Orion Energy Systems Annual Report 2017

FY2017 Annual Report · Orion Energy Systems

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Orion Energy Systems, Inc.
Shareholders’ Letter and Annual Report on Form 10-K
Fiscal Year Ended March 31, 2017

To Our Valued Shareholders,

It is my privilege, as Orion’s recently appointed CEO, to write to you about the Company’s goals
for fiscal 2018 and to review our significant accomplishments last year. Orion is well positioned
as a product and customer service leader in the LED lighting market, with a focus on the upgrade
or retrofit market where energy efficiency is a primary customer objective.

I am proud to lead a very talented and committed team of lighting industry professionals. As we
progress into fiscal 2018, our two priorities are to drive growth and to manage our cost structure
and overhead in order to accelerate Orion's path to profitability. In support of these objectives, we
are maintaining our sales and marketing focus which we believe positions Orion to our annual
revenue growth goal of 10-15%. We also identified a range of cost reduction initiatives that we
are implementing over the first six months of the fiscal year.

Specifically, we have identified approximately $3.5-$4.0 million in annualized costs to be
eliminated, representing a 12-13% reduction versus fiscal 2017 levels. One action already
completed is a reduction in total executive management and outside director compensation, which
we have cut by approximately 35% as compared to fiscal 2017 levels.

This initiative included compensation reductions as well as headcount reductions that we felt
were appropriate given the size of our business. We have also implemented other cost reductions
that will bring Orion's overhead more in line with our current revenue trajectory and should
accelerate our path to EBITDA (earnings before interest, taxes, depreciation and amortization)
breakeven (before taking into account non-recurring items), which we now believe is achievable
by the fourth quarter of fiscal 2018. As we previously disclosed, we will record non-recurring
charges between $1.5 and $2.0 million, in Q1 and Q2 of fiscal 2018, related to these cost
initiatives.

Though we have right-sized our cost structure, we are maintaining our go-to market strategy
which focuses on expanding our customer base and sales volume via a new network of sales
agents. To support this new focus, we are integrating the efforts of our traditional direct sales
team with our agent model. Our internal team will work to identify and refer new sales
opportunities into our national agent network, along with serving a few select large accounts.

This new model allows us to expand the reach of our ‘high-touch,’ in-market sales, customer
service and installation support. It also helps differentiate Orion from other lighting companies as
a partner that can directly support our agents’ success through business referrals and strong
support. As a result, our market reach and presence is substantially more robust, which supports
growth from untapped customers and markets.

We remain focused on the LED lighting retrofit market with a sales and marketing focus built
around energy efficiency, intelligent design, best in class service and rapid delivery enabled by
our high-quality, ‘made in the USA’ manufacturing.

We will continue to build on the core elements of our business strategy that have propelled rapid
growth in our LED lighting products, while embracing new opportunities for continued growth
and success. Overall, given the substantial scale of the LED lighting opportunity over the next
decade, we feel Orion is extremely well positioned for growth and improved financial

performance in fiscal 2018 and beyond.

Looking at last year’s performance, Orion made solid progress building our product leadership
and distribution reach in the energy-efficient LED lighting market.

Fiscal 2017 Highlights:

• Fiscal 2017 revenue rose 3.8% to $70.2 million, reflecting strong LED lighting sales growth
which more than offset the ongoing run-off of legacy product sales and an industry decline in
average selling prices for LED products.

• LED lighting sales continued to expand, rising 16.3% to $53.1 million compared to $45.7
million in fiscal 2016, and accounting for 81% of product sales in fiscal 2017, versus 71% in
fiscal 2016 and less than 5% four years ago.

$60.0

$50.0

$40.0

$30.0

$20.0

$10.0

LED Product Sales Growth

$53.1 M

$45.7 M

$30.8 M

$1.9 M

$4.8 M

FY13

FY14

FY15

FY16

FY17

• Orion transitioned its go-to-market strategy to an agency driven model from direct sales,
substantially increasing its market reach. The agent channel delivered 43% of fiscal 2017
product sales vs. 4% in fiscal 2016.

Orion ended fiscal 2017 with 42 sales agents reaching 95% of the U.S. and Canada, with plans
to expand to 50 agents by the end of our second quarter of fiscal 2018.

• Product Innovation – Orion introduced a range of new LED lighting products and new

features that deliver industry-leading performance for:
o Healthcare facilities seeking to optimize patient safety and improve the ambiance for
patient healing with recently developed technology that is delivered through lighting
fixtures;

o Food service facilities looking to protect exposed food from contamination/ fluorescent

or HID lamp breakages;

o Agribusinesses seeking to regulate temperature lighting and other, extreme temperature

environments; and

o Various customers in other verticals looking to minimize energy consumption, while

maximizing workflow activity and optimizing their facility energy usage.

New product launches included:

o Orion’s ISON™ Class Gen III LED High Bay lighting fixture, the first and only fixture
to break the 200 lumen per watt energy efficiency barrier. This product won several
awards, including Electrical Construction & Maintenance Magazine product of the year.
Also, our lower priced APOLLO Gen III LED High Bay Fixture was introduced and
delivers 165 lumens per watt (LPW), one of the most energy-efficient fixtures in its class.

o The APOLLO LED High Lumen High Bay Fixture which delivers 55,000 lumen

performance, maximizing high bay energy savings.

o Our HARRIS Generation II LED High Bay Fixtures – a value priced solution delivering

140 LPW illumination.

• Marquee customer wins in fiscal 2017 included Toyota, Ford, Winn-Dixie, Kroger, Costco,

Steelcase and the U.S. Navy.

• Gross Margin increased to 24.7% in fiscal 2017 compared to 23.6% in fiscal 2016. The

improvement reflected a range of production efficiency and sourcing initiatives in fiscal 2017
that were partially offset by $2.2 million in non-cash charges to cost of product sales in Q4 of
fiscal 2017 related to legacy inventory charges.

• Fiscal 2017 net loss improved to $12.3 million, or $0.44 per share, compared to a net loss of

$20.1 million, or $0.73 per share in fiscal 2016. Fiscal 2017 and 2016 results included
impairment charges of $0.3 million and $6.0 million, respectively.

• Strong year-end balance sheet, with shareholder equity of $35.5 million, or roughly $1.26
per share, including net working capital of $25.5 million and cash and cash equivalents of
$17.3 million.

Outlook:

In fiscal 2018 we are setting the stage to put Orion on a path to sustainable long-term growth and
profitability. Though we fully expect to see some variability in the timing and pace of the
business – due to economic and other factors outside our control – we remain highly confident in
the potential for our energy efficient LED lighting technology and controls to replace legacy
lighting systems. We remain encouraged by the momentum behind our products and the
substantial growth potential for LED lighting.

To capture the growing opportunity ahead of us, our focus going forward is to:

• Solidify our national agent sales network - developing the right relationships and properly

empowering and managing them to achieve the greatest possible productivity.

• Develop further sector-focused solutions to expand our reach and value proposition
within targeted market opportunities including motor vehicle factories, food production
facilities, healthcare facilities, etc.

• Maintain our technology, performance and customer satisfaction leadership in the LED

lighting industry.

Though we fell short of our full fiscal year 2017 revenue goal, I am very proud of all the work
that has been done to strengthen Orion and its foundation for future growth and success. Our
achievements were fueled by delivering products with industry-leading energy-efficiency and
performance, innovative engineering, design and ease of installation, rapid order-to-ship
performance, and the unsurpassed customer experience we provide throughout the process.

Orion’s progress this past year was the direct result of the vision, hard work, and continued
support from all our team members, who I thank on behalf of Orion’s management team and
Board of Directors.

Finally, I also thank our patient shareholders who have been supporting Orion as we navigate
very rapidly changing technology and industry trends. I am grateful for your support and
confident that Orion is on the right path to success in our business for all stakeholders.

Sincerely,

Mike Altschaefl
CEO and Board Chair
Orion Energy Systems, Inc.
July 18, 2017

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, 2017

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
The Nasdaq Stock Market LLC
(NASDAQ Captial Market)

The Nasdaq Stock Market LLC
(NASDAQ Captial Market)

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

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the

Act. Yes

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

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). Yes

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.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an "emerging growth company". See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company) Smaller reporting company
Emerging growth company

Accelerated filer

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes

The aggregate market value of shares of the Registrant’s common stock held by non-affiliates as of September 30, 2016, the last

business day of the Registrant’s most recently completed second fiscal quarter, was approximately $29,845,443.

As of May 31, 2017, there were 28,497,329 shares of the Registrant’s common stock outstanding.

______________________________

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 2017 Annual Meeting of Shareholders to be held on August 30, 2017 are

incorporated herein by reference in Part III of this Annual Report on Form 10-K.

ORION ENERGY SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2017

Table of Contents

Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Mine Safety Disclosures

PART I

PART II

Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity 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

PART III

Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
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

PART IV

Item 15 Exhibits and Financial Statement Schedules
Item 16 10-K Summary
Signatures

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements that are based on Orion Energy Systems, Inc's
("Orion", "we", "us", "our" and similar references) 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 under the current 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, including particularly the Risk Factors described under Part I. Item 1A. 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:

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our ability to achieve profitability and positive cash flows;
our levels of cash and our limited borrowing capacity under our revolving line of credit;
the availability of additional debt financing and/or equity capital;
our increasing emphasis on selling more of our products through third party distributors and sales agents, including our
ability to attract and retain effective third party distributors and sales agents to execute our sales model;
our ability to develop and participate in new product and technology offerings or applications in a cost effective and
timely manner;
our ability to manage the ongoing decreases in the average selling prices of our products as a result of competitive pressures
in the evolving light emitting diode ("LED") market;
our ability to manage our inventory and avoid inventory obsolescence in a rapidly evolving LED market;
our lack of major sources of recurring revenue and the potential consequences of the loss of one or more key customers or
suppliers, including key contacts at such customers;
our ability to adapt to increasing convergence in the LED market;
our ability to differentiate our products in a highly competitive market;
the deterioration of market conditions, including our dependence on customers' capital budgets for sales of products and
services;
our ability to complete and execute our strategy in a highly competitive market and our ability to respond successfully to
market competition;
our increasing reliance on third parties for the manufacture and development of products and product components;
our ability to successfully implement our strategy of focusing mainly on lighting solutions using LED technologies;
the market acceptance of our products and services;
our ability to realize expected cost savings from our cost reduction initiatives;
adverse developments with respect to litigation and other legal matters pursuant to which we are subject, including the
ongoing litigation initiated against us by a former Chief Executive Officer;
our failure to comply with the covenants in our revolving credit agreement;
our fluctuating quarterly results of operations as we focus on new LED technologies, implement cost reduction
initiatives and continue to focus investing in our third party distribution sales channel;
our ability to recruit, hire and retain talented individuals in all disciplines of our company;
our inability to timely and effectively remediate any material weakness in our internal controls and our failure to
maintain an effective system of internal control over financial reporting;
price fluctuations, shortages or interruptions of component supplies and raw materials used to manufacture our products;
our ability to defend our patent portfolio;
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; and
potential warranty claims in excess of our reserve estimates.

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.

ITEM 1.

BUSINESS

As used herein, unless otherwise expressly stated or the context otherwise requires, all references to “Orion,” “we,” “us,”

“our,” “Company” and similar references are to Orion Energy Systems, Inc. and its consolidated subsidiaries.

