments discussed herein are reasonable, however, actual results could differ,
which could result in gains or losses that could be material.
Recent Accounting Pronouncements
See Note B —Summary of Significant Accounting Policies to our accompanying audited consolidated financial statements
for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected
effects on results of operations and financial condition.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss related to changes in market prices, including interest rates, foreign exchange rates and
commodity pricing that may adversely impact our consolidated financial position, results of operations or cash flows.
Inflation. Our results from operations have not been, and we do not expect them to be, materially affected by inflation.
Foreign Exchange Risk. We face minimal exposure to adverse movements in foreign currency exchange rates. Our foreign
currency losses for all reporting periods have been nominal.
Interest Rate Risk. Our investments consist primarily of investments in money market funds and certificate of deposits.
While the instruments we hold are subject to changes in the financial standing of the issuer of such securities, we do not believe
that we are subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive instruments. It is our policy not to enter into interest
rate derivative financial instruments. As a result, we do not currently have any significant interest rate exposure.
As of March 31, 2010, $0.9 million of our $3.7 million of outstanding debt was at floating interest rates. An increase of
1.0% in the prime rate would result in an increase in our interest expense of approximately $9,300 per year.
Commodity Price Risk. We are exposed to certain commodity price risks associated with our purchases of raw materials,
most significantly our aluminum purchases. We attempt to mitigate commodity price fluctuation for our aluminum through 12-
to 24-month forward fixed-price purchase orders and minimum quantity purchase commitments with suppliers. Additionally, we
recycle legacy HID fixtures and recover the salvaged scrap value which we believe provides a raw materials cost hedge as
commodity prices change.
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ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Temporary Equity and Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
48
Page
Number
49
51
52
53
54
55
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Orion Energy Systems, Inc.
We have audited the accompanying consolidated balance sheets of Orion Energy Systems, Inc. (a Wisconsin Corporation) as of
March 31, 2009 and 2010, and the related consolidated statements of operations, temporary equity and shareholders’ equity, and
cash flows for each of the three years in the period ended March 31, 2010. Our audits of the basic financial statements included
the financial statement schedule listed in the index appearing under item 15(b). These consolidated financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Orion Energy Systems, Inc as of March 31, 2009 and 2010, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended March 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Orion Energy Systems, Inc.’s internal control over financial reporting as of March 31, 2010, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated June 14, 2010 expressed an unqualified opinion.
/s/ Grant Thornton LLP
Milwaukee, Wisconsin
June 14, 2010
49
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Orion Energy Systems, Inc.
We have audited Orion Energy Systems, Inc.’s (a Wisconsin Corporation) internal control over financial reporting as of
March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Orion Energy Systems Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting . Our
responsibility is to express an opinion on Orion Energy Systems Inc.’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Orion Energy Systems, Inc. maintained, in all material respects, effective internal control over financial reporting
as of March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of March 31, 2009 and 2010, and the related consolidated statements of
operations, temporary equity and shareholders’ equity, and cash flows for each of the three years in the period ended March 31,
2010 and our report dated June 14, 2010 expressed an unqualified opinion on those consolidated financial statements.
/s/ GRANT THORNTON LLP
Milwaukee, Wisconsin
June 14, 2010
50
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ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $222 and $382
Inventories, net
Deferred tax assets
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Patents and licenses, net
Deferred tax assets
Other long-term assets
Total assets
Liabilities and Shareholders’ Equity
Accounts payable
Accrued expenses
Deferred tax liabilities
Current maturities of long-term debt
Total current liabilities
$
$
$
Long-term debt, less current maturities
Other long-term liabilities
Total liabilities
Commitments and contingencies (See Note G)
Shareholders’ equity:
Preferred stock, $0.01 par value: Shares authorized: 30,000,000 shares at March 31, 2009 and
2010; no shares issued and outstanding at March 31, 2009 and 2010
Common stock, no par value: Shares authorized: 200,000,000 at March 31, 2009 and 2010; shares
issued: 28,875,879 and 29,911,203 at March 31, 2009 and 2010; shares outstanding:
21,528,783 and 22,442,380 at March 31, 2009 and 2010
Additional paid-in capital
Treasury stock: 7,347,096 common shares at March 31, 2009 and 7,468,823 at March 31, 2010
Accumulated other comprehensive loss
Retained earnings (deficit)
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
March 31,
2009
2010
36,163 $
6,490
11,572
19,582
548
4,019
78,374
22,999
1,404
593
352
103,722 $
7,817 $
2,315
—
815
10,947
3,647
433
15,027
23,364
1,000
14,617
25,991
—
2,974
67,946
30,500
1,590
2,610
975
103,621
7,761
3,844
44
562
12,211
3,156
584
15,951
—
—
—
118,907
(31,536 )
(32 )
1,356
88,695
103,722 $
—
122,515
(32,011 )
—
(2,834 )
87,670
103,621
The accompanying notes are an integral part of these consolidated statements.
51
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ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Fiscal Year Ended March 31,
2009
2008
2010
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
Operating expenses:
General and administrative
Sales and marketing
Research and development
Total operating expenses
Income (loss) from operations
Other income (expense):
Interest expense
Extinguishment of debt
Dividend and interest income
Total other income (expense)
Income (loss) before income tax
Income tax expense (benefit)
Net income (loss)
Accretion of redeemable preferred stock and preferred stock dividends
Participation rights of preferred stock in undistributed earnings
Net income (loss) attributable to common shareholders
Basic net income (loss) per share attributable to common shareholders
Weighted-average common shares outstanding
Diluted net income (loss) per share attributable to common shareholders
Weighted-average common shares and share equivalents outstanding
$
$
$
65,359
15,328
80,687
42,127
10,335
52,462
28,225
10,200
8,832
1,832
20,864
7,361
63,008
9,626
72,634
42,235
6,801
49,036
23,598
10,451
11,261
1,942
23,654
(56 )
58,227
7,191
65,418
38,628
5,266
43,894
21,524
12,836
12,596
1,891
27,323
(5,799 )
(1,390 )
—
1,189
(201 )
7,160
2,750
4,410
(225 )
(775 )
3,410
$
$
0.22
15,548,189
$
0.19
23,453,803
(167 )
—
1,661
1,494
1,438
927
511
—
—
511
$
$
0.02
25,351,839
$
0.02
27,445,290
(260 )
250
269
259
(5,540 )
(1,350 )
(4,190 )
—
—
(4,190 )
$
$
(0.19 )
21,844,150
$
(0.19 )
21,844,150
The accompanying notes are an integral part of these consolidated statements.
52
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ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TEMPORARY EQUITY AND SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)
Temporary Equity
Series C
Redeemable
Preferred Stock
Shares
Preferred Stock
Series A
Series B
Amount Shares Amount Shares
Amount Shares
Shareholders’ Equity
Common Stock
Additional
Paid-in
Capital
Shareholder
Treasury Notes
Stock
Receivable
Accumulated
Other
Retained
Comprehensive Earnings Shareholders’
(Deficit)
Equity
Total
Loss
Balance,
March 31,
2007
Accretion of
1,818,182 $
4,953 — $ — 2,989,830 $
5,959 12,038,499 $
9,438 $
(361 ) $
(2,128 ) $
— $
(3,553 ) $
9,355
preferred stock
—
225 —
Accrued dividend
conversion
Changes in
—
(423 ) —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(225 )
—
423
(225 )
423
shareholder
notes
receivable
Initial public
offering:
conversion of
preferred stock (1,818,182 )
—
— —
—
—
—
(306,932 )
—
(1,378 )
2,128
—
—
750
(4,755 ) —
— (2,989,830 )
(5,959 ) 4,808,012
10,714
—
—
—
—
4,755
Initial public
offering:
conversion of
debt
Initial public
offering, net of
issuance costs
of $4,246
Issuance of stock
and warrants
for services
Exercise of stock
options and
warrants for
cash
Tax benefit from
exercise of
stock options
Stock-based
compensation
Adoption of FIN
48
Net income
Unrealized loss
on short-term
investments
Comprehensive
income
Balance,
March 31,
2008
Issuance of stock
and warrants
for services
Exercise of stock
options and
warrants for
cash
Tax benefit from
exercise of
stock options
Stock-based
compensation
Treasury stock
purchase
Net income
Unrealized loss
on short-term
investments
Comprehensive
income
Balance,
March 31,
2009
Issuance of stock
and warrants
for services
Exercise of stock
options and
warrants for
cash
Tax benefit from
exercise of
—
— —
—
—
— 2,360,802
10,762
—
—
—
—
10,762
—
— —
—
—
— 6,849,092
78,559
—
—
—
—
78,559
—
— —
—
—
—
2,210
29
—
—
—
—
29
—
— —
—
—
— 1,211,725
2,014
—
—
—
—
2,014
—
—
—
—
— —
— —
— —
— —
—
— —
—
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,183
1,391
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6 )
—
—
—
(210 )
4,410
—
—
1,183
1,391
(210 )
4,410
(6 )
4,404
— $
— — $ —
— $
— 26,963,408 $
114,090 $
(1,739 ) $
— $
(6 ) $
845 $
113,190
—
— —
—
—
—
16,627
105
—
—
—
—
105
—
— —
—
—
— 1,519,838
2,032
—
—
—
—
2,032
—
—
—
—
— —
— —
— —
— —
—
— —
—
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,103
1,577
—
—
— (6,971,090 )
—
—
—
—
(29,797 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(26 )
—
—
—
—
511
—
—
1,103
1,577
(29,797 )
511
(26 )
485
— $
— — $ —
— $
— 21,528,783 $
118,907 $
(31,536 ) $
— $
(32 ) $
1,356 $
88,695
—
— —
—
—
—
11,211
48
—
—
—
—
48
—
— —
—
—
— 1,024,113
1,989
—
—
—
—
1,989
stock options
Stock-based
compensation
Treasury stock
purchase
Net loss
Unrealized gain
on short-term
investments
Comprehensive
loss
Balance,
March 31,
2010
—
—
—
—
—
—
— —
— —
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
80
1,491
—
—
(121,727 )
—
—
—
—
—
—
—
—
—
—
—
(475 )
—
—
—
—
—
—
—
—
—
—
—
—
—
32
—
—
—
—
(4,190 )
—
—
80
1,491
(475 )
(4,190 )
32
(4,222 )
— $
— — $ —
— $
— 22,442,380 $
122,515 $
(32,011 ) $
— $
— $
(2,834 ) $
87,670
The accompanying notes are an integral part of these consolidated statements.