Overview

We are a leading designer and manufacturer of high-performance, energy-efficient light emitting diode ("LED") and

other lighting platforms. We research, develop, design, manufacture, market, sell and implement energy management systems
consisting primarily of high-performance, energy-efficient commercial and industrial interior and exterior lighting systems and
related services. Our products are targeted for applications in three primary market segments: commercial office and retail, area
lighting and industrial applications, although we do sell and install products into other markets. Virtually all of our sales occur
within North America.

Our lighting products consist primarily of LED lighting fixtures. Our principal customers include national accounts,

electrical distributors, Energy Service Companies ("ESCOs") and electrical contractors. Currently, substantially all of our
products are manufactured at our leased production facility location in Manitowoc, Wisconsin, although we source products and
components from third parties as the LED market continues to evolve and in order to provide versatility in our product
development.

Although we continue to sell some lighting products using our legacy high intensity fluorescent ("HIF") technology, we

believe the market for lighting products has shifted to LED lighting systems, and that the customer base for our legacy HIF
products will continue to decline. Compared to our legacy lighting systems, we believe that LED lighting technology allows
for better optical performance, significantly reduced maintenance costs due to performance longevity and reduced energy
consumption. Due to their size and flexibility in application, we also believe that LED lighting systems can address
opportunities for retrofit applications that cannot be satisfied by fluorescent or other legacy technologies. Our LED lighting
technologies have become the primary component of our revenue as we continue to strive to be a leader in the LED market.
Based on a July 2015 United States Department of Energy report, we estimate the potential North American LED retrofit
market within our key product categories to be approximately 1.1 billion lighting fixtures. We plan to continue to primarily
focus on developing and selling innovative LED products.

We do not have long-term contracts with our customers that provide us with recurring revenue from period to period and

we typically generate substantially all of our revenue from sales of lighting systems and related services to governmental,
commercial and industrial customers on a project by project basis. We typically sell our lighting systems in replacement of our
customers’ existing fixtures. We call this replacement process a “retrofit.” We frequently engage our customer’s existing
electrical contractor to provide installation and project management services. We also sell our lighting systems on a wholesale
basis, principally to electrical contractors, electrical distributors and ESCOs to sell to their own customer bases.

Our ability to achieve our desired growth and profitability depends on our ability to effectively engage distribution and
sales agents, develop recurring revenue streams, and improve our marketing, new product development, project management,
margin enhancement and operating expense management, as well as other factors. In addition, the gross margins of our
products can vary significantly depending upon the types of products we sell, with margins ranging from 15% to 50%. Thus, a
change in the total mix of our sales toward higher or lower margin products can cause our profitability to fluctuate from period
to period.

In addition to selling directly to electrical distribution customers, we sell our lighting products and services to national
accounts. We now have relationships with more than 200 resellers and distributors that are represented by a North American
network of independent lighting agencies. We intend to continue to selectively build our sales network in the future.

Recent Developments

On May 25, 2017, our Board of Directors restructured our management team. As part of this restructuring, our Chief Executive
Officer, John Scribante, left the Company and Mike Altschaefl, our current Board Chair, assumed the role of Chief Executive
Officer. In addition, Scott Green, our Executive Vice President - Sales, became our new Chief Operating Officer, with ongoing
primary responsibility for improving our revenue generation. Mike Potts and Marc Meade, our current Executive Vice Presidents,
remained in their positions and were assigned primary responsibility for substantially reducing our cost structure and for streamlining
operations. Bill Hull remained in his position as Chief Financial Officer.

Our market and product strategy are not changing. We are renewing our focus on execution, including a reduction in our
cost structure. Our restructured management team has developed a plan to achieve positive earnings before interest, taxes,
depreciation, and amortization, or EBITDA, no later than the fourth quarter of fiscal 2018 through the implementation of the
following cost cutting measures:

• Constant monitoring and management of manufacturing overhead costs to ensure we continue to deliver strong gross

margin amid an increasingly competitive market landscape;

• Reducing staff positions through a targeted reduction in existing headcount;
• Reductions in the total compensation of our executive management and board of directors;
• Reductions in operating expenses, including better control of legal spending, elimination of our racing program and

removal of various non-critical back office programs and initiatives.

We believe the above cost reduction plan, coupled with our renewed focus on sales channel execution, will help to drive

revenue growth and accelerate our path to profitability.

Reportable Segments

Reportable segments are components of an entity that have separate financial data that the entity's chief operating decision
maker ("CODM") regularly reviews when allocating resources and assessing performance. Our CODM is our chief executive
officer. Orion has three reportable segments: Orion U.S. Markets Division ("USM"), Orion Engineered Systems Division ("OES"),
and Orion Distribution Services Division ("ODS").

Orion U.S. Markets Division

Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets.
USM customers include ESCOs and electrical contractors. During fiscal 2017, a significant portion of the historic sales of this
division migrated to distribution channel sales as a result of the implementation of our distribution sales strategy. The migrated
sales are included in Orion's ODS Division. We expect this migration to continue during fiscal 2018.

Orion Engineered Systems Division

Our OES segment develops and sells lighting products and provides construction and engineering services for Orion's

commercial lighting and energy management systems. OES provides turnkey solutions for large national accounts,
governments, municipalities and schools.

Orion Distribution Services Division

Our ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of
broadline North American distributors. This segment expanded in fiscal 2017 as a result of our focus on expanding the amount
of our sales through distributors as a result of the implementation of our distribution sales strategy. This expansion included the
migration of customers from direct sales previously included in our USM division. We expect this migration to continue during
fiscal 2018.

For financial results by reportable segment, please refer to Note 19, "Segment Data" in our consolidated financial statements
included in Item 8. of this Annual Report.

Our Market Opportunity

We are primarily focused on providing commercial and industrial facilities lighting retrofit solutions in North America using
solid-state LED technology. Although we continue to sell some lighting products using our legacy HIF technology, we believe the
market for lighting products has shifted to LED lighting systems, and thus the customer base for our legacy HIF products will
continue to decline. Compared to our legacy lighting systems, LED lighting technology allows for better optical performance,
significantly reduced maintenance costs due to performance longevity and reduced energy consumption. Due to their size and
flexibility in application we also believe that LED lighting systems can address opportunities for retrofit applications that cannot
be satisfied by fluorescent or other legacy technologies.

Our products deliver energy savings and efficiency gains to our commercial and industrial customers without compromising
their quantity or quality of light. We estimate that our energy management systems reduce our customers’ lighting-related electricity
costs by approximately 50% to 80%, while increasing their quantity of light by approximately 50% and improving lighting quality
when replacing traditional fixtures. Our customers typically realize a one to three-year payback period from electricity cost savings
generated by our lighting systems without considering utility incentives or government subsidies. We have sold and installed our
lighting products in over 14,665 facilities across North America, representing approximately 2.2 billion square feet of commercial
and industrial building space, including sales to 191 of the Fortune 500 companies.

Energy-efficient lighting systems are cost-effective and environmentally responsible solutions allowing end users to reduce
operating expenses. Based on a July 2015 report published by the United States Department of Energy, or DOE, we estimate the
potential North American LED retrofit market within our primary markets to be approximately 1.1 billion lighting fixtures. Our
primary markets are: commercial office and retail, area lighting and industrial applications.

Commercial office and retail. Our commercial office and retail market includes commercial office buildings, retail store
fronts, government offices, schools, hospitals and other buildings with traditional 10 to 12 foot ceiling heights. The DOE estimates
that there are approximately 987 million office troffer fixtures within the United States, which is a rectangular light fixture that
fits into a modular dropped ceiling grid. We believe we have the opportunity to increase our revenue by serving this market with
our LED Door Retrofit, or LDRTM, lighting solutions.

Area lighting. Our market for area lighting includes parking garages, surface lots, automobile dealerships and gas service
stations. The DOE estimates that there are approximately 66 million area lighting fixtures within the United States and an additional
45 million roadway lighting fixtures in the United States.

Industrial applications. Our market for industrial facilities includes manufacturing facilities, distribution and warehouse
facilities, government buildings and agricultural buildings. These facilities typically contain high bay lighting fixtures. The DOE
estimates that there are approximately 139 million low/high bay fixtures within the United States. We estimate that approximately
50% of this market still utilizes inefficient high intensity discharge ("HID") lighting technologies.

Commercial and industrial facilities in the United States employ a variety of lighting technologies, including HID, traditional
fluorescents, LED and incandescent lighting fixtures. Our lighting systems typically replace less efficient HID and HIF fixtures.
According to the Electric Power Research Institute, or EPRI, HID fixtures only convert approximately 36% of the energy they
consume into visible light. We estimate our lighting systems generally reduce lighting-related electricity costs by approximately
50% to 80% compared to HID fixtures, while increasing the quantity of light by approximately 50% and improving lighting quality.

We believe that utilities within the United States recognize the importance of energy efficiency as an economical means to
manage capacity constraints and as a low-cost alternative when compared to the construction costs of building new power plants.
Accordingly, many of these utilities are continually focused on demand reduction through energy efficiency. According to our
research of individual state and utility programs, 50 states, through legislation, regulation or voluntary action, have seen their
utilities design and fund programs that promote or deliver energy efficiency. In fact, as of May 31, 2017, only Alaska and Kansas
do not currently have some form of utility or state energy efficiency programs for any of their commercial or industrial customers.
Our products are not solely dependent upon these incentive programs, but we do believe that these incentive programs provide an
important benefit as our customers evaluate their out-of-pocket cash investments.

Our Solution

50/50 Value Proposition. We estimate our lighting systems generally reduce lighting-related electricity costs by approximately
50% to 80% compared to legacy fixtures, while increasing the quantity of light by approximately 50% and improving lighting
quality. In the commercial office and retail markets, we estimate our lighting systems generally reduce electricity costs by 50%.
From December 1, 2001 through March 31, 2017, we believe that the use of LED and HIF fixtures has saved our customers $4.2
billion in electricity costs and reduced their energy consumption by 54.6 billion kWh.

Multi-Facility Roll-Out Capability. We offer our customers a single source, turnkey 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 commercial and industrial facility 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 and HIF fixtures, our customers typically realize a
one to three year payback period on our lighting systems. These returns are achieved without considering utility incentives or
government subsidies (although subsidies and incentives are continually being made available to our customers and us in connection
with the installation of our systems that further shorten payback periods).

Easy Installation, Implementation and Maintenance. Most of our fixtures are designed with a lightweight construction and
modular plug-and-play architecture that allows for fast and easy installation and facilitates maintenance, which allows for easy
integration of other components of our energy management system. Our office LED LDRTM products are designed to allow for
a fast and easy installation without disrupting the ceiling space or the office workspace. 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 Offerings. We are committed to continue developing LED product offerings in all of the markets we
serve. Our third generation of ISON® class of LED interior fixture delivers a market leading 214 lumens per watt. This advancement
means our customers can get more light with less energy, and sometimes fewer fixtures, than with any other product on the market.
In fiscal 2017, we launched a variety of new products, features and functionality targeting healthcare, food service, high and low
temperature environments and other market segments. See "Products and Services" below.

Environmental Benefits. By allowing for the permanent reduction of electricity consumption, our energy management systems
reduce indirect CO2 emissions that are a negative by-product of energy generation. We estimate that one of our LED lighting
systems, when replacing a standard HID fixture, displaces 0.352 kW of electricity, which, based on information provided by the

EPA, reduces a customer’s indirect CO2 emissions by approximately 1.5 tons per year. Based on these figures, we estimate that
the use of our products has reduced indirect CO2 emissions by approximately 34.1 million tons through March 31, 2017.