53
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ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended March 31,
2009
2008
2010
Operating activities
Net income (loss)
$
4,410
$
511
$
(4,190 )
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization
Stock-based compensation expense
Deferred income tax (benefit) provision
Gain (loss) on sale of assets
Change in allowance for notes and accounts receivable
Extinguishment of debt
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Net cash provided by (used in) operating activities
Investing activities
Purchase of property and equipment
Purchase of property and equipment leased to customers under
operating leases
Purchase of short-term investments
Sale of short-term investments
Additions to patents and licenses
Proceeds from sales of long term assets
Gain on sale of long term investment
Proceeds from disposal of equipment
Net decrease (increase) in amount due from shareholder
Net cash used in investing activities
Financing activities
Proceeds from issuance of long-term debt
Proceeds from issuance of convertible debt
Repurchase of common stock into treasury
Payment of long-term debt
Net activity in revolving line of credit
Excess benefit for deferred taxes on stock-based compensation
Proceeds from shareholder notes receivable
Proceeds from initial public offering, net of issuance costs of $4,246
Deferred financing costs
Proceeds from issuance of common stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of non-cash investing and financing
activities:
Shares surrendered into treasury for stock option exercise (see Note C)
Long-term note receivable received on sale of investment
Shares surrendered for payment of shareholder note receivable
Conversion of debt to common stock
Conversion of redeemable preferred stock and accrued dividends to
common stock
Preferred stock accretion
$
$
$
1,410
1,391
966
2
(10 )
—
228
(6,459 )
(7,293 )
33
1,914
2,046
(1,362 )
1,841
1,577
145
(31 )
144
—
106
5,950
(2,793 )
(2,580 )
296
(1,927 )
3,239
3,072
1,491
(1,425 )
(16 )
458
(139 )
48
(3,205 )
(6,409 )
268
(56 )
1,529
(8,574 )
(5,044 )
(13,140 )
(5,649 )
—
(2,410 )
—
(171 )
—
—
—
188
(7,437 )
750
10,600
—
(710 )
(6,064 )
1,183
750
78,559
(256 )
2,014
86,826
78,027
285
78,312
1,182
830
—
—
(307 )
10,762
10,714
225
$
$
$
—
(4,113 )
—
(1,121 )
858
(361 )
4
—
(17,873 )
—
—
(29,340 )
(854 )
—
1,103
—
—
—
1,576
(27,515 )
(42,149 )
78,312
36,163
350
134
457
297
—
—
—
—
$
$
$
(4,795 )
—
5,522
(299 )
—
—
7
—
(5,214 )
200
—
(475 )
(805 )
—
80
—
—
—
1,989
989
(12,799 )
36,163
23,364
277
32
—
—
—
—
—
—
The accompanying notes are an integral part of these consolidated statements.
54
Table of Contents
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — DESCRIPTION OF BUSINESS
Organization
The Company includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated subsidiaries. The
Company is a developer, manufacturer and seller of lighting and energy management systems and a seller and integrator of
renewable energy technologies to commercial and industrial businesses, predominantly in North America. The corporate offices
and manufacturing operations are located in Manitowoc, Wisconsin and an operations facility is located in Plymouth, Wisconsin.
Initial Public Offering
In December 2007, the Company completed its initial public offering (IPO) of common stock in which a total of 8,846,154
shares were sold, including 1,997,062 shares sold by selling shareholders, at an issuance price of $13.00 per share. The Company
raised a total of $89.0 million in gross proceeds from the IPO, or approximately $78.6 in net proceeds after deducting
underwriting discounts and commissions of $6.2 million and offering costs of approximately $4.2 million. Concurrent with the
closing of the initial public offering on December 24, 2007 all of the Company’s then outstanding Series B preferred stock and
Series C preferred stock converted on a one share to one share basis to common stock. The number of shares converted was
2,989,830 and 1,818,182 of Series B preferred stock and Series C preferred stock, respectively. On December 24, 2007, the
holders of the convertible debt converted $10.8 million of such debt and accreted interest into 2,360,802 shares of the
Company’s common stock.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Orion Energy Systems, Inc. and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
Certain items have been reclassified from the fiscal year 2009 classifications to conform to the fiscal year 2010
presentation. The reclassification had no effect on net cash provided by operating activities, total assets, net income or earnings
per share.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during that reporting period. Areas that require the use of significant management estimates include
revenue recognition, inventory obsolescence and bad debt reserves, accruals for warranty expenses, income taxes and certain
equity transactions. Accordingly, actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid, short-term investments with original maturities of three months or less to be cash
equivalents.
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Short-term investments
Investments with maturities of greater than three months and less than one year are classified as short-term investments. All
short-term investments are classified as available for sale and recorded at market value using the specific identification method.
Changes in market value are reflected in the consolidated financial statements as “Accumulated other comprehensive income
(loss)”. The amortized cost and fair value of short-term investments, with gross unrealized gains and losses, as of March 31,
2009 and 2010 were as follows (in thousands):
March 31, 2009
Amortized Unrealized Unrealized
Cost
Gains
Losses
Money market funds
Bank certificates of deposit
Commercial paper
Corporate obligations
Government agency obligations
Total
$
$
14,114 $
9,007
3,690
2,257
12,412
41,480 $
— $
—
—
—
—
— $
Amortized Unrealized Unrealized
Gains
Losses
Cost
Money market funds
Bank certificates of deposit
Total
$
$
22,297 $
1,000
23,297 $
— $
—
— $
Cash and Cash Short Term
Fair Value Equivalents Investments
—
2,800
3,690
—
—
6,490
14,114 $
6,207
—
2,250
12,387
34,958 $
14,114 $
9,007
3,690
2,250
12,387
41,448 $
— $
—
—
(7 )
(25 )
(32 ) $
March 31, 2010
Cash and Cash Short Term
Fair Value Equivalents Investments
—
1,000
1,000
22,297 $
—
22,297 $
22,297 $
1,000
23,297 $
— $
—
— $
As of March 31, 2009 and 2010, the Company’s financial assets described in the table above were measured at fair value on
a recurring basis employing level 1 inputs.
Fair value of financial instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, investments,
accounts receivable, and accounts payable, approximate their respective fair values due to the relatively short-term nature of
these instruments. Based upon interest rates currently available to the Company for debt with similar terms, the carrying value of
the Company’s long-term debt is also approximately equal to its fair value.
The Company’s accounting and disclosures are in accordance with the requirements of the Fair Value Measurements and
Disclosure, Financial Instrument, and Investments: Debt and Security Topics of the FASB Accounting Standards Codification
(ASC 820). The Fair Value Measurements and Disclosure Topic defines fair value, establishes a framework for measuring fair
value under GAAP and requires certain disclosures about fair value measurements. Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure
fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP describes a fair value
hierarchy based on the following three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
Accounts receivable
The majority of the Company’s accounts receivable are due from companies in the commercial, industrial and agricultural
industries, and wholesalers. Credit is extended based on an evaluation of a customer’s financial condition. Generally, collateral is
not required for end users; however, the payment of certain trade accounts receivable from wholesalers is secured by irrevocable
standby letters of credit. Accounts receivable are generally due within 30-60 days. Accounts receivable are stated at the amount
the Company expects to collect from outstanding balances. The Company provides for probable uncollectible amounts through a
charge to earnings and a credit to an allowance for doubtful accounts based on its assessment of the current status of individual
accounts. Balances that are still outstanding after the Company has used reasonable collection efforts are written off through a
charge to the allowance for doubtful accounts and a credit to accounts receivable.
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Included in accounts receivable are amounts due from a third party finance company to which the Company has sold,
without recourse, the future cash flows from lease arrangements entered into with customers. Such receivables are recorded at
the present value of the future cash flows discounted at 7.25%, which approximates the Company’s weighted average cost of
capital. As of March 31, 2010, the following amounts were due from the third party finance company in future periods (in
thousands):
Fiscal 2011
Fiscal 2012
Fiscal 2013
Fiscal 2014
Fiscal 2015
Total gross receivable
Less: amount representing interest
Net contracts receivable
Inventories
$
$
1,646
—
338
338
405
2,727
(212 )
2,515
Inventories consist of raw materials and components, such as ballasts, metal sheet and coil stock and molded parts; work in
process inventories, such as frames and reflectors; and finished goods, including completed fixtures or systems and accessories,
such as lamps, meters and power supplies. All inventories are stated at the lower of cost or market value; with cost determined
using the first-in, first-out (FIFO) method. The Company reduces the carrying value of its inventories for differences between the
cost and estimated net realizable value, taking into consideration usage in the preceding 12 months, expected demand, and other
information indicating obsolescence. The Company records as a charge to cost of product revenue the amount required to reduce
the carrying value of inventory to net realizable value. As of March 31, 2009 and 2010, the Company had inventory
obsolescence reserves of $668,000 and $756,000.
Costs associated with the procurement and warehousing of inventories, such as inbound freight charges and purchasing and
receiving costs, are also included in cost of product revenue.
Inventories were comprised of the following (in thousands):
Raw materials and components
Work in process
Finished goods
Prepaid Expenses and Other Current Assets
March 31, March 31,
2009
2010
$
$
9,629
1,753
8,200
19,582
$
$
11,107
669
14,215
25,991
Prepaid expenses and other current assets consist primarily of prepaid insurance premiums, prepaid license fees, purchase
deposits, advance payments to contractors, prepaid income taxes and miscellaneous receivables.
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions and improvements are capitalized, while
replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are expensed as
incurred. Properties sold, or otherwise disposed of, are removed from the property accounts, with gains or losses on disposal
credited or charged to income from operations.
The Company periodically reviews the carrying values of property and equipment for impairment in accordance with ASC
360, Property, Plant and Equipment , when events or changes in circumstances indicate that the assets may be impaired. The
estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition are
compared to the assets’ carrying amount to determine if a write down to market value is required. No write downs were recorded
in fiscal 2008, 2009 or 2010.
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Property and equipment were comprised of the following (in thousands):
Land and land improvements
Buildings
Furniture, fixtures and office equipment
Plant equipment
Construction in progress
Less: accumulated depreciation and amortization
Net property and equipment
Equipment included above under capital leases were as follows (in thousands):
Equipment
Less: accumulated amortization
Net equipment
March 31,
2009
2010
822
5,435
3,432
6,882
11,366
27,937
(4,938 )
22,999
$
$
1,436
14,072
8,201
7,627
6,777
38,113
(7,613 )
30,500
March 31,
2009
2010
1,104
(477 )
627
$
$
25
(20 )
5
$
$
$
$
Depreciation is provided over the estimated useful lives of the respective assets, using the straight-line method. Depreciable
lives by asset category are as follows:
Land improvements
Buildings
Furniture, fixtures and office equipment
Plant equipment
10 – 15 years
10 – 39 years
3 – 10 years
3 – 10 years
The Company capitalized $215,000 and $21,000 of interest for construction in progress in fiscal 2009 and fiscal 2010.