Our Competitive Strengths

Compelling Value Proposition. By permanently reducing lighting-related electricity usage, our systems enable our customers
to achieve significant cost savings, without compromising the quantity or quality of light in their facilities. As a result, our products
offer our customers a rapid return on their investment, without relying on government subsidies or utility incentives. We also offer
our customers a single source solution whereby we manage and are responsible for the entire project, including installation across
their entire North American real estate portfolio. Our ability to offer such a turnkey, national solution allows us to deliver energy
reductions and cost savings to our customers in timely, orderly and planned multi-facility roll-outs.

Large and Growing Customer Base. We have developed a large and growing national customer base, and have installed our
products in more than 14,665 commercial and industrial facilities across North America. 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. We intend to leverage our expertise in managing
projects across multiple facilities within our new LED product markets, which now include new customer opportunities with banks,
insurance companies, hospitals, fast food chains, retail storefronts, grocery and pharmacies.

Innovative Technology. We have developed a portfolio of 78 United States patents primarily covering various elements of
our products. We believe these innovations allow our products to produce more light output per unit of input energy compared to
our competition. We also have 25 patents pending that primarily cover various elements of our newly developed LED products
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 their North American
facility footprints. Our demonstrated ability to innovate provides us with significant competitive advantages. Our lighting products
offer significantly more light output as measured in foot-candles of light delivered per watt of electricity consumed when compared
to HID or traditional fluorescent fixtures.

Expanded Sales and Distribution Network. In addition to selling directly to electrical distribution customers, we sell our
lighting products and services to national accounts. We now have relationships with more than 200 resellers and distributors that
are represented by a North American network of independent lighting agencies. At the end of fiscal 2017, we had 42 different
lighting agencies representing us in approximately 95% of the United States and Canada and parts of the Caribbean and Latin
America, with a goal of roughly 50 representative agencies by the end of fiscal 2018. We intend to continue to selectively build
our sales network in the future, with a focus on geographic regions where we do not currently have a strong sales presence.

Our Growth Strategies

Emphasize and Expand LED Product and Market. We believe the market for lighting products has experienced a significant
technology shift to LED lighting systems. Accordingly, our primary focus is on our lighting and retrofit solutions using LED
technologies. We have expanded our role and product offerings in the LED marketplace, and plan to increase sales of LED fixtures
for commercial office and retail applications, schools, hospitals and government buildings, freezer and cold storage applications,
exterior area applications, as well as high bay interior applications.

Expanded Sales Network and Salesforce. In addition to selling directly to national account customers, we are increasingly
emphasizing selling our lighting products and services to end users through electrical distributors and sales agents. During fiscal
2016, we engaged more than 18 manufacturer representative agencies to expand our reach with the broadline distributors and
further enhance our ability to grow revenue. During fiscal 2017, we engaged an additional 24 manufacturer representative agencies,
culminating the year at 42 different lighting agencies covering approximately 95% of the United States and Canada and parts of
the Caribbean and Latin America. We now have relationships with more than 200 resellers and distributors that are represented
by a North American network of independent lighting agencies. We continue to expand our sales network and we are also maintaining
our in-market sales force which generates revenue through our independent channels.

Leverage Existing Customer Base. Over the last several years, we have focused on expanding our relationships with our
existing customers by transitioning from single-site facility implementations to comprehensive enterprise-wide rollouts of our
lighting products. We also intend to leverage our large installed base of HIF lighting systems to implement all aspects of our energy
management system, particularly LED lighting products, wireless controls, cloud-based power data analysis and storage capabilities
for our existing customers.

Continue to Improve Operational Efficiencies. We are focused on continually improving the efficiency of our operations to

increase the profitability of our business and allow us to continue to deliver our compelling value proposition.

Create a Culture to Support Growth. We are focused on establishing a corporate culture that embraces high expectations

and performance to continue to drive innovation, efficiency and deliver superior results to our customers.

Products and Services

Our recent primary focus has been, and will continue to be, emphasizing our LED lighting fixtures. Currently, substantially
all of our products are manufactured at our leased production facility location in Manitowoc, Wisconsin, although we also source
products and components from third parties as the LED market continues to evolve in order to have versatility in our product
development. We are focused on researching, developing and/or acquiring new innovative LED products and technologies for
the retrofit markets, such as the LED door retrofit. We plan to focus our efforts on developing creative new LED retrofit products
in order to offer our customers a variety of integrated energy management services, such as system design, project management
and installation.

Products

The following is a description of our primary products:

The LED Troffer Door Retrofit (LDRTM): The LDRTM is designed to replace existing 4 foot by 2 foot and 2 foot by 2 foot
fluorescent troffers that are frequently found in office or retail grid ceilings. Our LDRTM product is unique in that the LED optics
and electronics are housed within the doorframe that allows for installation of the product in approximately one to two minutes.
The product also provides reduced maintenance expenses based upon improved LED chips.

Interior LED High Bay Fixtures: Our LED interior high bay lighting products consist of our Harris high bay, ApolloTM high
bay and ISON® high bay products. Our ISON® class of LED interior fixture offers a full package of premium features, including
low total cost of ownership, optics that currently exceed competitors in terms of lumen package, delivered light, modularity and
advanced thermal management. Our third generation of ISON® class of LED interior fixture delivers a market leading 214 lumens
per watt. This advancement means our customers can get more light with less energy, and sometimes fewer fixtures, than with
any other product on the market. Our ApolloTM class of LED interior fixtures is designed for new construction and retrofit projects
where initial cost is the largest factor in the purchase decision. Our Harris high bay is ideal for customers seeking a cost-effective
solution to deliver energy savings and maintenance reductions. In addition, our LED interior lighting products are lightweight
and easy to handle, which further reduces installation and maintenance costs and helps to build brand loyalty with electrical
contractors and installers.

Smart Lighting Controls. We offer a broad array of smart building control systems that have either been developed by us
under the InteLite brand, or procured from third parties. These control systems provide both lighting control options (such as
occupancy, daylight, or schedule control) and data intelligence capabilities for building managers to log, monitor, and analyze use
of space, energy savings, and provide physical security of the space.

Other Products. We also offer our customers a variety of other LED, HIF, and induction fixtures to address their lighting
and energy management needs, including fixtures designed for agribusinesses, parking lots, roadways, retail, mezzanine, outdoor
applications and private label resale.

Our warranty policy generally provides for a limited one-year warranty on our HIF products and a limited five-year warranty
on our LED products, although we do offer warranties ranging up to 10 years for certain LED products. Ballasts, lamps, drivers,
LED chips and other electrical components are excluded from our standard warranty as they are covered by separate warranties
offered by the original equipment manufacturers. We coordinate and process customer warranty inquiries and claims, including
inquiries and claims relating to ballast and lamp components, through our customer service department.

Services

We provide 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, or SFV, during which we perform a test implementation of our energy management system at a
customer’s facility;

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 customers' 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 us 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, for our products, 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.

We also provide other services that comprise a small amount of our revenue. These services primarily include management
and control of power quality and remote monitoring and control of our installed systems. We also sell and distribute replacement
lamps and fixture components into the after-market.

Our Customers

We primarily target commercial, institutional and industrial customers who have warehousing, manufacturing, and office
facilities. As of March 31, 2017, we have installed our products in 14,665 commercial and industrial facilities across North
America. In fiscal 2017 and fiscal 2016, there was no single customer that accounted for more than 10% of our total revenue. In
fiscal 2015 we had one customer that accounted for 12% of our total revenue.

Sales and Marketing

We believe that partnering with an agency sales force focused on providing technical product and sales support to our
customers provides us with a greater potential for revenue growth. We sell our products in one of two ways: (i) directly to
commercial and industrial customers using a systematic multi-step process that focuses on our value proposition and provides our
sales force with a specific protocol for working with our customers from the point of lead generation through delivery of our
products and services and (ii) indirectly through independent sales agencies and electrical distributors. Our ODS segment focuses
on developing and expanding customer relationships with independent manufacturer’s agents and broadline distributors. During
fiscal 2017 and fiscal 2016, we engaged more than 42 manufacturer representative agencies to expand our reach with broadline
distributors and further enhance our ability to increase our revenue. We attempt to leverage the customer relationships of these
distributors to further extend the geographic scope of our selling efforts. We work cooperatively with our indirect channels through
participation in national trade organizations and by providing training on our sales methodologies. We intend to continue to
selectively expand our independent sales agent network, focusing on those geographic regions where we lack sufficient sales
coverage.

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. 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, social media and other lead generation and brand-building initiatives.

Competition

The market for energy-efficient lighting products and services is fragmented. We face strong competition primarily from
manufacturers and distributors of lighting products and services as well as electrical contractors. We compete primarily on the
basis of technology, cost, performance, quality, customer experience, energy efficiency, customer service and marketing support.

There are a number of lighting fixture manufacturers that sell LED and HIF products that compete with our lighting product
lines. Lighting companies such as Acuity Brands, Inc., Carmanah Technology Corporation, Energy Focus, Inc., Eaton Corporation
plc, Cree, Inc., LSI Industries, Inc., Revolution Lighting Technologies Inc., TCP International Holdings, Inc., and Hubbell
Incorporated are some of our main competitors within the commercial office, retail and industrial markets.

We also face competition from companies who provide energy management services. Some of these competitors, such as
Ameresco, Inc., Johnson Controls, Inc. and Honeywell International, provide basic systems and controls designed to further energy
efficiency.

Intellectual Property

As of March 31, 2017, we had been issued 78 United States patents and have applied for 25 additional United States patents.
The patented and patent pending technologies cover various innovative elements of our products, including our HIF and LED
fixtures. Our patented LDRTM product allows for a significantly quicker installation when compared to competitor's commercial
office lighting products. Our smart lighting controls allow our lighting fixtures to selectively provide a targeted amount of light
where and when it is needed most.

We believe that our patent portfolio as a whole is material to our business. We also believe that our patents covering our
ability to manage the thermal and optical performance of our LED and HIF lighting products are material to our business, and that
the loss of these patents could significantly and adversely affect our business, operating results and prospects.

Backlog

Backlog represents the amount of revenue that we expect to realize in the future as a result of firm, committed orders. Backlog
as of March 31, 2017 and March 31, 2016 totaled $7,300,000 and $5,600,000, respectively. We generally expect our backlog to
become revenue within one year.

Manufacturing and Distribution

We lease approximately 197,000 square foot manufacturing and distribution facility located in Manitowoc, Wisconsin, where
substantially all of our products are manufactured. As part of our business initiatives to adapt to the rapidly evolving LED market
and to continue to enhance our competitiveness, we are considering implementing significant changes to our manufacturing
production and assembly facility and processes.

We generally maintain a significant supply of raw material and purchased and manufactured component inventory. We
contract with transportation companies to ship our products and 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 LED products and technologies and enhancing existing
products. The products, technologies and services we are developing are focused on increasing end user energy efficiency and
enhancing lighting output. During fiscal 2014, we developed and commercialized the LDRTM product obtained through our
acquisition of Harris Manufacturing. Over the last three fiscal years, we have focused our development on additional LED products,
resulting in our development and commercialization of several new suites of LED interior high bay products.

Our research and development expenditures were $2,004,000, $1,668,000 and $2,554,000 for fiscal years 2017, 2016 and

2015, respectively.