There was no interest capitalized in fiscal 2008. As of March 31, 2010, the Company had equipment leased to customers under
operating leases of $5.0 million, net of depreciation of $0.3 million, including $3.7 million in construction in progress.
Patents and Licenses
In April 2008, the Company entered into a new employment agreement with the Company’s CEO, Neal Verfuerth, which
superseded and terminated Mr. Verfuerth’s former employment agreement with the Company. Under the former agreement,
Mr. Verfuerth was entitled to initial ownership of any intellectual work product he made or developed, subject to the Company’s
option to acquire, for a fee, any such intellectual work product. The Company made payments to Mr. Verfuerth totaling $144,000
per year in exchange for the rights to eight issued and pending patents. Pursuant to the new employment agreement, in exchange
for a lump sum payment of $950,000, Mr. Verfuerth terminated the former agreement and irrevocably transferred ownership of
his current and future intellectual property rights to the Company as the Company’s exclusive property. This amount was
capitalized in fiscal 2009 and is being amortized over the estimated future useful lives (ranging from 10 to 17 years) of the
property rights.
The Company capitalized $171,000, $1,121,000 and $299,000 of costs associated with obtaining patents and licenses in
fiscal 2008, 2009 and 2010. Amortization expense recorded to cost of revenue for fiscal 2008, 2009 and 2010 was $26,000,
$105,000 and $113,000. The costs and accumulated amortization for patents and licenses were $1,606,000 and $202,000 as of
March 31, 2009; and $1,905,000 and $315,000 as of March 31, 2010. The average remaining useful life of the patents and
licenses as of March 31, 2010 was approximately 13.3 years.
As of March 31, 2010, future amortization expense of the patents and licenses is estimated to be as follows (in thousands):
Fiscal 2011
Fiscal 2012
Fiscal 2013
Fiscal 2014
Fiscal 2015
Thereafter
$
$
113
113
110
109
109
1,036
1,590
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The Company’s management periodically reviews the carrying value of patents and licenses for impairment. No write-offs
were recorded in fiscal 2008, fiscal 2009 or fiscal 2010.
Other Long-Term Assets
Other long-term assets include $33,000 and $27,000 of deferred financing costs as of March 31, 2009 and March 31, 2010.
Deferred financing costs related to debt issuances are amortized to interest expense over the life of the related debt issue (6 to
15 years). For the year ended March 31, 2008, the amortization was $293,000, which included $256,000 related to the
convertible debt issuance which was expensed upon the completion of our initial public offering. For the years ended March 31,
2009 and 2010, the amortization was $29,000 and $6,000.
In June 2008, the Company sold its long-term investment consisting of 77,000 shares of preferred stock of a manufacturer
of specialty aluminum products. The investment was originally acquired in July 2006 by exchanging products with a fair value of
$794,000. The Company received cash proceeds from the sale in the amount of $986,000, which included accrued dividends of
$128,000, and also received a promissory note in the amount of $298,000. During fiscal 2010, the specialty aluminum products
company was placed into receivership and the assets of the Company sold. Proceeds from the sale were not sufficient to cover
any portion of the promissory note, which is described in more detail below.
The promissory note provided for interest only payments at 7% for the first year and 15% for the second year and
thereafter. The full principal amount of the note is due in June 2011. The note is secured by a personal guarantee from the CEO
of the specialty aluminum products company. In fiscal 2010, the Company assessed the long-term note receivable and
determined that all of the note receivable may not be collectible. Accordingly, the Company established a reserve for
uncollectibility of $298,000, the original face value of the promissory note.
Accrued Expenses
Accrued expenses include warranty accruals, accrued wages, accrued vacations, accrued insurance, accrued interest, sales
tax payable and other miscellaneous accruals. Accrued legal costs amounted to $1,175,000 as of March 31, 2010. No accrued
expenses exceeded 5% of current liabilities as of March 31, 2009.
The Company generally offers a limited warranty of one year on its products in addition to those standard warranties
offered by major original equipment component manufacturers. The manufacturers’ warranties cover lamps and ballasts, which
are significant components in the Company’s products.
Changes in the Company’s warranty accrual were as follows (in thousands):
Beginning of year
Provision to cost of revenue
Charges
End of year
Incentive Compensation
March 31,
2009
2010
$
$
69
30
(44 )
55
$
$
55
80
(75 )
60
The Company’s compensation committee approved an Executive Fiscal Year 2008 Annual Cash Incentive Program under
its 2004 Stock and Incentive Awards Plan, which became effective upon the closing of the Company’s IPO. The program called
for performance and discretionary bonus payments ranging from 23-125% of the fiscal 2008 base salaries of the Company’s
named executive officers. The range of fiscal 2008 financial performance-based bonus guidelines under the approved program
began if the Company achieved a minimum of 1.25 times the fiscal 2007 revenue and/or up to 3.25 times the fiscal 2007
operating income, and correspondingly increased on a pro rata basis up to a maximum of 1.67 times those initial measures.
Accordingly, based upon the results for the year ended March 31, 2008, the Company accrued expense of $696,000 related to
this program.
The Company’s compensation committee approved an Executive Fiscal Year 2009 Annual Cash Incentive Program under
its 2004 Stock and Incentive Awards Plan which became effective as of July 30, 2008. The plan called for performance and
discretionary bonus payments ranging from 28-125% of the fiscal 2009 base salaries of the Company’s named executive officers.
The range of fiscal 2009 financial performance-based bonus guidelines under the approved plan began if the Company achieved
a minimum of 1.125 times the fiscal 2008 revenue and/or up to 2.00 times the fiscal 2008 operating income, and correspondingly
increased on a pro rata basis up to a maximum of 1.67 times those initial measures. Based upon the results for the year ended
March 31, 2009, the Company did not accrue any expense related to this plan.
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The Company’s compensation committee chose to freeze target bonus programs for fiscal 2010 at their respective fiscal
2009 levels due to the economic environment the Company was operating in. Based upon the results for the year ended
March 31, 2010, the Company did not accrue any expense related to this plan.
Revenue Recognition
Revenue is recognized when the following four criteria are met:
•
•
•
•
persuasive evidence of an arrangement exists;
delivery has occurred and title has passed to the customer;
the sales price is fixed and determinable and no further obligation exists; and
collectability is reasonably assured
These four criteria are met for the Company’s product only revenue upon delivery of the product and title passing to the
customer. At that time, the Company provides for estimated costs that may be incurred for product warranties and sales returns.
Revenues are presented net of sales tax and other sales related taxes.
For sales contracts consisting of multiple elements of revenue, such as a combination of product sales and services, the
Company determines revenue by allocating the total contract revenue to each element based on the relative fair values.
Services other than installation and recycling that are completed prior to delivery of the product are recognized upon
shipment and are included in product revenue as evidence of fair value does not exist. These services include comprehensive site
assessment, site field verification, utility incentive and government subsidy management, engineering design, and project
management.
Service revenue includes revenue earned from installation, which includes recycling services. Service revenue is recognized
when services are complete and customer acceptance has been received. The Company primarily contracts with third-party
vendors for the installation services provided to customers and, therefore, determines fair value based upon negotiated pricing
with such third-party vendors. Recycling services provided in connection with installation entail disposal of the customer’s
legacy lighting fixtures.
In October 2008, the Company introduced a financing program called the Orion Virtual Power Plant (OVPP) for a
customer’s lease of the Company’s energy management systems. The OVPP is structured as an operating lease in which the
Company receives monthly rental payments over the life of the lease, typically a 12-month renewable agreement with a
maximum term of between two and five years. Upon successful installation of the system and customer acknowledgement that
the product is operating as specified, revenue is recognized on a monthly basis over the life of the contract.
Costs of products delivered, and services performed, that are subject to additional performance obligations or customer
acceptance are deferred and recorded in Prepaid Expenses and Other Current Assets on the Balance Sheet. These deferred costs
are expensed at the time the related revenue is recognized. Deferred costs amounted to $251,000 and $415,000 as of March 31,
2009 and 2010.
Deferred revenue relates to advance customer billings and a separate obligation to provide maintenance on certain sales and
is classified as a liability on the Balance Sheet. The fair value of the maintenance is readily determinable based upon pricing
from third-party vendors. Deferred revenue is recognized when the services are delivered, which occurs in excess of a year after
the original contract.
Deferred revenue was comprised of the following (in thousands):
Deferred revenue — current liability
Deferred revenue — long term liability
Total deferred revenue
60
March 31,
2009
2010
$
$
103
36
139
$
$
338
186
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Shipping and Handling Costs
The Company records costs incurred in connection with shipping and handling of products as cost of product revenue.
Amounts billed to customers in connection with these costs are included in product revenue.
Advertising
Advertising costs of $448,000, $608,000 and $482,000 for fiscal 2008, 2009 and 2010 were charged to operations as
incurred.
Research and Development
The Company expenses research and development costs as incurred.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences of temporary differences
between financial reporting and income tax basis of assets and liabilities, measured using the enacted tax rates and laws expected
to be in effect when the temporary differences reverse. Deferred income taxes also arise from the future tax benefits of operating
loss and tax credit carryforwards. A valuation allowance is established when management determines that it is more likely than
not that all or a portion of a deferred tax asset will not be realized.
ASC 740, Income Taxes , also prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a
tax position must be more-likely-than-not to be sustained upon examination. The Company has classified the amounts recorded
for uncertain tax benefits in the balance sheet as other liabilities (non-current) to the extent that payment is not anticipated within
one year. The Company recognizes penalties and interest related to uncertain tax liabilities in income tax expense. Penalties and
interest were immaterial as of the date of adoption and are included in the unrecognized tax benefits.
Deferred tax benefits have not been recognized for income tax effects resulting from the exercise of non-qualified stock
options. These benefits will be recognized in the period in which the benefits are realized as a reduction in taxes payable and an
increase in additional paid-in capital. Realized tax benefits from the exercise of stock options were $1,183,000, $1,103,000 and
$80,000 for the fiscal years 2008, 2009 and 2010.
Stock Option Plans
The Company’s share-based payments to employees are measured at fair value and are recognized in earnings, net of
estimated forfeitures, on a straight-line basis over the requisite service period.
The Company adopted ASC 718, Compensation — Stock Compensation , as of the beginning of fiscal 2007, using the
modified prospective method. Under this transition method, compensation cost recognized for the years ended March 31, 2008,
2009 and 2010 includes the current period’s cost for all stock options granted prior to, but not yet vested as of April 1, 2006. This
cost was based on the grant-date fair value estimated in accordance with the original provisions of ASC 718. The cost for all
share-based awards granted subsequent to March 31, 2006, represents the grant-date fair value that was estimated in accordance
with the provisions of ASC 718.
Cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation
costs (excess tax benefits) are classified as financing cash flows. For the years ended March 31, 2008, 2009 and 2010,
$1,183,000, $1,103,000 and $80,000 of such excess tax benefits were classified as financing cash flows.
The Company uses the Black-Scholes option-pricing model. Beginning in fiscal 2007, the Company determined volatility
based on an analysis of a peer group of public companies which was determined to be more reflective of the expected future
volatility. For fiscal 2008, 2009 and 2010, the Company continued to use an analysis of a peer group of public companies to
determine volatility and will continue to do so until the Company establishes sufficient history of the Company’s public stock
price. The risk-free interest rate is the rate available as of the option date on zero-coupon U.S. Government issues with a
remaining term equal to the expected term of the option. The expected term is based upon the vesting term of the Company’s
options and expected exercise behavior. The Company has not paid dividends in the past and does not plan to pay any dividends
in the foreseeable future. The Company estimates its forfeiture rate of unvested stock awards based on historical experience.
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The fair value of each option grant in fiscal 2008, 2009 and 2010 was determined using the assumptions in the following
table:
Fiscal Year Ended March 31,
2009
2008
2010
Weighted average expected term
Risk-free interest rate
Expected volatility
Expected forfeiture rate
Expected dividend yield
Net Income per Common Share
4.0 years
3.92 %
60 %
6 %
0 %
5.7 years
3.01 %
60 %
2 %
0 %
6.6 years
2.68 %
60 %
3 %
0 %
Basic net income per common share is computed by dividing net income attributable to common shareholders by the
weighted-average number of common shares outstanding for the period and does not consider common stock equivalents.
Prior to the Company’s IPO, all series of the Company’s preferred stock participated in all undistributed earnings with the
common stock. The Company allocated earnings to the common shareholders and participating preferred shareholders under the
two-class method. The two-class method is an earnings allocation method under which basic net income per share is calculated
for the Company’s common stock and participating preferred stock considering both accrued preferred stock dividends and
participation rights in undistributed earnings as if all such earnings had been distributed during the year. Since the Company’s
participating preferred stock was not contractually required to share in the Company’s losses, in applying the two-class method
to compute basic net income per common share, no allocation was made to the preferred stock if a net loss existed or if an
undistributed net loss resulted from reducing net income by the accrued preferred stock dividends.
Diluted net income per common share reflects the dilution that would occur if preferred stock were converted, warrants and
employee stock options were exercised, and shares issued per exercise of stock options for which the exercise price was paid by
a non-recourse loan from the Company were outstanding. In the computation of diluted net income per common share, the
Company uses the “if converted” method for preferred stock and restricted stock, and the “treasury stock” method for
outstanding options and warrants. In addition, in computing the dilutive effect of the convertible notes, the numerator is adjusted
to add back the after-tax amount of interest recognized in the period. Diluted net loss per common share is the same as basic net
loss per common share for the year ended March 31, 2010, because the effects of potentially dilutive securities are anti-dilutive.
The effect of net income per common share is calculated based upon the following shares (in thousands except share amounts):
Fiscal Year Ended March 31,
2009
2008
2010
Numerator:
Net income (loss)
Accretion of redeemable preferred stock and preferred stock dividends
Participation rights of preferred stock in undistributed earnings
Numerator for basic net income (loss) per common share
Adjustment for convertible note interest, net of income tax effect
Preferred stock dividends and participation rights of preferred stock
Numerator for diluted net income (loss) per common share
Denominator:
Weighted-average common shares outstanding
Weighted-average effect of preferred stock, restricted stock, convertible
notes and assumed conversion of stock options and warrants
Weighted-average common shares and common share equivalents
$
$
4,410
(225 )
(775 )
3,410
149
1,000
4,559
$
$
511
—
—
511
—
—
511
$
$
(4,190 )
—
—
(4,190 )
—
—
(4,190 )
15,548,189
25,351,839
21,844,150
7,905,614
2,093,451
—
outstanding
23,453,803
27,445,290
21,844,150
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The following table indicates the number of potentially dilutive securities as of the end of each period:
Common stock options
Common stock warrants
Total
2008
4,716,022
578,788
5,294,810
March 31,
2009
3,680,945
488,504
4,169,449
2010
3,546,249
76,240
3,622,489
Concentration of Credit Risk and Other Risks and Uncertainties
The Company’s cash is deposited with three financial institutions. At times, deposits in these institutions exceed the amount
of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not
exposed to any significant risk on these balances.
The Company currently depends on one supplier for a number of components necessary for its products, including ballasts
and lamps. If the supply of these components were to be disrupted or terminated, or if this supplier were unable to supply the
quantities of components required, the Company may have short-term difficulty in locating alternative suppliers at required
volumes. Purchases from this supplier accounted for 28%, 19% and 27% of cost of revenue in fiscal 2008, 2009 and 2010.
For fiscal 2008, one customer accounted for 17% of revenue. In fiscal 2009 and fiscal 2010, there were no customers who
individually accounted for greater than 10% of revenue.
As of March 31, 2009, no customers accounted for more than 10% of accounts receivable. As of March 31, 2010, one
customer accounted for 16% of accounts receivable.
Segment Information
The Company has determined that it operates in only one segment in accordance with the Segment Reporting Topic of the
FASB Accounting Standards Codification as it does not disaggregate profit and loss information on a segment basis for internal
management reporting purposes to its chief operating decision maker.
The Company’s revenue and long-lived assets outside the United States are insignificant.
Recent Accounting Pronouncements
In September 2009, the FASB issued Accounting Standards Update No. 2009-08, Earnings Per Share Amendments to
Section 260-10-S99, (ASU 2009-08). This ASU represents technical corrections to Topic 260-10-S99, Earnings per Share, based
on EITF Topic D-53, Computation of Earnings Per Share for a Period that Includes a Redemption or an Induced Conversion of a
Portion of a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings Per Share for the
Redemption or Induced Conversion of Preferred Stock. The adoption of ASU 2009-08 did not have a material impact on the
Company’s interim consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements —
a consensus of the FASB Emerging Issues Task Force (Topic 605), which amends the revenue guidance under ASC 605. This
update requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. This guidance eliminates the residual method of revenue allocation and requires revenue to be
allocated using the relative selling price method. This update is effective for fiscal years ending after June 15, 2010, and may be
applied prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively
for all revenue arrangements for all periods presented. The Company does not expect the provision of ASU 2009-13 to have a
material effect on the financial position, results of operations, or cash flows of the Company.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures,
(ASU 2010-06) which provides amendments to subtopic 10 of ASC 820, Fair Value Measurements and Disclosures that require
new disclosures regarding (1) transfers in and out of Levels 1 and 2 fair value measurements and (2) activity in Level 3 fair value
measurements. Additionally, ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. The guidance in ASU 2010-06 is effective for interim and annual
reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in
the roll forward activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material effect on the
Company’s consolidated financial statements.
NOTE C — RELATED PARTY TRANSACTIONS
As of March 31, 2007, the Company had non-interest bearing advances of $157,000 to a shareholder, and also held an
unsecured, 1.46% note receivable due from the same shareholder in the amount of $67,000, including interest receivable. These
advances and this note were repaid on August 2, 2007. During fiscal 2008, the Company forgave $37,000 of shareholder
advances as part of a contractual employment relationship.
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The Company incurred fees of $112,500 in fiscal 2008 for intellectual property fees paid to its CEO pursuant to his
employment agreement. In April 2008, the intellectual property rights were purchased from the executive for a cash payment of
$950,000. Refer to “Patents and Licenses” under footnote B for additional disclosure.
During fiscal 2008, 2009 and 2010, the Company recorded revenue of $309,000, $109,000 and $86,000 for products and
services sold to an entity for which a member of the board of directors serves as the chief executive officer. During the same
timeframes, the Company purchased goods and services from the same entity in the amounts of $368,000, $430,000 and
$171,000. The terms and conditions of such relationship are believed to be not materially more favorable to the Company or the
entity than could be obtained from an independent third party.
During fiscal 2008, 2009 and 2010, the Company recorded revenue of $136,000, $49,000 and $29,000 for products and
services sold to an entity for which a director of the Company was formerly the executive chairman. During fiscal 2008, 2009
and 2010, the Company purchased goods and services from the same entity in the amounts of $1,000, $180,000 and $30,000.
The terms and conditions of such relationship are believed to be not materially more favorable to the Company or the entity than
could be obtained from an independent third party.
The Company incurred fees of $24,000, which were paid to a shareholder as consideration for guaranteeing notes payable
and certain accounts payable during fiscal 2008. These fees were based on a percentage applied to the monthly outstanding
balances or revolving credit commitments. These guarantees were released in fiscal 2008.
During fiscal 2008, 2009 and 2010, the Company recorded revenue of $198,000, $521,000 and $766,000 for products and
services sold to various entities affiliated or associated with an entity for which a director of the Company serves as a member of
the board of directors. The Company is not able to identify the respective amount of revenues attributable to specifically
identifiable entities within such group of affiliated or associated entities or the extent to which any such individual entities are
related to the entity on whose board of directors the Company’s director serves. The terms and conditions of such relationship
are believed to be not materially more favorable to the Company or the entity than could be obtained from an independent third
party.
During fiscal 2010, the Company paid or accrued severance costs of $139,000 to former members of management.
NOTE D — LONG-TERM DEBT
Long-term debt as of March 31, 2009 and 2010 consisted of the following (in thousands):
Term note
First mortgage note payable
Debenture payable
Lease obligations
Other long-term debt
Total long-term debt
Less current maturities
Long-term debt, less current maturities
Revolving Credit Agreement
March 31,
2009
2010
$
$
1,235
990
885
227
1,125
4,462
(815 )
3,647
$
$
1,017
926
847
7
921
3,718
(562 )
3,156
On March 18, 2008, the Company entered into a credit agreement (Credit Agreement) to replace a previous agreement
between the Company and Wells Fargo Bank, N.A. The Credit Agreement provides for a revolving credit facility (Line of
Credit) that matures on August 31, 2010. The initial maximum aggregate amount of availability under the Line of Credit is
$25.0 million. In December 2008, the Company briefly drew $4.0 million on the line of credit due to the timing of treasury
repurchases and funds available in the Company’s operating account. In May 2009, the Company completed an amendment to
the Credit Agreement, effective as of March 31, 2009, which formalized Wells Fargo’s prior consent to the Company’s treasury
repurchase program, increased the capital expenditures covenant for fiscal 2009 and revised certain financial covenants by
adding a minimum requirement for unencumbered liquid assets, increasing the quarterly rolling net income requirement and
modifying the merger and acquisition covenant exemption. In December 2009, the Company completed a second amendment to
the Credit Agreement which formalized Wells Fargo’s prior consent to the Company’s prior failure to meet its net earnings and
fixed charge coverage ratio covenants, limited borrowings to a percentage of eligible money market funds held in a Wells Fargo
account, revised certain financial covenants by removing the minimum requirement for unencumbered assets and removing the
fixed charge coverage ratio, decreased the quarterly rolling net income requirement, removed the first lien security interest in all
of the Company’s accounts receivable, general intangibles and inventory, and removed the second lien priority in all of the
Company’s equipment and fixtures and reduced the fee rate of the unused amounts on the Line of Credit. As of March 31, 2009
and 2010, there was no outstanding balance due on the Line of Credit.