During fiscal 2016, we opened an innovation hub in Chicago, Illinois to support the development and design of new LED
products. We believe that this location is in close proximity to highly regarded engineering and business schools and will offer us
a greater supply of technical talent to help us develop new LED products in the future. We also operate research and development
lab and test facilities in our Jacksonville, Florida and Manitowoc, Wisconsin locations.

Regulatory Matters

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.orionlighting.com. 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 free of charge 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, 2017, we had 181 full-time and 83 temporary employees, of which 150 work in manufacturing. 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.

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 following 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 operations and future growth prospects and
could cause the trading price of our common stock to decline.

We have had a history of losses and we may be unable to achieve profitability or positive cash flows in the future.

We have experienced net losses for the past five fiscal years. Generating net income and positive cash flows in the future

will depend on our ability to successfully complete and execute our strategic plan and our recently announced cost reduction
initiatives. There is no guarantee that we will be able to achieve profitability or positive cash flows in the future. Our inability
to successfully achieve profitability and positive cash flows may result in us experiencing a serious liquidity deficiency and
resulting in material adverse consequences that could threaten our viability.

We may not be able to obtain equity capital or debt financing necessary to fund our ongoing operations, effectively pursue
our strategy and sustain our growth initiatives.

Our existing liquidity and capital resources may not be sufficient to allow us to fund our ongoing operations, effectively

pursue our strategy or sustain our growth initiatives. As of March 31, 2017, we had $17,307,000 of cash and
approximately $6,629,000 of outstanding borrowings and only $203,000 of remaining borrowing capacity available under our
revolving credit facility. If we require additional capital resources, we may not be able to obtain sufficient equity capital and/or
debt financing to allow us to continue our normal course of operations or we may not be able to obtain such equity capital or
debt financing on acceptable terms or conditions. Factors affecting the availability to us of equity capital or debt financing on
acceptable terms and conditions include:

• The price, volatility and trading volume and history of our common stock.
• Our current and future financial results and position.
• The market’s view of our company, 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.

Our inability to obtain the equity capital or debt financing necessary to fund our ongoing operations or pursue our
strategies could force us to scale back our operations or our sales initiatives due to the high working capital costs associated
with an increase in the sales of our products from existing levels. If we are unable to pursue our strategy and sustain our growth
initiatives, our business and operating results will be materially adversely affected.

We are increasing our emphasis on indirect distribution channels to sell our products and services. If we are unable to
attract, incentivize and retain our third-party distributors and sales agents, our revenues could decline and our costs
could increase.

We have significantly expanded the number of our manufacturer representative agencies that sell our products through
distributors, many of which are not exclusive, which means that these sales agents and distributors may sell other third-party
products and services in direct competition with us. Since many of our competitors use sales agents and distributors to sell their
products and services, competition for such agents and distributors is intense and may adversely affect our product pricing and
gross margins. Additionally, due to mismanagement, industry trends, macro-economic developments, or other reasons, our sales
agents and distributors may be unable to effectively sell our products at the levels desired or anticipated. In addition, we have
historically relied on direct sales to sell our products, which were often made in competition with sales agents and distributors. In
order to attract and form lasting partnerships with sales agents and distributors in the future, we will be required to overcome our
historical perception as a direct sales competitor. As a result, we may have difficulty attracting and retaining sales agents and
distributors and any inability to do so could have a negative effect on our ability to attract and obtain customers, which could have
an adverse impact on our business.

The success of our business depends upon our adaptation to the changing market conditions in the lighting industry and
on market acceptance of our lighting retrofit solutions using new LED technologies.

The market for lighting products has recently experienced a significant technology shift to LED lighting systems. As a result,
we are focusing our business primarily on providing lighting retrofit solutions using new LED technologies in lieu of traditional
HIF lighting upon which our business has historically relied.

As a result, our future success depends significantly upon the adoption rate of LED products within our primary markets and
our ability to participate in this ongoing market trend. To be an effective participant in this growing LED market opportunity, we
must keep up with the evolution of LED technology, which has been moving at a fast pace. We may be unable to successfully

develop and market new LED products or services that keep pace with technological or industry changes, differentiate ourselves
from our competition, satisfy changes in customer demands or comply with present or emerging government and industry regulations
and technology standards. The development and introduction of new LED products may result in increased warranty expenses
and other new product introduction expenses. In addition, we will likely continue to incur substantial costs to research and develop
new LED products, which will increase our expenses, without guarantee that our new products and services will be commercially
viable. We may also spend time and resources to develop and release new LED products only to discover that a competitor has
also introduced similar new products with superior performance. Moreover, if new sources of lighting are developed, our current
products and technologies could become less competitive or obsolete, which could result in reduced revenue, reduced earnings or
increased losses and/or inventory and other impairment charges. Additionally, as the lighting retrofit market continues to shift to
LED lighting products from HIF and other traditional lighting products, customer purchasing decisions have been delayed as they
evaluate the relative advantages and disadvantages of the lighting retrofit product alternatives and wait for further decreases in the
price of LED lighting products. These circumstances have led, and may continue to lead, to reduced revenue for us in the periods
affected.

As we attempt to adapt our business organization to this quickly evolving market, we have been managing through significant
change in our vendor supply chain as LED product portfolio and our product revenue continue to increase and we place most of
our focus on this product line. We currently believe that our continuing efforts to negotiate further lower material input costs will
help maintain or improve our LED product gross margins. However, we may not be able to realize the gross margin benefits in
the amounts or on the timetable anticipated and we may experience higher warranty expenses in the future as we implement our
manufacturing and assembly process changes. It is also possible that, as we continue to focus our sales efforts on our LED product
lines, we may increase our risk of inventory obsolescence for our legacy lighting product lines or even for outmoded LED products.

Finally, in connection with our primary focus on selling our LED products, we expect our results of operations to continue
to fluctuate from quarter to quarter as customers may continue to delay purchasing decisions as they evaluate their return on
investment from purchasing new LED products compared to alternative lighting solutions, the pricing of LED products continues
to fall and LED products continue to gain more widespread customer acceptance. Similarly, these circumstances have impacted,
and may continue to adversely impact, our product gross margins and our profitability from quarter to quarter.

If we are unable to achieve market acceptance of our lighting retrofit solutions using new LED technologies or realize the
expected benefits from our emphasis on promoting our LED technologies, our results of operations and financial condition will
likely be materially adversely affected.

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 with the expanding availability of LED products,
HID technology, as well as HIF products and older fluorescent technology in the lighting systems retrofit market.

Many of our competitors are better capitalized than we are, have strong customer relationships, greater name recognition,
and more extensive engineering, manufacturing, sales and marketing capabilities. In addition, the LED market has seen increased
convergence in recent years, resulting in our competition gaining increased market share and resources. 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 average selling 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.

The success of our LED lighting retrofit solutions depend, in part, on our ability to claim market share ahead of our
competitors.

Participants in the LED market who are able to quickly establish customer relationships and achieve market penetration are
likely to gain a competitive advantage as the lighting retrofit solutions offered by us and our competitors generally have a product
life of several years following installation. If we are unable to establish customer relationships and achieve market penetration in
the LED market in a timely manner, we may lose the opportunity to market our LED products and services to significant portions
of the lighting systems retrofit market for several years and may be at a disadvantage in securing future business opportunities
from customers that have previously established relationships with one or more of our competitors. These circumstances could
reduce our revenue and profitability, which could have a material adverse effect on our results of operations and financial condition.

We do not have major sources of recurring revenue and depend upon a limited number of customers in any given period
to generate a substantial portion of our revenue. The loss of significant customers or a major customer could have an
adverse effect on our operations.

We do not have long-term contracts with our customers that provide us with recurring revenue from period to period. As a
result, we generate a substantial portion of our revenue by securing large retrofit and multi-facility roll-out projects from new
and existing 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
33%, 37%, and 36% respectively, of our total revenue for fiscal 2017, 2016 and 2015. In fiscal 2015, our top customer
accounted for 12% of our total revenue. In fiscal 2017 and fiscal 2016, there was no single customer that accounted for more
than 10% of our revenue. While we are making efforts to increase our sources of recurring revenue, we expect large retrofit and
rollout projects to continue to remain a significant component of our total revenue. Additionally, commercial office lighting
retrofits provide for single large project opportunities. As a result, we may continue to experience customer concentration in
future periods. The loss of, or substantial reduction in sales to, any of our significant customers, or a major customer, could
have a material adverse effect on our results of operations in any given future period.

Our financial performance is dependent on our ability to execute on our strategy, including implementing cost reduction
initiatives, and achieve profitability.

Our ability to achieve our desired growth and profitability depends on our ability to effectively engage distribution and sales
agents, develop recurring revenue streams, and improve our marketing, new product development, project management, margin
enhancement and operating expense management, as well as other factors. If we are unable to successfully execute in any of these
areas or on our growth and profitability strategy, then our business and financial performance will likely be materially adversely
affected.

In addition, the gross margins of our products can vary significantly, with margins ranging from 15% to 50%. While we
continue to implement our strategy of transitioning to higher-margin products, a change in the total mix of our sales toward lower
margin products, a decrease in the margins on our products as a result of competitive pressures driving down the average selling
price of our products, lower sales volumes and promotional programs to increase sales volumes could reduce our profitability and
result in a material adverse effect on our business and financial performance.

We increasingly rely on third-party manufacturers for the manufacture and development of our products and product
components.

We have increased our utilization of third-party manufacturers for the manufacture and development of our products and

product components. Our business, prospects, results of operations, financial condition or cash flows could be materially
adversely affected if our manufacturers were to experience problems with product quality, credit or liquidity issues, or
disruptions or delays in the manufacturing process or delivery of the finished products and components or the raw materials
used to make such products and components.

Adverse conditions in the global economy have negatively impacted, and could continue to negatively impact, our
customers, suppliers and business.

Global economic and political uncertainty has led many customers to adopt strategies for conserving cash, including limits
on capital spending. Our 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. Continued weak economic conditions have adversely affected our customers’ capital budgets, purchasing decisions and
facilities managers and, therefore, have adversely affected our results of operations. The return to a 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. Our business and results of operations will
continue to be adversely affected to the extent these adverse economic conditions continue to affect our customers’ purchasing
decisions.

The success of our business depends upon market acceptance of our energy management products and services.

Our future success depends on continued commercial acceptance of our energy management products and services. If we
are unable to convince current and potential customers of the advantages of our lighting systems and energy management products
and services, then our ability to sell our 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
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.

Our inability to attract and retain key employees, our reseller network or manufacturer representative agencies could
adversely affect our operations and our ability to execute on our operating plan and growth strategy.

We rely upon the knowledge, experience and skills of key employees throughout our organization, particularly our senior
management team and our sales group that require technical knowledge or contacts in, and knowledge of, the industry. In addition,
our ability to attract talented new employees, particularly in our sales group, is also critical to our success. We also depend on our
distribution channels and network of manufacturer representative agencies. If we are unable to attract and retain key employees,
resellers, and manufacturer representative agencies because of competition or, in the case of employees, inadequate compensation
or other factors, our operations and our ability to execute our operating plan could be adversely affected.

We are subject to litigation and other legal matters that could result in charges against our income or strain our resources
and distract our management, which could have a material adverse effect on our business, financial condition, results of
operations, cash flows or reputation.