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The Company must currently pay a fee of 0.15% on the average daily unused amount of the Line of Credit and fees upon
the issuance of each letter of credit equal to 1.25% per annum of the principal amount thereof.
The Credit Agreement provides that the Company has the option to select the interest rate applicable to all or a portion of
the outstanding principal balance of the Line of Credit either (i) at a fluctuating rate per annum 1.00% below the prime rate in
effect from time to time, or (ii) at a fixed rate per annum determined by Wells Fargo to be 1.25% above LIBOR. Interest is
payable on the last day of each month.
The Credit Agreement contains certain financial covenants including minimum net income requirements and requirements
that the Company maintain a net worth ratio at prescribed levels. The Credit Agreement also contains certain restrictions on the
ability of the Company to make capital or lease expenditures over prescribed limits, incur additional indebtedness, consolidate or
merge, guarantee obligations of third parties, make loans or advances, declare or pay any dividend or distribution on its stock,
redeem or repurchase shares of its stock, or pledge assets.
Term Note
The Company’s term note requires principal and interest payments of $25,000 per month payable through February 2014 at
an interest rate of 6.9%. Amounts outstanding under the note are secured by a first security interest and first mortgage in certain
long-term assets and a secondary interest in inventory and accounts receivable and a secondary general business security
agreement on all assets. In addition, the agreement precludes the payment of dividends on our common stock. Amounts
outstanding under the note are 75% guaranteed by the United States Department of Agriculture Rural Development Association.
First Mortgage Note Payable
The Company’s first mortgage note payable has an interest rate of prime plus 2% (effective rate of 5.25% at March 31,
2010), and requires monthly payments of principal and interest of $10,000 through September 2014. The mortgage is secured by
a first mortgage on the Company’s manufacturing facility. The mortgage includes certain prepayment penalties and various
restrictive covenants, with which the Company was in compliance as of March 31, 2010.
Debenture Payable
The Company’s debenture payable was issued by Certified Development Company at an effective interest rate of 6.18%.
The balance is payable in monthly principal and interest payments of $8,000 through December 2024 and is guaranteed by
United States Small Business Administration 504 program. The amount due was collateralized by a second mortgage on
manufacturing facility.
Lease Obligations
The Company’s capital lease obligation has been recorded at a rate of 12.1%. The lease is payable in installments through
April 2011 and is collateralized by the related leased equipment.
Other Long-Term Debt
In November 2007, the Company completed a Wisconsin Community Development Block Grant with the local city
government to provide financing in the amount of $750,000 for the purpose of acquiring additional production equipment. The
loan has an interest rate of 4.9% and is collateralized by the related equipment. The loan requires monthly payments of $11,000
through March 2015.
Other long-term debt consists of block grants and equipment loans from local governments. Interest rates range from 2.0%
to 4.9%. The amounts due are collateralized by purchase money security interests in plant equipment. In fiscal 2010, $250,000 of
debt was forgiven related to the creation of certain types and numbers of jobs within the lending locality.
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Aggregate Maturities
As of March 31, 2010, aggregate maturities of long-term debt were as follows (in thousands):
Fiscal 2011
Fiscal 2012
Fiscal 2013
Fiscal 2014
Fiscal 2015
Thereafter
$
$
562
608
556
564
291
1,137
3,718
NOTE E — CONVERTIBLE NOTES
In August 2007, the Company issued $10.6 million of convertible subordinated notes, maturing in August 2012 and bearing
interest at 6% per annum with no scheduled principal payments prior to maturity. The 6% interest accrued at 2.1% payable in
cash on a quarterly basis and 3.9% which accreted to the principal balance of the convertible notes on a quarterly basis.
The convertible notes contained terms and conditions, including: (i) automatic conversion into 2,360,802 shares of the
Company’s common stock upon a qualified public offering, (ii) various registration rights with respect to the shares of the
Company’s common stock received upon conversion of the notes and (iii) a requirement for the Company to reserve an equal
number of shares of its authorized common stock to satisfy the conversion obligation. In accordance with the terms, the notes
and accrued interest converted to common stock upon the Company’s IPO in December 2007.
NOTE F — INCOME TAXES
The total provision (benefit) for income taxes consists of the following for the fiscal years ending (in thousands):
Fiscal Year Ended March 31,
2009
2008
2010
Current
Deferred
Federal
State
$
$
$
$
1,784
966
2,750
2008
2,494
256
2,750
$
$
$
$
782
145
927
2009
824
103
927
$
$
$
$
75
(1,425 )
(1,350 )
2010
(1,677 )
327
(1,350 )
A reconciliation of the statutory federal income tax rate and effective income tax rate is as follows:
Fiscal Year Ended March 31,
2009
2008
2010
Statutory federal tax rate
State taxes, net
Stock-based compensation expense
Federal tax credit
State tax credit
Change in valuation reserve
Change in tax contingency reserve
Other, net
Effective income tax rate
34.0 %
4.2 %
2.7 %
(1.5 )%
(1.0 )%
0.0 %
(0.1 )%
(0.2 )%
38.1 %
34.0 %
11.0 %
21.2 %
(2.7 )%
(1.5 )%
1.4 %
0.7 %
0.4 %
64.5 %
(34.0 )%
1.8 %
4.2 %
(3.0 )%
(0.4 )%
4.4 %
0.1 %
2.5 %
(24.4 )%
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The net deferred tax assets and liabilities reported in the accompanying consolidated financial statements include the
following components (in thousands):
Inventory, accruals and reserves
Other
Deferred revenue
Total current deferred tax assets and liabilities
Federal and state operating loss carryforwards
Tax credit carryforwards
Non qualified stock options
Fixed assets
Valuation allowance
Total long-term deferred tax assets
March 31,
2009
2010
$
$
$
$
464
178
(94 )
548
74
832
435
(724 )
(24 )
593
$
$
$
$
608
532
(1,184 )
(44 )
3,111
848
603
(1,683 )
(269 )
2,610
Gross deferred tax assets were $2.1 million and $5.7 million and gross deferred tax liabilities were $1.0 million and
$2.9 million at March 31, 2009 and 2010, respectively.
The Company is eligible for tax benefits associated with the excess tax deduction available for exercises of non-qualified
stock options over the amount recorded at grant. The amount of the benefit is based upon the ultimate deduction reflected in the
applicable income tax return. Benefits of $1.1 million and $0.1 million were recorded in fiscal 2009 and 2010 as a reduction in
taxes payable and a credit to additional paid in capital based on the amount that was utilized in the current year.
As of March 31, 2010, the Company has federal net operating loss carryforwards of approximately $14.5 million, of which
$6.1 million are associated with the exercise of non-qualified stock options that have not yet been recognized by the Company in
its financial statements. The Company also has state net operating loss carryforwards of approximately $8.4 million, of which
$3.1 million are associated with the exercise of non-qualified stock options. The benefit from the net operating losses created
from these exercises will be recorded as a reduction in taxes payable and a credit to additional paid-in capital in the period in
which the benefits are realized.
As of March 31, 2010, the Company also has federal tax credit carryforwards of approximately $499,000 and state tax
credit carryforwards of approximately $120,000, which is net of the valuation allowance of $408,000. Management believes it is
more likely than not that the Company will realize the benefits of most of these assets and has reserved for an allowance due to
the Company’s state apportioned income and the potential expiration of the state tax credits due to the carryforwards period.
Both the net operating losses and tax credit carryforwards expire between 2014 and 2030.
In 2007, the Company’s past issuances and transfers of stock caused an ownership change. As a result, the Company’s
ability to use its net operating loss carryforwards, attributable to the period prior to such ownership change, to offset taxable
income will be subject to limitations in a particular year, which could potentially result in increased future tax liability for the
Company. The Company does not believe the ownership change affects the use of the full amount of the net operating loss
carryforwards.
As of March 31, 2009 and 2010, the Company had income tax receivables of $778,000 and $18,000 related to
overpayments of estimated state and federal taxes.
Uncertain tax positions
As of March 31, 2010 the balance of gross unrecognized tax benefits was approximately $398,000, all of which would
reduce the Company’s effective tax rate if recognized. The Company does not expect any of these amounts to change in the next
twelve months as none of the issues are currently under examination, the statutes of limitations do not expire within the period,
and the Company is not aware of any pending litigation. Due to the existence of net operating loss and credit carryforwards, all
years since 2002 are open to examination by tax authorities.
The Company has classified the amounts recorded for uncertain tax benefits in the balance sheet as other liabilities (non-
current) to the extent that payment is not anticipated within one year. The Company recognizes penalties and interest related to
uncertain tax liabilities in income tax expense. Penalties and interest are immaterial as of the date of adoption and are included in
the unrecognized tax benefits.
Unrecognized tax benefits as of beginning of fiscal year
Decreases relating to settlements with tax authorities
Additions based on tax positions related to the current period positions
Unrecognized tax benefits as of end of fiscal year
Fiscal Year Ended Fiscal Year Ended
March 31, 2009 March 31, 2010
397
392 $
$
—
(5 )
1
10
398
397 $
$
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NOTE G — COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases vehicles and equipment under operating leases expiring at various dates through 2016. Rent expense
under operating leases was $924,000, $1,082,000 and $1,385,000 for fiscal 2008, 2009 and 2010. Total annual commitments
under non-cancelable operating leases with terms in excess of one year at March 31, 2010 are as follows (in thousands):
Fiscal 2011
Fiscal 2012
Fiscal 2013
Fiscal 2014
Fiscal 2015
Thereafter
Purchase Commitments
$
$
953
877
560
131
131
108
2,760
The Company enters into non-cancellable purchase commitments for certain inventory items in order to secure better
pricing and ensure materials on hand and capital expenditures. As of March 31, 2010, the Company had entered into
$13.0 million of purchase commitments related to fiscal 2011, including $0.6 million related to capital expenditure projects for
information systems and new product development and $12.4 million for inventory purchases.
Retirement Savings Plan
The Company sponsors a tax deferred retirement savings plan that permits eligible employees to contribute varying
percentages of their compensation up to the limit allowed by the Internal Revenue Service. This plan also provides for
discretionary Company contributions. In fiscal 2008, 2009 and 2010, the Company made matching contributions of
approximately $10,000, $15,000 and $12,000.
Litigation
In February and March 2008, three class action lawsuits were filed in the United States District Court for the Southern
District of New York against the Company, several of its officers, all members of its then existing board of directors, and certain
underwriters relating to the Company’s December 2007 IPO. The plaintiffs claimed to represent those persons who purchased
shares of the Company’s common stock from December 18, 2007 through February 6, 2008. The plaintiffs alleged, among other
things, that the defendants made misstatements and failed to disclose material information in the Company’s IPO registration
statement and prospectus. The complaints alleged various claims under the Securities Act of 1933, as amended. The complaints
sought, among other relief, class certification, unspecified damages, fees, and such other relief as the court may deem just and
proper.
On August 1, 2008, the court-appointed lead plaintiff filed a consolidated amended complaint in the United States District
Court for the Southern District of New York. On September 15, 2008, the Company and the other director and officer defendants
filed a motion to dismiss the consolidated complaint, and the underwriters filed a separate motion to dismiss the consolidated
complaint on January 16, 2009. After oral argument on August 19, 2009, the court granted in part and denied in part the motions
to dismiss. The plaintiff filed a second consolidated amended complaint on September 4, 2009, and the defendants filed an
answer to the complaint on October 9, 2009.
In the fourth quarter of fiscal 2010, the Company reached a preliminary agreement to settle the class action lawsuits.
Although the preliminary settlement is subject to approval by the court, as well as other conditions, it is expected to provide for
the dismissal of the consolidated action against all defendants. Substantially all of the proposed preliminary settlement amount
will be covered by the Company’s insurance. However, for the Company’s share of the proposed preliminary settlement not
covered by insurance, the Company recorded an after-tax charge in the fourth quarter of fiscal 2010 of approximately $0.02 per
share.
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If the preliminary settlement is not approved or the other conditions are not met, the Company will continue to defend
against the lawsuits and believes that it and the other defendants have substantial legal and factual defenses to the claims and
allegations contained in the consolidated complaint. In such a case, the Company would intend to pursue these defenses
vigorously. There can be no assurance, however, that the Company would be successful, and an adverse resolution of the
lawsuits could have a material adverse effect on the Company’s financial condition, results of operations and cash flow. In
addition, although the Company carries insurance for these types of claims, a judgment significantly in excess of the Company’s
insurance coverage or any costs, claims or judgment which are disputed or not covered by insurance could materially and
adversely affect the Company’s financial condition, results of operations and cash flow. If the preliminary settlement is not
approved or the other conditions are not met, the Company is not presently able to reasonably estimate potential costs and/or
losses, if any, related to the lawsuit.
NOTE H —SHAREHOLDERS’ EQUITY
Conversion of Preferred Stock Upon Completion of Initial Public Offering
Upon completion of the Company’s IPO, all preferred shares were converted into common stock. Prior to the IPO, the
Company had issued various classes of preferred stock. Series B and Series C preferred stock carried terms allowing for
liquidation preference, voting rights, and conversion into common stock at a one-to-one ratio upon certain qualifying exit events.
Series C preferred shares carried a redemption provision and a dividend preference at a non-compounded rate of 6% resulting in
the carrying value of the preferred Series C stock being increased by an accretion each period.
Series C Redeemable Preferred Stock
In August and September 2006, the Company sold an aggregate 1,818,182 shares of Series C redeemable preferred stock to
institutional investors for total proceeds of approximately $4.8 million, net of offering costs of $245,000. As of March 31, 2007,
2,000,000 shares of authorized preferred stock had been reserved for Series C. The terms of the Series C preferred stock
provided for:
•
senior rank to other classes and series of stock with respect to the payment of dividends and proceeds upon
liquidation
•
entitlement to receive cumulative dividends accruing at a non-compounded annual rate of 6% upon the
occurrence of certain events (accumulated dividends through the IPO were $423,000)
•
•
liquidation preference equal to the purchase price plus any accumulated dividends
conversion into common stock at a one-to-one ratio upon certain qualifying exit events resulting in net proceeds
to the Company of at least $30 million (upon conversion in a qualifying event, all rights related to accrued and
unpaid dividends would be extinguished)
•
weighted average dilution protection for any issuance of stock or other equity instruments (other than for stock
options granted under existing stock plans) at a price per share less than the Series C purchase price of $2.75
•
proportional adjustment of the number of shares of common stock into which one share of Series C preferred
stock may be converted in the event of stock splits, stock dividends reclassifications and similar events
•
a redemption feature at the option of the holder, including accumulated dividends, if certain liquidity events are
not achieved within five years from issuance
•
right to vote with common stock on all matters submitted to a vote of shareholders
Due to the nature of the redemption feature and other provisions, the Company classified the Series C redeemable preferred
stock as temporary equity. The carrying value was being accreted to its redemption value over a period of five years at a non-
compounded rate of 6%.
Series B Preferred Stock
From October 2004 through June 2006, the Company completed various private placements of Series B preferred stock for
net proceeds in fiscal 2006 and 2007 of $1.4 million and $400,000. Proceeds were net of direct offering costs of $81,000 and
zero in fiscal 2006 and 2007. The Series B placements consisted of one share of Series B preferred stock and, in certain
placements, a warrant to purchase one-third share of common stock for $2.30 per share expiring at various dates through
January 2010. The terms of the Series B preferred stock provided for:
•
•
a liquidation preference equal to the purchase price of the Series B shares
automatic conversion to common stock at a one-to-one ratio upon registration of the common stock under a 1933
Act registration
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•
•
no dividend preference
right to vote with common stock on all matters submitted to a vote of shareholders
For the Series B transactions where common stock warrants were issued, the value of the warrants issued to the placement
agent was recorded as additional paid-in capital.
Series A Preferred Stock
In December 2004, the Company offered its Series A 12% preferred shareholders the opportunity to exchange each share of
their Series A preferred stock for three shares of the Company’s common stock. The Series A preferred stock carried a
liquidation preference over the common stock and a cumulative 12% dividend and, prior to the December conversion offer, a
conversion entitling each share of the Series A preferred stock the right to convert into two shares of common stock feature.
Under the guidance provided in ASC 470, Debt , the Company determined that the increase in conversion ratio from 2 to 3 was
an inducement offer and accounted for the change in conversion ratio as an increase to paid-in capital and a charge to
accumulated deficit. Furthermore, the historical carrying value of the Series A preferred was reclassified to paid-in capital at the
time of conversion.
As of March 31, 2005, all but 20,000 shares of Series A preferred stock had been converted. The remaining 20,000 shares
were converted in March 2007. The amount assigned to the inducement, calculated using the number of additional common
shares offered multiplied by the estimated fair market value of common stock at the time of conversion, was $83,000 for fiscal
2007.
Share Repurchase Program and Treasury Stock
In July 2008, the Company’s board of directors approved a share repurchase program authorizing the Company to
repurchase in the aggregate up to a maximum of $20 million of the Company’s outstanding common stock. In December 2008,
the Company’s board of directors supplemented the share repurchase program authorizing the Company to repurchase up to an
additional $10 million of the Company’s outstanding common stock. As of March 31, 2010, the Company had repurchased
7,092,817 shares of common stock at a cost of $29.8 million under the program, which is now effectively terminated.
In fiscal 2008, certain shareholder receivables were settled with shares of common stock. The shares tendered totaled
306,932 and are held as treasury stock by the Company.
In fiscal 2009, the Company affected a net stock option exercise with an executive vice president. The executive
surrendered 317,629 shares in lieu of a cash payment to cover the exercise price and taxes related to the stock option exercise.
The shares surrendered were valued at $4.25, the closing market price of the Company’s stock on the date of exercise.
Shareholder Rights Plan
On January 7, 2009, the Company’s Board of Directors adopted a shareholder rights plan and declared a dividend
distribution of one common share purchase right (a “Right”) for each outstanding share of the Company’s common stock. The
issuance date for the distribution of the Rights was February 15, 2009 to shareholders of record on February 1, 2009. Each Right
entitles the registered holder to purchase from the Company one share of the Company’s common stock at a price of $30.00 per
share, subject to adjustment (the “Purchase Price”).
The Rights will not be exercisable (and will be transferable only with the Company’s common stock) until a “Distribution
Date” occurs (or the Rights are earlier redeemed or expire). A Distribution Date generally will occur on the earlier of a public
announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial
ownership of 20% or more of the Company’s outstanding common stock (a “Shares Acquisition Date”) or 10 business days after
the commencement of, or the announcement of an intention to make, a tender offer or exchange offer that would result in any
such person or group of persons acquiring such beneficial ownership.
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If a person becomes an Acquiring Person, holders of Rights (except as otherwise provided in the shareholder rights plan)
will have the right to receive that number of shares of the Company’s common stock having a market value of two times the
then-current Purchase Price, and all Rights beneficially owned by an Acquiring Person, or by certain related parties or
transferees, will be null and void. If, after a Shares Acquisition Date, the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so
that each holder of a Right (except as otherwise provided in the shareholder rights plan) will thereafter have the right to receive
that number of shares of the acquiring company’s common stock which at the time of such transaction will have a market value
of two times the then-current Purchase Price.
Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company. At any time
prior to a person becoming an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but
not in part, at a price of $0.001 per Right. Unless they are extended or earlier redeemed or exchanged, the Rights will expire on
January 7, 2019.
Shareholder receivables
In fiscal 2006, the Company issued to a director a note receivable with recourse, totaling $375,000, to purchase 400,000
shares of common stock by exercise of fully vested non-qualified stock options. The note matured in November 2012 or earlier
upon notice from the Company and bore interest at 4.23% payable annually in cash or stock.
The interest rate was deemed to be a below market rate on issuance and the Company recorded additional compensation
expense of $525,000 in fiscal 2006. This amount represented the appreciation of the fair value of the Company’s stock from the
time of the option grant through the issuance of the recourse note.
In fiscal 2007, the Company issued $1,753,000 of notes receivable to officers to purchase 2,150,000 shares of common
stock by exercise of fully vested non-qualified stock options. The notes matured in March 2012 or earlier upon notice from the
Company and bore interest at 7.65% payable annually in cash or stock. As the notes were repaid, and interest collected, interest
received would be credited to compensation expense. For accounting purposes, the notes are considered non-recourse and
therefore, the options are not deemed exercised until the note is paid. Accordingly, the common stock was not considered issued
for accounting purposes until the Company received payment of the notes.