We are involved in a variety of claims, lawsuits and other disputes. These suits concern a variety of issues, including employee-
related matters and contract disputes, as well as the ongoing lawsuit against us by a former Chief Executive Officer. It is not feasible
to predict the outcome of these pending suits and other matters, and the ultimate resolution of these matters, as well as future
potential lawsuits, could result in liabilities, fines, significant expenses, distraction of management and other issues that could
have a material adverse effect on our business, financial condition, results of operations, cash flows or reputation.

Increased employee turnover could negatively impact our business.

We have, from time to time, experienced increased employee turnover. The increased turnover has resulted in the loss of
numerous long-term employees, along with their institutional knowledge and expertise, and the reallocation of certain employment
responsibilities, all of which could adversely affect operational efficiencies, employee performance and retention. Such turnover
has also placed a significant burden on our continuing employees, has resulted in higher recruiting expenses as we have sought to
recruit and train employees, and introduced increased instability in our operations as responsibilities were reallocated to new or
different employees. To the extent that we are unable to effectively reallocate employee responsibilities, retain key employees
and reduce employee turnover, our operations and our ability to execute our operating plan could be adversely affected.

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,
copper, certain rare earth minerals, electronic drivers, chips, 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. In the past, 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 occur, our results of operations and financial condition could be materially adversely affected.

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 virtually all 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.

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 employee and 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
upon our patents, or that we will have adequate resources to enforce our patents. Effective protection of our United States patents
may be unavailable or limited in jurisdictions outside the United States, as the intellectual property laws of foreign countries
sometimes offer less protection or have onerous filing requirements. In addition, 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’s 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.
Also, 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 upon
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 are subject to financial and operating covenants in our credit agreement and any failure to comply with such covenants,
or obtain waivers in the event of non-compliance, could limit our borrowing availability under the credit agreement,
resulting in our being unable to borrow under our credit agreement and materially adversely impact our liquidity.

Our credit agreement with Wells Fargo Bank, National Association contains provisions that may limit our future borrowing
availability, and may from time to time require us to maintain a minimum fixed charge coverage ratio. The credit agreement also
contains other customary covenants, including certain restrictions on our ability to incur additional indebtedness, consolidate or
merge, enter into acquisitions, guarantee obligations of third parties, make loans or advances, declare or pay any dividend or
distribution on our stock, redeem or repurchase shares of our stock, or pledge or dispose of assets.

There can be no assurance that we will be able to comply with the financial and other covenants in our credit agreement. Our
failure to comply with these covenants could cause us to be unable to borrow under the credit 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 credit agreement, which would require us to pay all amounts then outstanding. Such an event could materially adversely
affect our financial condition and liquidity. Additionally, such events of non-compliance could impact the terms of any additional
borrowings and/or any credit renewal terms. Any failure to comply with such covenants 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.

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. 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:

• 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.

If our information technology systems security measures are breached or fail, our products may be perceived as not being
secure, customers may curtail or stop buying our products, we may incur significant legal and financial exposure, our
business, results of operations and financial condition could be materially adversely affected.

Our information technology systems involve the storage of customers’ personal and proprietary information in our equipment,
networks and corporate systems. Security breaches expose us to a risk of loss of this information, litigation and increased costs
for security measures, loss of revenue, damage to our reputation and potential liability. Security breaches or unauthorized access
may in the future result in a combination of significant legal and financial exposure, increased remediation and other costs, damage
to our reputation and a loss of confidence in the security of our products, services and networks that could have an adverse effect
upon our business. We take steps to prevent unauthorized access to our corporate systems, however, because the techniques used
to obtain unauthorized access, disable or sabatoge systems change frequently or may be designed to remain dormant until a
triggering event, we may be unable to anticipate these techniques or implement adequate preventative measures. In addition,
hardware, software or applications we procure from third parties may contain defects in design or manufacture or other problems
that could unexpectedly compromise network and data security.

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 which may have a material adverse effect on our
results of operations, financial condition, cash flows or reputation.

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 that could adversely affect our results of operations or financial condition.

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 securities
litigation.

Our quarterly revenue and operating results have fluctuated in the past and will likely vary from quarter to quarter in the
future. The results of one quarter are not 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 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 net operating loss carry-forwards provide a future benefit only if we are profitable and may be subject to limitation
based upon ownership changes.

We have significant federal net operating loss carry-forwards and state net operating loss carry-forwards. While our federal
and state net operating loss carry-forwards are fully reserved for, if we are unable to return to and maintain profitability, we may
not be able to fully utilize these tax benefits. Furthermore, 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 carry-forwards 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 carry-forwards, but we do not believe the ownership change affects the use of the full amount of our net
operating loss carry-forwards. As a result, our ability to use our net operating loss carry-forwards 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.

Our failure to establish and maintain effective internal controls over financial reporting could harm our business and
financial results.

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal
control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for
external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent
limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect
a misstatement of our financial statements or fraud. As of March 31, 2017 and March 31, 2016, our Chief Executive Officer and
Chief Financial Officer concluded that our internal controls were not effective due to certain identified material weaknesses. The
material weakness identified as of March 31, 2017 was the result of our insufficient review of our project costs and related accounting
entries. The material weaknesses identified as of March 31, 2016 were a result of our insufficient review of non-routine revenue
transactions and the related accounting entries and were remediated during fiscal 2017. These material weaknesses were a result
of our insufficient review of non-routine revenue transactions and the related accounting entries. A material weakness is defined
as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. If
the remedial measures implemented are determined to be insufficient to address this material weakness, if we are unable to
successfully remediate our current material weakness related to our accounting close process, or if additional material weaknesses
or significant deficiencies in the internal control are discovered or occur in the future, our consolidated financial statements may
contain material misstatements and we could be required to restate our financial results. The failure to maintain an effective system
of internal control over financial reporting could limit our ability to report our financial results accurately and in a timely manner
or to detect and prevent fraud and could also cause a loss of investor confidence and decline in the market price of our common
stock.

If securities or industry analysts do not continue to 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 our business or us. 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 us or our executive officers and directors.

We and 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 us or our executive
officers and directors, or the perception of such sales, would have on the market price of our common stock.

We may not be able to maintain compliance with The NASDAQ Capital Market’s continued listing requirements.

Our common stock is listed on The NASDAQ Capital Market. In order to maintain the listing of our common stock on The
NASDAQ Capital Market, we must meet minimum financial, and other requirements, including requirements that our common
stock maintains a minimum price per share of $1.00. As of May 31, 2017 the closing price per share of our common stock was
$1.38. If the price of our common stock were to fall below $1.00 for 30 or more consecutive business days, we would no longer
be in compliance with the continued listing requirements of The NASDAQ Capital Market and may be required to take steps to
satisfy the minimum price per share requirement, including calling a special meeting of our shareholders to approve a reverse
stock split. A potential delisting of our common stock could adversely affect the market liquidity of our common stock, our ability
to obtain financing and our ability to fund our operations.

We are not currently paying dividends and will likely continue not paying dividends for the foreseeable future.

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 paying any cash dividends
in the foreseeable future. In addition, the terms of our existing revolving 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
17

on our financial condition, results of operations, capital requirements, contractual restrictions and other factors that our board of
directors deems relevant. The restriction on and decision not to pay dividends may impact our ability to attract investors and raise
funds, if necessary, in the capital markets.

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 common 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 and restricted stock awards, 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

On March 31, 2016, we entered into a purchase and sale agreement with a third party to sell and leaseback our

manufacturing and distribution facility located in Manitowoc, Wisconsin. The transaction closed on June 30, 2016. Pursuant to
the agreement, a lease was entered into on June 30, 2016, in which we are leasing approximately 197,000 square feet of the
building for not less than three years. The lease contains options by either party to reduce the amount of leased space after
March 1, 2017. We continue to lease approximately 197,000 square feet of the building as of the date of this report.

We own our approximately 70,000 square foot technology center and corporate headquarters adjacent to our leased
Manitowoc manufacturing and distribution facility, of which we lease a portion to a third party. We also lease office space in
the following locations:

•

5,600 square foot office in Houston, Texas.

10,500 square foot office space in Jacksonville, Florida.

3,100 square foot office space in Chicago, Illinois.

Facilities noted above are utilized by all our business segments.

ITEM 3.

LEGAL PROCEEDINGS

We are subject to various claims and legal proceedings arising in the ordinary course of business. As of the date of this
report, we are unable to currently assess whether the final resolution of any of such claims or legal proceedings may have a
material adverse effect on our future results of operations. In addition to ordinary-course litigation, we are a party to the
proceedings described below.

On March 27, 2014, we were named as a defendant in a civil lawsuit filed by Neal R. Verfuerth, a former Chief Executive

Officer who was terminated for cause in November 2012, in the United States District Court for the Eastern District of
Wisconsin (Green Bay Division). The plaintiff alleged, among other things, that we breached certain agreements entered into
with the plaintiff, including the plaintiff’s employment agreement, and violated certain laws. The complaint sought, among
other relief, unspecified pecuniary and compensatory damages, fees and such other relief as the court may deem just and proper.
On November 4, 2014, the court granted our motion to dismiss six of the plaintiff's claims. On January 9, 2015, the plaintiff
filed an amended complaint re-alleging claims that were dismissed by the court, including, among other things, a retaliation
claim and certain claims with respect to prior management agreements and certain intellectual property rights. On January 22,
2015, we filed a motion to dismiss and a motion to strike certain of the claims made in the amended complaint. On May 18,
2015, the court dismissed the intellectual property claims re-alleged in the January 9, 2015 amended complaint. At the court's
direction, the parties attempted to mediate the matter in May 2016, but were unsuccessful in resolving the matter.

On August 25, 2016, the Chief Judge of the United States District Court for the Eastern District of Wisconsin (Green Bay

Division) dismissed all claims against us brought by the plaintiff, including his claims that we had allegedly breached the
plaintiff’s employment agreement and had allegedly violated the plaintiff's whistleblower rights. On September 22, 2016, the
plaintiff filed an appeal to the United States Court of Appeals challenging the judgment rendered on August 25, 2016. After the
court-mandated mediation was unsuccessful, the plaintiff moved forward with his appeal focusing only on the District Court's
dismissal of his whistleblower claims.

We intend to continue to defend against the claims vigorously. We believe that we have substantial legal and factual
defenses to the claims and allegations remaining in the case and that we will prevail in this proceeding. Based upon the current
status of the lawsuit, we do not believe that it is reasonably possible that the lawsuit will have a material adverse impact on our
future continuing results of operations.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

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 is currently listed on The NASDAQ Capital Market under the symbol “OESX”. Prior to June 15, 2015,
our common stock was listed on the NYSE MKT. The following table sets forth the range of high and low sales prices per share
as reported on The NASDAQ Capital Market or NYSE MKT, as applicable, for the periods indicated.

Fiscal 2017
First Quarter

Second Quarter

Third Quarter

Fourth Quarter
Fiscal 2016
First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Shareholders

High

Low

$
$

1.55
1.45

2.49

2.31

3.48

2.59

2.50

2.25

$
$

1.13
1.18

1.17

1.76

2.17

1.73

1.58

1.18

As of May 31, 2017, there were approximately 226 record holders of the 28,497,329 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 paying 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.

Securities Authorized for Issuance under Equity Compensation Plans

The following table represents shares outstanding under our 2003 Stock Option Plan, our 2004 Stock and Incentive Awards

Incentive Plan, and our 2016 Omnibus Incentive Plan as of March 31, 2017.

Equity Compensation Plan Information

Plan Category
Equity Compensation plans approved by security holders

Equity Compensation plans not approved by security holders

Total

______________________________

Number of
Securities to be
Issued Upon
Exercise of
Outstanding Options
and Vesting of
Restricted Shares

Weighted Average
Exercise Price of
Outstanding Options
and Restricted
Shares

Number of Securities
Remaining Available
for
Future Issuances
Under the
Equity Compensatio
n Plans (1)

3,225,496

—

3,225,496

2.47

—

2.47

1,298,221

—

1,298,221

(1)

Excludes shares reflected in the column titled “Number of Securities to be Issued Upon Exercise of Outstanding Options
and Vesting of Restricted Shares”.

Issuer Purchase of Equity Securities

We did not purchase shares of our common stock during the year ended March 31, 2017.

Unregistered Sales of Securities

We did not make any unregistered sales of our common stock during the year ended March 31, 2017 that were not previously

disclosed in a Quarterly Report on form 10-Q or a current report on Form 8-K during such period.

Stock Price Performance Graph

The following graph shows the total shareholder return of an investment of $100 in cash on March 31, 2012 through March 31,
2017, for (1) our common stock, (2) the Russell 2000 Index and (3) The NASDAQ Clean Edge Green Energy Index. Data for the
Russell 2000 Index and the NASDAQ Clean Edge Green Energy Index assume reinvestment of dividends. The stock price
performance graph should not be deemed filed or incorporated by reference into any other filing made by us under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate the stock performance
graph by reference in another filing.

ITEM 6.

SELECTED FINANCIAL DATA

You should read the following selected consolidated financial data in conjunction with Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes
included in Item 8. "Financial Statements and Supplementary Data" of this report. The selected historical consolidated financial
data are not necessarily indicative of future results.

Consolidated statements of operations data:
Product revenue

Service revenue

Total revenue

Cost of product revenue (1)(5)(7)

Cost of service revenue

Total cost of revenue

Gross profit (loss)

General and administrative expenses (1)(2)(3)

Impairment of assets (6)

Acquisition and integration related expenses (4)

Sales and marketing expenses (1)(2)

Research and development expenses (1)

Loss from operations

Other income

Interest expense

Dividend and interest income

Loss before income tax

Income tax (benefit) expense (2)(3)

Net loss and comprehensive loss
Net loss per share attributable to common shareholders:

Basic

Diluted
Weighted-average shares outstanding:

Basic

Diluted

______________________________

Fiscal Year Ended March 31,

2017

2016

2015

2014

2013

(in thousands, except per share amounts)

$ 66,224

$ 64,897

$ 65,881

$ 71,954

$ 72,604

3,987

70,211

49,630

3,244

52,874

17,337

14,777

250

—

2,745

67,642

49,630

2,015

51,645

15,997

16,884

6,023

—

6,329

72,210

68,388

4,959

73,347
(1,137)
14,908

—

16,669

88,623

54,423

11,220

65,643

22,980

14,951

—

819

13,482

86,086

49,551

9,805

59,356

26,730

13,946

—

12,833

11,343

13,290

13,527

17,129

2,004
(12,527)
215
(273)
36
(12,549)
(261)

2,259
(6,604)
—
(567)
845
(6,326)
4,073
$(12,288) $(20,126) $(32,061) $ (6,199) $(10,399)

2,554
(31,936)
—
(376)
300
(32,012)
49

1,668
(19,921)
—
(297)
128
(20,090)
36

2,026
(8,343)
—
(481)
567
(8,257)
(2,058)

(0.44) $
(0.44) $

(0.73) $
(0.73) $

(1.43) $
(1.43) $

(0.30) $
(0.30) $

(0.50)
(0.50)

28,156

27,628

22,353

20,988

20,997

(1)

Includes stock-based compensation expense recognized under Financial Accounting Standards Board Accounting Standards
Codification Topic 718, or ASC Topic 718, as follows:

Cost of product revenue
General and administrative expenses

Sales and marketing expenses

Research and development expenses
Total stock-based compensation expense

Fiscal Year Ended March 31,

2017

2016

2015

2014

2013

(in thousands)

1,337

1,148

1,056

1,025

139

235

360

485

114

578

451

$ 1,605

$ 1,462

1,499

$ 1,593

$ 1,164

(2)

(3)

Includes fiscal 2013 reorganization expenses of $1,900 in general and administrative expenses, $225 in sales and marketing
expenses and a $4,074 valuation reserve for deferred tax assets in income tax expense.

Includes fiscal 2014 loss on sale of a leased corporate jet of $1,507 in general and administrative expenses and a $2,315
benefit for deferred tax liabilities created by the acquisition of Harris in income tax benefit. Includes in fiscal 2016 a $1,400
loss contingency.

(4) Includes fiscal 2014 expenses of $515 related to the acquisition and integration of Harris.

(5)

(6)

Includes fiscal 2015 expenses of $12,130 related to the impairment of wireless control inventory, fixed assets and intangible
assets.

Includes fiscal 2017 intangible asset impairment of $250 and fiscal 2016 expenses of $4,409 related to the impairment of
goodwill and $1,614 related to the write-down to fair value of the manufacturing facility.

(7)

Includes fiscal 2017 expenses of $2,209 related to an increase in inventory reserves and other inventory adjustments.

______________________________

Consolidated balance sheet data:
Cash and cash equivalents

Short-term investments

Total assets

Long term borrowings

Shareholder notes receivable

Total shareholders’ equity

2017

2016

2015

2014

2013

As of March 31,

(in thousands)

17,307

15,542

20,002

17,568

—

62,051

6,819

(4)

35,450

—

70,875

4,021
(4)
45,983

—

87,805

3,222
(4)
64,511

470

98,940

3,151
(50)
77,012

14,376

1,021

102,097

4,109
(265)
77,769

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our
audited consolidated financial statements and related notes included in this Annual Report on Form 10-K for the fiscal year ended
March 31, 2017. See also “Forward-Looking Statements” and Item 1A “Risk Factors”.

Overview

We are a leading designer and manufacturer of high-performance, energy-efficient LED and other lighting platforms. We

research, develop, design, manufacture, market, sell and implement energy management systems consisting primarily of high-
performance, energy-efficient commercial and industrial interior and exterior lighting systems and related services. Our
products are targeted for applications in three primary market segments: commercial office and retail, area lighting and
industrial applications, although we do sell and install products into other markets. Virtually all of our sales occur within North
America.

Our lighting products consist primarily of light emitting diode ("LED") lighting fixtures. Our principal customers include

national accounts, electrical distributors, energy service companies ("ESCOs") and electrical contractors. Currently,
substantially all of our products are manufactured at our leased production facility location in Manitowoc, Wisconsin, although
we are increasingly sourcing products and components from third parties as the LED market continues to evolve and in order to
provide versatility in our product development.

Although we continue to sell some lighting products using our legacy high intensity fluorescent ("HIF") technology, we
believe the market for lighting products has shifted to LED lighting systems, and that the customer base for our legacy HIF products
will continue to decline. Compared to our legacy lighting systems, we believe that LED lighting technology allows for better
optical performance, significantly reduced maintenance costs due to performance longevity and reduced energy consumption. Due
to their size and flexibility in application, we also believe that LED lighting systems can address opportunities for retrofit applications
that cannot be satisfied by fluorescent or other legacy technologies. Our LED lighting technologies have become the primary
component of our revenue as we continue to strive to be a leader in the LED market. Based on a July 2015 United States Department
of Energy report, we estimate the potential North American LED retrofit market within our key product categories to be
approximately 1.1 billion lighting fixtures. We plan to continue to primarily focus on developing and selling innovative LED
products.

We do not have long-term contracts with our customers that provide us with recurring revenue from period to period and
we typically generate substantially all of our revenue from sales of lighting systems and related services to governmental,
commercial and industrial customers on a project-by-project basis. We typically sell our lighting systems in replacement of our
customers’ existing fixtures. We call this replacement process a “retrofit.” We frequently engage our customer’s existing electrical
contractor to provide installation and project management services. We also sell our lighting systems on a wholesale basis,
principally to electrical contractors, electrical distributors, and ESCOs to sell to their own customer bases.

Our ability to achieve our desired revenue growth and profitability goals depends on our ability to effectively engage
distribution and sales agents, develop recurring revenue streams, implement our cost reduction initiatives, and improve our
marketing, new product development, project management, margin enhancement and operating expense management, as well as
other factors. In addition, the gross margins of our products can vary significantly depending upon the types of products we sell,
with margins ranging from 15% to 50%. As a result, a change in the total mix of our sales toward higher or lower margin products
can cause our profitability to fluctuate from period to period.

Our fiscal year ends on March 31. We refer to our prior fiscal year which ended on March 31, 2015, as “fiscal 2015”, the
year ended March 31, 2016 as "fiscal 2016", and our current fiscal year, which ends on March 31, 2017, as “fiscal 2017.” Our
fiscal first quarter of each fiscal year ends on June 30, our fiscal second quarter ends on September 30, our fiscal third quarter ends
on December 31 and our fiscal fourth quarter ends on March 31.

Market Shift to Light Emitting Diode Products

The rapid market shift in the lighting industry from legacy lighting products to LED lighting products has caused us to

adopt new strategies, approaches and processes in order to respond proactively to this industry transition. These changing
underlying business fundamentals in this transition include:

• Rapidly declining LED component costs and LED product end user customer pricing pressure.

•

Improving LED product performance and customer return on investment payback periods driving increasing customer
preferences for LED lighting products compared to legacy lighting products.
Increasing LED lighting product customer sales compared to decreasing HIF product sales.

•
• A broader and more diverse customer base and market opportunities compared to our historical commercial and

•

industrial facility customers.
Increased importance of highly innovative product designs and features and enhanced product research and
development capabilities resulting in more rapid new product introduction.
Significantly reduced product technology life cycles; significantly shorter product inventory shelf lives and the related
increased risk of rapidly occurring product technology obsolescence.
Increased reliance on international component sources.

•
• Less internal product fabrication and production capabilities needed to support LED product assembly.
• Different and broader types of components, fabrication and assembly processes needed to support LED product

assembly compared to our legacy products.
• Expanding customer bases and sales channels.
•

Significantly longer end user product warranty requirements for LED products compared to our legacy products.

As we continue to focus our primary business on selling our LED product lines to respond to the rapidly changing

market dynamics in the lighting industry, we face intense competition from an increased number of other LED product
companies, a number of which have substantially greater resources and more experience and history with LED lighting
products than we do.

Fiscal 2017 Developments

During the second half of fiscal 2017 we experienced a slowing of customer capital spending which we attribute to general
macro-economic concerns and conservative cash allocation strategies within our manufacturing and industrial customer base.
Additionally, during fiscal 2017, we continued to further emphasize sales through our distribution channel by working through
manufacturer representative agencies that represent lighting distributors throughout our addressable markets: commercial office
and retail, area lighting and industrial applications. While we expect this activity to generate long-term growth, in the near-term
it may have a dampening impact on revenues.