In fiscal 2008, all director and shareholder notes and advances, along with accrued interest, were settled, either in cash or
with shares. Total principal payments were $985,800 and shares tendered totaled 306,932. Concurrent with the above
transaction, the Company issued 306,932 non-qualifying stock options with a fair value exercise price of $4.49 and recognized
stock-based compensation expense with respect to such grants of $224,000, $127,000 and $0 in fiscal 2008, 2009 and 2010.
NOTE I — STOCK OPTIONS AND WARRANTS
The Company grants stock options and stock awards under its 2003 Stock Option and 2004 Stock and Incentive Awards
Plans (the Plans). Under the terms of the Plans, the Company has reserved 9,000,000 shares for issuance to key employees,
consultants and directors. The options generally vest and become exercisable ratably between one month and five years although
longer vesting periods have been used in certain circumstances. Exercisability of the options granted to employees are contingent
on the employees’ continued employment and non-vested options are subject to forfeiture if employment terminates for any
reason. Options under the Plans have a maximum life of ten years. In the past, the Company has granted both incentive stock
options and non-qualified stock options, although in July 2008, the Company adopted a policy of only granting non-qualified
stock options. Stock awards have no vesting period and have been issued to certain non-employee directors pursuant to elections
made under the non-employee director compensation plan, which became effective upon the closing of the Company’s IPO. The
Plans also provide to certain employees accelerated vesting in the event of certain changes of control of the Company. In
December 2007, upon the closing of the Company’s IPO, an additional 1,500,000 shares were made available for grant under our
2004 Stock and Incentive Awards Plan.
Prior to the Company’s IPO, certain non-employee directors elected to receive stock awards in lieu of cash compensation
under the non-employee director compensation plan which became effective upon the closing of the Company’s IPO. The
Company granted 2,210 shares from the 2004 Stock and Incentive Awards Plan as pro-rata compensation for fiscal 2008. The
shares were issued in January 2008 and valued at the Company’s IPO price. In fiscal 2009, the Company granted 16,627 shares
from the 2004 Stock and Incentive Awards Plan to certain non-employee directors who elected to receive stock awards in lieu of
cash compensation. The shares were valued at the market price as of the grant date, ranging from $3.00 to $11.61 per share. In
fiscal 2010, the Company granted 11,211 shares from the 2004 Stock and Incentive Awards Plan to certain non-employee
directors who elected to receive stock awards in lieu of cash compensation. The shares were valued at the market price as of the
grant date, ranging from $3.29 to $5.44 per share.
71
Table of Contents
The following amounts of stock-based compensation were recorded (in thousands):
Cost of product revenue
General and administrative
Sales and marketing
Research and development
2008
Fiscal Year Ended
2009
2010
$
$
122
852
375
42
1,391
$
$
269
676
587
45
1,577
$
$
222
539
691
39
1,491
The number of shares available for grant under the plans were as follows:
Available at March 31, 2007
Amendment to Plan; concurrent with IPO
Granted stock options
Granted shares
Forfeited
Available at March 31, 2008
Granted stock options
Granted shares
Forfeited
Available at March 31, 2009
Granted stock options
Granted shares
Forfeited
Available at March 31, 2010
The following table summarizes information with respect to outstanding stock options:
670,700
1,500,000
(737,432 )
(2,210 )
51,000
1,482,058
(731,879 )
(16,627 )
337,402
1,070,954
(888,018 )
(11,211 )
397,965
569,690
Outstanding at March 31, 2007
Granted
Exercised
Forfeited
Outstanding at March 31, 2008
Granted
Exercised
Forfeited
Outstanding at March 31, 2009
Granted
Exercised
Forfeited
Outstanding at March 31, 2010
Exercisable at March 31, 2010
Weighted
Weighted
Average
Average Fair Value
Number of
Shares
Exercise
of Options Aggregate Intrinsic
Price
Granted
Value
1.56 $
6.09
1.27
2.05
2.30 $
7.58
1.24
6.26
3.40 $
3.92
1.71
4.89
3.66 $
4,714,547
737,432
(684,957 )
(51,000 )
4,716,022
731,879
(1,429,554 )
(337,402 )
3,680,945
888,018
(624,749 )
(397,965 )
3,546,249
1,757,130
72
1.35
3.03
4.25
2.23 $
6,399,684
$
4,139,343
Table of Contents
The following table summarizes the range of exercise prices on outstanding stock options at March 31, 2010:
March 31, 2010
Weighted
Average
Price
$0.69
0.75 – 0.94
1.50
2.20 – 2.25
2.50 – 2.75
3.00 – 4.32
4.48 – 4.76
5.23 – 6.05
9.00 – 10.04
10.14 – 11.61
Outstanding
370,610
112,420
31,000
1,086,946
118,167
578,102
475,932
457,870
122,500
192,702
3,546,249
Remaining Weighted
Contractual
Life
(Years)
Average
Exercise
Price
Weighted
Vested
370,610
112,420
31,000
554,646
80,167
107,776
346,632
53,477
43,900
56,502
1,757,130
$
$
Average
Exercise
Price
0.69
0.89
1.50
2.21
2.51
3.06
4.50
5.46
9.24
10.87
2.86
1.14
1.66
3.52
6.54
6.20
9.31
7.88
9.01
8.03
8.06
6.87
$
$
0.69
0.89
1.50
2.21
2.51
3.36
4.53
5.45
9.42
11.07
3.66
The aggregate intrinsic value represents the total pre-tax intrinsic value, which is calculated as the difference between the
exercise price of the underlying stock options and the fair value of the Company’s closing common stock price of $4.90 as of
March 31, 2010.
Unrecognized compensation cost related to non-vested common stock-based compensation as of March 31, 2010 is as
follows (in thousands):
Fiscal 2011
Fiscal 2012
Fiscal 2013
Fiscal 2014
Fiscal 2015
Thereafter
Remaining weighted average expected term
$
$
1,352
1,184
854
526
290
259
4,465
6.9 years
The Company has issued warrants to placement agents in connection with various stock offerings and services rendered.
The warrants grant the holder the option to purchase common stock at specified prices for a specified period of time. Warrants
issued in fiscal 2007 were treated as offering costs and valued at $18,000. There were no warrants issued in fiscal 2008, 2009 or
2010.
Outstanding warrants are comprised of the following:
Outstanding at March 31, 2007
Issued
Exercised
Cancelled
Outstanding at March 31, 2008
Issued
Exercised
Cancelled
Outstanding at March 31, 2009
Issued
Exercised
Cancelled
Outstanding at March 31, 2010
73
Weighted
Number of
Shares
Average
Exercise
Price
1,109,390
—
(526,766 )
(3,836 )
578,788
—
(90,284 )
—
488,504
—
(399,364 )
(12,900 )
76,240
$
$
$
$
2.24
—
2.17
1.50
2.31
—
2.32
—
2.31
—
2.30
—
2.37
Table of Contents
A summary of outstanding warrants as of March 31, 2010 follows:
Exercise Price
$2.25
$2.50
Total
Number of
Warrants
38,980
37,260
76,240
Expiration
Fiscal 2015
Fiscal 2011
NOTE J — QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly results for the years ended March 31, 2010 and March 31, 2009 are as follows
Total revenue
Gross profit
Net income (loss)
Basic net income per share
Shares used in basic per share calculation
Diluted net income per share
Shares used in diluted per share calculation
Total revenue
Gross profit
Net income
Basic net income per share
Shares used in basic per share calculation
Diluted net income per share
Shares used in diluted per share calculation
June 30,
2009
$ 12,628
3,501
(2,773 )
$
$
(0.13 )
21,588
$
(0.13 )
21,588
June 30,
2008
$ 16,106
5,197
34
$
$
0.00
27,038
$
0.00
30,015
Three Months Ended
Sept. 30,
Dec. 31, Mar. 31,
2009
2010
2009
(in thousands, except per share amounts)
$ 18,876
$ 19,295
$ 14,619
6,164
7,094
4,765
807
(1,399 )
(825 )
$
$
$
$
$
$
(0.04 )
0.04
(0.06 )
22,255
21,792
21,707
$
$
$
(0.04 )
0.04
(0.06 )
22,255
22,568
21,707
Three Months Ended
Sept. 30,
Dec. 31, Mar. 31,
2008
2009
2008
(in thousands, except per share amounts)
$ 15,393
$ 22,375
$ 18,760
4,646
7,420
6,335
(1,130 )
1,154
453
$
$
$
$
$
$
(0.05 )
0.05
0.02
22,154
25,204
26,960
$
$
$
(0.05 )
0.04
0.02
22,154
26,415
29,019
Total
$ 65,418
21,524
(4,190 )
$
$
(0.19 )
21,844
$
(0.19 )
21,844
Total
$ 72,634
23,598
511
$
$
0.02
25,352
$
0.02
27,445
The four quarters for net earnings per share may not add to the total year because of differences in the weighted average
number of shares outstanding during the quarters and the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our
management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions
regarding required disclosure.
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures and our internal control over financial reporting as of March 31, 2010,
pursuant to Exchange Act Rule 13a-15 and 15d-15. Based upon such evaluation, our Chief Executive Officer along with our
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2010.
74
Table of Contents
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or
under the supervision of, our principal executive and principal financial officers and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorization of our management and directors: and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2010. In making
this assessment, management used the criteria set forth by the Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Based on this assessment using the COSO criteria, management believes that, as of March 31, 2010, our internal control
over financial reporting was effective.
Grant Thornton LLP, independent registered public accounting firm has audited our consolidated financial statements for
the fiscal years ended March 31, 2008, 2009, and 2010 and our internal control over financial reporting as of March 31, 2010.
Their reports appear in Item 8 under the heading “Reports of Independent Registered Public Accounting Firm” of this Annual
Report on Form 10-K.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that occurred during the quarter ended March 31, 2010, that have materially affected or are reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for our 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2010.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for our 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2010.
75
Table of Contents
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for our 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for our 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for our 2010 Annual Meeting of
Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2010.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
Our financial statements are set forth in Item 8 of this Form 10-K.
(b) Financial Statement Schedule
SCHEDULE II
VALUATION and QUALIFYING ACCOUNTS
Balance at
beginning
of period
Provisions
charged to Write offs
and other
expense
Balance at
end of
period
(in thousands)
March 31,
2008
2009
2010
2008
2009
2010
Allowance for Doubtful Accounts
Allowance for Doubtful Accounts
Allowance for Doubtful Accounts
Inventory Obsolescence Reserve
Inventory Obsolescence Reserve
Inventory Obsolescence Reserve
89
79
222
448
530
668
$
$
76
66
178
388
376
149
105
$
$
76
35
228
294
11
17
79
222
382
530
668
756
Table of Contents
Number
Exhibit Title
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Amended and Restated Articles of Incorporation of Orion Energy Systems, Inc., filed as Exhibit 3.3 to the
Registrant’s Form S-1 filed August 20, 2007 (File No. 333-145569), is hereby incorporated by reference as
Exhibit 3.1.
Amended and Restated Bylaws of Orion Energy Systems, Inc., filed as Exhibit 3.5 to the Registrant’s
Form S-1 filed August 20, 2007 (File No. 333-145569), is hereby incorporated by reference as Exhibit 3.2.
Form of Warrant to purchase Common Stock of Orion Energy Systems, Inc., filed as Exhibit 4.3 to the
Registrant’s Form S-1 filed August 20, 2007 (File No. 333-145569), is hereby incorporated by reference as
Exhibit 4.1.
Form of Warrant to purchase Common Stock of Orion Energy Systems, Inc., filed as Exhibit 4.4 to the
Registrant’s Form S-1 filed August 20, 2007 (File No. 333-145569), is hereby incorporated by reference as
Exhibit 4.2.
Rights Agreement, dated as of January 7, 2009, between Orion Energy Systems, Inc. and Wells Fargo Bank,
N.A., which includes as Exhibit A thereto the Form of Right Certificate and as Exhibit B thereto the
Summary of Common Share Purchase Rights, filed as Exhibit 4.1 to the Registrant’s Form 8-A filed
January 8, 2009 (File No. 001-33887), is hereby incorporated by reference as Exhibit 4.3.
Credit Agreement, dated March 18, 2008, by and between Orion Energy Systems, Inc., Great Lakes Energy
Technologies, LLC and Wells Fargo Bank, National Association, filed as Exhibit 10.1 to the Registrant’s
Form 8-K filed March 21, 2008 (File No. 001-33887), is hereby incorporated by reference as Exhibit 10.1.
First Amendment, dated May 15, 2009, to the Credit Agreement, dated as of March 18, 2008, among the
Company, Great Lakes Energy Technologies, LLC, and Wells Fargo Bank, National Association, filed as
Exhibit 10.1 to the Registrant’s Form 8-K filed May 20, 2009 (File No. 001-33887), is hereby incorporated by
reference as Exhibit 10.2.*
Second Amendment, dated December 18, 2009, to the Credit Agreement, dated as of March 18, 2008, among
the Company, Great Lakes Energy Technologies, LLC, and Wells Fargo Bank, National Association, filed as
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 18, 2009 (File No. 001-33887),
is hereby incorporated by reference as Exhibit 10.3.
Revolving Line of Credit Note, dated March 18, 2008, by and between Orion Energy Systems, Inc., Great
Lakes Energy Technologies, LLC and Wells Fargo Bank, National Association, filed as Exhibit 10.2 to the
Registrant’s Form 8-K filed March 21, 2008 (File No. 001-33887), is hereby incorporated by reference as
Exhibit 10.4.
Orion Energy Systems, Inc. 2003 Stock Option Plan, as amended, filed as Exhibit 10.6 to the Registrant’s
Form S-1 filed August 20, 2007 (File No. 333-145569), is hereby incorporated by reference as Exhibit 10.5.*
Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2003 Stock Option Plan, filed as
Exhibit 10.7 to the Registrant’s Form S-1 filed August 20, 2007 (File No. 333-145569), is hereby
incorporated by reference as Exhibit 10.6.*
Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan, filed as Exhibit 10.9 to the Registrant’s
Form S-1 filed August 20, 2007 (File No. 333-145569), is hereby incorporated by reference as Exhibit 10.7.*
Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2004 Equity Incentive Plan, filed as
Exhibit 10.10 to the Registrant’s Form S-1 filed August 20, 2007 (File No. 333-145569), is hereby
incorporated by reference as Exhibit 10.8.*
Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2004 Stock and Incentive Awards
Plan, filed as Exhibit 10.11 to the Registrant’s Form S-1 filed August 20, 2007 (File No. 333-145569), is
hereby incorporated by reference as Exhibit 10.9.*
Summary of Non-Employee Director Compensation, filed as Exhibit 10.15 to the Registrant’s Form S-1 filed
November 16, 2007 (File No. 333-145569), is hereby incorporated by reference as Exhibit 10.10.*
Executive Employment and Severance Agreement, dated August 12, 2008, by and between Orion Energy
Systems, Inc. and Daniel J. Waibel, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2008 (File No. 001-33887), is hereby incorporated by reference as
Exhibit 10.11.*
Executive Employment and Severance Agreement, dated February 21, 2008, by and between Orion Energy
Systems, Inc. and Michael J. Potts, filed as Exhibit 10.2 to the Registrant’s Form 8-K filed February 22, 2008
(File No. 001-33887), is hereby incorporated by reference as Exhibit 10.12.*
Executive Employment and Severance Agreement, dated February 20, 2008, by and between Orion Energy
Systems, Inc. and Eric von Estorff, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed February 22, 2008
(File No. 001-33887), is hereby incorporated by reference as Exhibit 10.13.*
Executive Employment and Severance Agreement, dated March 18, 2008, by and between Orion Energy
Systems, Inc. and John H. Scribante, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed March 21, 2008
(File No. 001-33887), is hereby incorporated by reference as Exhibit 10.14.*
77
Table of Contents
Number
Exhibit Title
10.15
10.16
10.17
10.18
10.19
10.20
Executive Employment and Severance Agreement, dated April 14, 2008, by and between Orion Energy
Systems, Inc. and Neal R. Verfuerth, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed April 18, 2008
(File No. 001-33887), is hereby incorporated by reference as Exhibit 10.15.*
Executive Employment and Severance Agreement, dated August 12, 2008, by and between Orion Energy
Systems, Inc. and Scott R. Jensen, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2008 (File No. 001-33887), is hereby incorporated by reference as
Exhibit 10.16.*
Patent and Trademark Security Agreement by and between Orion Energy Systems, Inc. and Wells Fargo
Bank, National Association, Acting Through its Wells Fargo Business Credit Operating Division, dated
December 22, 2005, filed as Exhibit 10.13 to the Registrant’s Form S-1 filed August 20, 2007 (File No. 333-
145569), is hereby incorporated by reference as Exhibit 10.17.
Patent and Trademark Security Agreement by and between Great Lakes Energy Technologies, LLC and
Wells Fargo Bank, National Association, Acting Through its Wells Fargo Business Credit Operating
Division, dated December 22, 2005, filed as Exhibit 10.14 to the Registrant’s Form S-1 filed August 20, 2007
(File No. 333-145569), is hereby incorporated by reference as Exhibit 10.18.
Letter Agreement, dated as of August 27, 2009, between the Company and John H. Scribante, filed as
Exhibit 10.1 to the Company’s Form 8-K filed on September 2, 2009, is hereby incorporated by reference as
Exhibit 10.19.*
Executive Employment and Severance Agreement, dated September 8, 2009, by and between Stuart L.
Ralsky and the Company, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2009, is hereby incorporated by reference as Exhibit 10.20.*
21.1
Subsidiaries of Orion Energy Systems, Inc.**
23.1
Consent of Independent Registered Public Accounting Firm.**
31.1
31.2
32.1
Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(a) or
Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.**
Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(a) or
Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.**
Certification of Chief Executive Officer and Chief Financial Officer of Orion Energy Systems, Inc. pursuant
to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
*
Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an
exhibit to this Annual Report on Form 10-K pursuant to Item 15(a)(3) of Form 10-K.
** Filed herewith
78
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on June 14, 2010.
SIGNATURES
ORION ENERGY SYSTEMS, INC.
By: /s/ NEAL R. VERFUERTH
Neal R. Verfuerth
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by
the following persons on behalf of the Registrant in the capacities indicated and on the date indicated.
Signature
/s/ NEAL R. VERFUERTH
Neal R. Verfuerth
/s/ SCOTT R. JENSEN
Scott R. Jensen
/s/ MICHAEL W. ALTSCHAEFL
Michael W. Altschaefl
/s/ JAMES R. KACKLEY
James R. Kackley
/s/ MICHAEL J. POTTS
Michael J. Potts
/s/ THOMAS A. QUADRACCI
Thomas A. Quadracci
/s/ THOMAS N. SCHUELLER
Thomas N. Schueller
/s/ ROLAND G. STEPHENSON
Roland G. Stephenson
/s/ MARK C. WILLIAMSON
Mark C. Williamson
Title
Chairman and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
79
Date
June 14, 2010
June 14, 2010
June 14, 2010
June 14, 2010
June 14, 2010
June 14, 2010
June 14, 2010
June 14, 2010
June 14, 2010
Subsidiaries
Exhibit 21.1
Entity
Jurisdiction of Organization
Great Lakes Energy Technologies, LLC
Clean Energy Solutions, LLC
Orion Asset Management, LLC
Wisconsin
Wisconsin
Wisconsin
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated June 14, 2010, with respect to the consolidated financial statements, schedule and internal
control over financial reporting included in the Annual Report of Orion Energy Systems, Inc. on Form 10-K for the year ended
March 31, 2010. We hereby consent to the incorporation by reference of said reports in the Registration Statement of Orion
Energy Systems, Inc. on Form S-8 (File No. 333-148401, effective December 28, 2007).
Exhibit 23.1
/s/ GRANT THORNTON LLP
Milwaukee, Wisconsin
June 14, 2010
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Neal R. Verfuerth, certify that:
1.
I have reviewed this Annual Report on Form 10-K for Orion Energy Systems, Inc.;
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: June 14, 2010
/s/ Neal R. Verfuerth
Neal R. Verfuerth
Chairman and Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Scott R. Jensen, certify that:
1.
I have reviewed this Annual Report on Form 10-K for Orion Energy Systems, Inc.;
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: June 14, 2010
/s/ Scott R. Jensen
Scott R. Jensen
Chief Financial Officer
Written Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, we, the undersigned Chief Executive Officer and Chief Financial Officer of Orion Energy Systems, Inc. (the
“Company”), hereby certify, based on our knowledge, that the Annual Report on Form 10-K of the Company for the twelve-
month period ended March 31, 2010, (the “Report”) fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Exhibit 32.1
/s/ Neal R. Verfuerth
Neal R. Verfuerth
Chairman and Chief Executive Officer
/s/ Scott R. Jensen
Scott R. Jensen
Chief Financial Officer
Date: June 14, 2010