During fiscal 2017, we continued to see slight improvements in our LED product gross margin related to LED products as
a result of our negotiated price decreases for lighting components and the benefits of our cost containment initiatives. In fiscal
2017, we introduced a series of new LED industrial high bay products, among them the High-Bay Luminaire that broke the 200
Lumens Per Watt (“LPW”) barrier at 214 LPW. These LED products have significant advantages in delivering lumens per watt
and, we believe, the lowest total cost of ownership versus other LED lighting products. Additionally, we expect that our gross
margins will improve as we increase sales of these new products. During fiscal 2017, LED lighting revenue increased by 16.3%
compared to fiscal 2016.

In the fourth quarter of fiscal 2017 we experienced a pullback in the market as customers reduced spending due to economic
concerns and became more conservative with the change in the U.S. economy upon the installment of new government leadership
at the national level. Orion converted its legacy fluorescent business to a “stock to order” basis and wrote off inventory as well
as increasing the reserve on certain LED exterior lighting products.

Recent Developments

• Constant monitoring and management of manufacturing overhead costs to ensure we continue to deliver strong gross

margin amid an increasingly competitive market landscape;

• Reducing staff positions through a targeted reduction in existing headcount;
• Reductions in the total compensation of our executive management and board of directors;

• Reductions in operating expenses, including better control of legal spending, elimination of our racing program and

removal of various non-critical back office programs and initiatives.

We believe the above cost reduction plan, coupled with our renewed focus on sales channel execution will help to drive

revenue growth and accelerate our path to profitability.

Fiscal 2018 Outlook

Despite recent economic challenges, we remain optimistic about our near-term and long-term financial performance. We
believe that customer purchases of LED lighting systems will continue to increase in the near-term as expected improvements in
LED performance and expected decreases in LED product costs make our LED products even more economically compelling to
our customers. Our near-term optimism is based upon: (i) our efforts to expand our distribution services customer base; (ii) our
intentions to continue to selectively expand our sales force; (iii) our investments into new high-performance LED industrial lighting
fixtures; (iv) our recent improvements in gross margin as a result of our cost containment initiatives and development of higher-
performance LED products; and (v) the increasing volume of unit sales of our new higher margin products, specifically our LED
high bay lighting fixtures.

Our long-term optimism is based upon the considerable size of the existing market opportunity for lighting retrofits, including
the market opportunities in commercial office, manufacturing, healthcare, government and retail markets, the continued
development of our new higher margin products and product enhancements, including our new LED product offerings, our efforts
to expand our channels of distribution and our cost reduction initiatives. As we continue to adapt to the rapidly evolving lighting
market, we have implemented significant changes to our manufacturing operations to increase our flexibility, lower our cost
structure and remain competitive.

Our outlook for 2018 is positive since other factors lead us to believe that the following factors will directly or indirectly

drive spending:

• LED adoption continues to grow in all sectors;
• Commercial and industrial sentiment is strengthening;
• Utility incentives continue to be available and are increasing as a percent of project costs in many areas;
•
• Capital spending is increasing;
• Business profits are increasing; and
• Consumer spending remains strong.

Prospects of tax regulatory reform are encouraging;

Beyond the benefits of our lighting fixtures, there is also an opportunity to utilize our system platform as a “digital” or
“connected ceiling”, or rather a framework or network that can support the installation and integration of other business solutions
on our digital platform. This exciting, cutting edge growth opportunity is also known as the “Industrial Internet of Things” or
IIoT, and is still early in its development, however, we have already participated in a few compelling applications that deliver cost
savings and efficiency in areas outside of lighting.

We expect that, based on the above circumstances, our revenues and gross margins will increase during fiscal 2018, when
compared to fiscal 2017, as we continue to recognize the benefits of higher purchase volumes of LED components at lower costs,
increasing sales volumes of our newly introduced and higher-margin LED high bay products and increased utilization of our
manufacturing facility.

We also expect that our selling and marketing expenditures will increase slightly in fiscal 2018 primarily to support more
robust customer lead generation and to further enhance our brand awareness with our agents to support their efforts to sell our
products.

Results of Operations: Fiscal 2017 versus Fiscal 2016

The following table sets forth the line items of our consolidated statements of operations and as a relative percentage of our
total revenue for each applicable period, together with the relative percentage change in such line item between applicable
comparable periods (in thousands, except percentages):

Product revenue

Service revenue

Total revenue

Cost of product revenue

Cost of service revenue

Total cost of revenue

Gross profit (loss)

General and administrative expenses

Impairment of assets

Sales and marketing expenses

Research and development expenses

Loss from operations

Other income

Interest expense

Interest income

Loss before income tax

Income tax expense

Net loss and comprehensive loss

*NM = Not Meaningful

Fiscal Year Ended March 31,

2017

2016

2017

2016

Amount

%
Change

% of
Revenue

$ 66,224

$ 64,897

2.0 % 94.3 %

95.9 %

3,987

70,211

49,630

3,244

52,874

17,337

14,777

250

2,745

67,642

49,630

2,015

51,645

15,997

16,884

6,023

45.2 %

5.7 %

4.1 %

3.8 % 100.0 % 100.0 %

— % 70.7 %

73.4 %

61.0 %

4.6 %

2.4 % 75.3 %

8.4 % 24.7 %

(12.5)% 21.0 %

0.4 %

3.0 %

76.4 %

23.6 %

25.0 %

8.6 %

12,833

11,343

13.1 % 18.3 %

16.8 %

2,004
(12,527)
215
(273)
36
(12,549)
(261)

1,668
(19,921)
—
(297)
128
(20,090)
36
$(12,288) $(20,126)

20.1 %

2.9 %

2.5 %

37.1 % (17.8)% (29.5)%

(8.1)%

(71.9)%

0.3 %

(0.4)%

0.1 %

— %

(0.4)%

0.2 %

37.5 % (17.9)% (29.7)%

(0.4)%

0.1 %

38.9 % (17.5)% (29.8)%

Revenue. Product revenue increased 2.0%, or $1,327,000. The increase in product revenue in fiscal 2017 was primarily a
result of strengthening sales volume of LED fixtures and sales of new products introduced during the year. Our increase in product
revenue was partially offset by negative impacts resulting from the transition of our distribution sales channel to an agent driven
model, that did not gain traction until late in the second quarter of fiscal 2017. LED lighting revenue increased by 16.3% to
$53,110,000 in fiscal 2017 as compared to $45,678,000 in fiscal 2016. Service revenue increased 45.2%, or $1,242,000, primarily
due to more installation project revenue in fiscal 2017 when compared to fiscal 2016. Total revenue increased by 3.8%, or $2,569,000,
primarily due to the items discussed above.

Cost of Revenue and Gross Margin. Our cost of product revenue remained the same although fiscal 2017 had higher sales
and better absorption. Our fiscal year 2017 gross margin includes the adverse impact of $2,209,000 of charges to increase the
inventory reserve by $1,671,000 and an adjustment to write off supplies inventory of $538,000. The increase to the reserve reflects
a growing customer preference for higher performing LED lighting technologies and the related slowdown in demand for lower
priced earlier generation solutions. Our cost of service revenue increased 61.0%, or $1,229,000 in fiscal 2017 versus fiscal 2016
primarily due to additional costs associated with our increased service revenue in fiscal 2017. Gross margin increased from 23.6%
of revenue in fiscal 2016 to 24.7% in fiscal 2017. Lighting gross margin was positively impacted by a favorable mix of higher-
priced and higher-margin LED high bay fixtures, better absorption due to higher volumes, negotiated price decreases for lighting
components, and the benefits of our cost containment initiatives.

Operating Expenses

General and Administrative. Our general and administrative expenses decreased 12.5%, or $2,107,000, in fiscal 2017
primarily due to a reduction in legal costs, depreciation and amortization expense, offset by increases in employee costs, stock
compensation, auditing and consulting expenses.

Impairment of assets. We performed an impairment test as of March 31, 2017 due to a triggering event for our indefinite-
lived intangible asset. As a result of this impairment test, we determined that $250,000 of our intangible asset for the Harris trade
name was impaired. In 2016, we performed our annual goodwill impairment test in the fourth quarter and we determined that the
entire amount of our recorded goodwill of $4,409,000 was impaired. Also in fiscal 2016, our long-lived assets related to the
pending sale and leaseback of our manufacturing facility were impaired by $1,614,000 to properly represent the fair value of the
property being sold.

Sales and Marketing. Our sales and marketing expenses increased 13.1%, or $1,490,000, in fiscal 2017 compared to fiscal
2016. The increase was primarily due to increased commissions related to our agency channel and rebranding costs, offset by a
reduction in bad debt expense incurred in fiscal 2017 when compared to fiscal 2016.

Research and Development. Our research and development expenses increased 20.1% or $336,000, in fiscal 2017 primarily

due to our investment in product innovation related to new product development.

Other income. Other income in fiscal 2017 represented product royalties received from licensing agreements for our patents.

Interest Expense. Our interest expense in fiscal 2017 decreased by 8.1% or $24,000 from fiscal 2016. The reduction in interest

expense is attributable to the decrease in our outstanding debt.

Interest Income. Our interest income in 2017 decreased by 71.9% or $92,000 from fiscal 2016. Our interest income decreased

due to an increase in customers opting to utilize outside third party finance providers.

Income Taxes. Our income tax expense decreased $297,000 from fiscal 2016. In fiscal 2017, we received refunds from
previously filed tax returns and reversed a valuation allowance resulting in a tax benefit in fiscal 2017. Our income tax expense
is typically due to changes in expected minimum state tax liabilities.

Results of Operations: Fiscal 2016 versus Fiscal 2015

Product revenue

Service revenue

Total revenue

Cost of product revenue

Cost of service revenue

Total cost of revenue

Gross profit (loss)

General and administrative expenses

Impairment of assets

Acquisition and integration related expenses
Sales and marketing expenses

Research and development expenses

Loss from operations

Interest expense

Interest income
Loss before income tax

Income tax expense

Net loss and comprehensive loss

Fiscal Year Ended March 31,

2016

2015

2016

2015

Amount

%
Change

% of
Revenue

$ 64,897

$ 65,881

(1.5)% 95.9 %

91.2 %

2,745

67,642

49,630

2,015

51,645
15,997

16,884

6,023

—

6,329

72,210

68,388

4,959

73,347
(1,137)
14,908

(56.6)%

4.1 %

8.8 %

(6.3)% 100.0 % 100.0 %

(27.4)% 73.4 %

94.7 %

(59.4)%

3.0 %

6.9 %

(29.6)% 76.4 % 101.6 %
(1.6)%
23.6 %

13.3 % 25.0 %

20.6 %

—

(100.0)%

0.4 %

— %

0.1 %

11,343

13,290

(14.7)% 16.8 %

18.4 %

1,668
(19,921)
(297)
128
(20,090)
36

2,554
(31,936)
(376)
300
(32,012)
49
$(20,126) $(32,061)

(34.7)%

2.5 %

3.5 %

37.6 % (29.5)% (44.2)%

21.0 %

(57.3)%

(0.4)%

0.2 %

(0.5)%

0.4 %

37.2 % (29.7)% (44.3)%

(26.5)%

0.1 %

37.2 % (29.8)% (44.4)%

Revenue. Product revenue decreased 1.5%, or $984,000. The slight decrease in product revenue was primarily a result of the
impact of the softening macro-economic environment in the back half of fiscal 2016. Strong customer response to our next

generation high bay product offering drove increased LED sales which were offset by tempered demand in the industrial sector
as a result of macro-economic uncertainty. LED lighting revenue increased 48% from $30,800,000 in fiscal 2015 to $45,679,000
in fiscal 2016. Service revenue decreased 56.6%, or $3,584,000, due to higher service revenue in fiscal 2015 primarily due to
more solar revenue and project revenue from a significant customer. Total revenue decreased by 6.3%, or $4,568,000, primarily
due to the items discussed above.

Cost of Revenue and Gross Margin. Our cost of product revenue decreased 27.4%, or $18,758,000, in fiscal 2016 versus
the comparable period in fiscal 2015 due primarily to lower component cost, cost containment initiatives and inventory impairment
charges in fiscal 2015. Our cost of service revenue decreased 59.4%, or $2,944,000 in fiscal 2016 versus the comparable period
in fiscal 2015 primarily due to more solar projects and significant customer revenue in fiscal 2015 than fiscal 2016. Gross profit
improved from a negative 1.6% of revenue in fiscal 2015 to 23.6% in fiscal 2016. The prior year included inventory impairment
charges of $12,130,000. Our lighting gross margin was positively impacted by a favorable mix of higher-priced and higher-margin
LED high bay fixtures, negotiated price decreases for lighting components and the benefits of our fiscal 2015 fourth quarter cost
containment initiatives.

Operating Expenses

General and Administrative. Our general and administrative expenses increased 13.3%, or $1,976,000, in fiscal 2016 primarily

due to the recognition of a loss contingency of $1,400,000 in the fourth quarter of 2016.

Impairment of assets. We performed our annual goodwill impairment test in the fourth quarter of fiscal 2016. In conjunction
with the annual goodwill impairment test, we determined that the entire amount of our recorded goodwill of $4,409,000 was
impaired. In addition, long-lived assets related to the pending sale and leaseback of our manufacturing facility were impaired by
$1,614,000 to properly represent the fair value of the property being sold.

Sales and Marketing. Our sales and marketing expenses decreased 14.7%, or $1,947,000, in fiscal 2016 compared to fiscal
2015. The decrease was due to a decrease in headcount related expenses for compensation and reduced travel costs in conjunction
with our cost containment efforts.

Research and Development. Our research and development expenses decreased by 34.7% or $886,000, in fiscal 2016 primarily
due to a reduction in consulting fees and customer field sample testing costs related to our new products as we continued to increase
our cost effectiveness related to launching new products and decrease our reliance on higher-cost third parties.

Interest Expense. Our interest expense in fiscal 2016 decreased by 21.0% or $79,000 from fiscal 2015. The decrease in interest

expense was due to a decrease in borrowings on our revolving credit facility.

Interest Income. Our interest income in 2016 decreased by 57.3% or $172,000 from 2015. Our interest income decreased as

we continue to increase the utilization of third party finance providers for a majority of our financed projects.

Income Taxes. Our income tax expense decreased by 26.5% or $13,000 from a year ago. Our income tax expense is due

primarily to the changes in expected minimum state tax liabilities.

U.S. Markets Division

Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets.
USM customers include ESCOs and electrical contractors. During fiscal 2017, a significant portion of the historic customers of
this division migrated to distribution channel sales as a result of the implementation of our distribution sales strategy. The migrated
sales are included in Orion's ODS Division. We expect this migration to continue during fiscal 2018.

The following table summarizes our USM segment operating results (dollars in thousands):

Revenues

Operating loss

Operating margin

Fiscal 2017 Compared to Fiscal 2016

For the year ended March 31,

2017

17,852

(1,357)

2016

2015

38,841

37,778

(4,958)

$ (12,542)

(7.6)%

(12.8)%

(33.2)%

USM segment revenue decreased from fiscal 2016 by 54.0%, or $20,989,000. The decrease in revenue during fiscal 2017
compared to fiscal 2016 was primarily due to our transition to more sales through manufacturer representative agents. These sales
are now reflected within ODS.

USM segment operating loss improved from fiscal 2016 by 72.6%, or $3,601,000. The decrease in operating loss in fiscal
2017 was primarily due to the non-recurrence of costs associated with the segment's fiscal 2016 goodwill impairment charge of
$2,371,000 and fiscal 2016 fixed asset impairment charge of $689,000.

Fiscal 2016 Compared to Fiscal 2015

USM segment revenue increased from fiscal 2015 by 2.8%, or $1,063,000. The increase in revenue during fiscal 2016 was

primarily due to increased sales of our LED lighting products and our initiative to expand the number of our key resellers.

USM segment operating loss decreased from fiscal 2015 by 60.5%, or $7,584,000. The decrease in operating loss in fiscal
2016 was primarily due to: (i) expense related to the segment's long-term inventory controls impairment charge of $6,586,000
incurred during fiscal 2015; (ii) the increase in revenue in fiscal 2016 and the related increase in contribution margin dollars; (iii)
the improvements to our gross margin related to cost decreases on LED components; and (iv) a reduction in our operating expenses
related to compensation and discretionary spending, partially offset by the segment's fiscal 2016 goodwill impairment charge of
$2,371,000 and fiscal 2016 fixed asset impairment charge of $689,000.

Engineered Systems Division

The OES segment develops and sells lighting products and provides construction and engineering services for Orion's

commercial lighting and energy management systems. OES provides turnkey solutions for large national accounts,
governments, municipalities and schools.

The following table summarizes our OES segment operating results (dollars in thousands):

Revenues

Operating income (loss)

Operating margin

Fiscal 2017 Compared to Fiscal 2016

For the year ended March 31,

2017

29,501

(3,647)

2016

26,325

(6,982)

2015

33,454

(12,431)

(12.4)%

(26.5)%

(37.2)%

OES revenue increased in fiscal 2017 by 12.1%, or $3,176,000, compared to fiscal 2016. This increase in revenue was
primarily driven by an increase in lighting revenue due to an increase in customer capital spending within the manufacturing
and industrial sector. OES completed more turnkey jobs in fiscal 2017 when compared to fiscal 2016

OES segment operating loss decreased 47.8%, or $3,335,000, from fiscal 2017 compared to fiscal 2016. The decreased

loss was due to improvements to fiscal 2017 revenues and increases in gross margin related to cost decreases on LED
components. The decrease in operating loss was also due to non-recurrence of the segment's fiscal 2016 goodwill impairment
charge of $2,038,000 and fiscal 2016 fixed asset impairment charge of $804,000.

Fiscal 2016 Compared to Fiscal 2015

OES revenue decreased in fiscal 2016 by 21.3%, or $7,129,000, compared to fiscal 2015. This decrease in revenue was

primarily due to customer contraction of capital spending within the manufacturing and industrial sector.

OES segment operating loss decreased 43.8%, or $5,449,000, from fiscal 2015 compared to fiscal 2016. The decrease in

operating loss was due to: (i) the segment's long-term inventory controls impairment charge of $5,544,000 incurred during
fiscal 2015; (ii) improvements to our fiscal 2016 gross margin related to cost decreases on LED components; and (iii) a
decrease in operating expenses for compensation and discretionary expenses resulting from our fourth quarter fiscal 2015 cost
containment initiative, partially offset by the segment's fiscal 2016 goodwill impairment charge of $2,038,000 and fiscal 2016
fixed asset impairment charge of $804,000.

Orion Distribution Services Division

The ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of

broadline North American distributors. This segment expanded in fiscal 2017 as a result of the expansion of sales through
distributors as a result of the implementation of our distribution sales strategy. This expansion included the migration of
customers from direct sales previously included in our USM division.

The following table summarizes our ODS segment operating results (dollars in thousands):

Revenues

Operating loss

Operating margin

Fiscal 2017 Compared to Fiscal 2016

For the year ended March 31,

2017

22,858

(927)

(4.1)%

2016

2015

2,476

(632)

(25.5)%

978

(455)

(46.5)%

ODS segment revenue increased in fiscal 2017 from fiscal 2016 by $20,382,000. The increase in revenue in fiscal 2017 was
due to our transition from ESCOs to distribution channel sales through manufacturer representative agents expanding our customer
base. Sales further increased due to the shift of customers from the USM division to this division as a result of our transition to
the distribution model.

ODS segment operating loss increased by 46.7%, or $295,000, in fiscal 2017. The operating loss increase was minimized
by our continued investment in selling costs and increasing commission expenses due to our manufacturer representative agents
as we complete our selling channel transition.

Fiscal 2016 Compared to Fiscal 2015

ODS segment revenue increased in fiscal 2016 from fiscal 2015 by 153%, or $1,498,000. The increase in revenue in fiscal
2016 was due to the relatively low base line of revenue following the April 2014 start-up of this business unit and to variability
in the timing of customer orders as this business unit develops.

ODS segment operating loss increased by 38.9%, or $177,000, in fiscal 2016. The operating loss was due to the increased
contribution margin dollars earned from our increasing revenue offset by our continued investment in selling costs to grow this
start-up business and a fiscal 2016 fixed asset impairment charge of $121,000.

Liquidity and Capital Resources

Overview

We had $17,307,000 in cash and cash equivalents as of March 31, 2017, compared to $15,542,000 at March 31, 2016. Our
cash position as of March 31, 2017 benefited from improvements in working capital, the gross proceeds of our $2,600,000 sale
and leaseback of our manufacturing facility on June 30, 2016 and recent borrowings under our revolving credit facility.

In February 2015, we entered into a credit and security agreement ("Credit Agreement") with Wells Fargo Bank, National
Association. In fiscal 2017, we amended the Credit Agreement to extend the maturity date to February 6, 2019 and eliminate a
$5,000,000 excess availability reserve that had limited the amount available to be drawn under the Credit Agreement by such
amount. The credit agreement provides for a revolving credit facility ("Credit Facility") subject to a borrowing base
requirement based on eligible receivables and inventory. As of March 31, 2017, our borrowing base was approximately
$6,832,000. Borrowings under the Credit Agreement outstanding as of March 31, 2017, amounted to approximately
$6,629,000. As a result, we estimate that as of March 31, 2017, we were eligible to only borrow an additional $203,000 under
the Credit Facility based upon current levels of eligible inventory and accounts receivable. The Credit Facility includes a
$2,000,000 sublimit for the issuance of letters of credit.

Our future liquidity needs are dependent upon many factors, including our relative revenue, gross margins, cash
management practices, cost reduction initiatives, capital expenditures, pending or future litigation results, cost containment
measures and future potential acquisition transactions. In addition, we tend to experience high working capital costs when we
increase sales from existing levels. Based on our current expectations, while we anticipate realizing improved net income
performance during fiscal 2018, we also currently believe that we will experience negative working capital cash flows during
some quarters of fiscal 2018.

While we believe that we will likely have adequate available cash and equivalents and credit availability under our Credit
Agreement to satisfy our currently anticipated working capital and liquidity requirements during the near-term, there can be no
assurance to that effect. We are pursuing various alternative sources of liquidity, including exploring a sale and leaseback of our
tech center office building, to help ensure that we will have the best allocation of investing capital to satisfy our working capital
needs. We are also implementing certain inventory management practices that we anticipate will help to reduce our inventory
levels and enhance our cash position. If we experience significant liquidity constraints, we may be required to reduce our sales
efforts, implement additional cost savings initiatives or undertake other efforts to conserve our cash.

In February 2017, we filed a universal shelf registration statement with the Securities and Exchange Commission. Under
our shelf registration statement, we currently have the flexibility to publicly offer and sell from time to time up to $75,000,000
of debt and/or equity securities, although, we are currently limited to selling an amount of securities equal to one-third of our
public float on such registration statement. The filing of the shelf registration statement may help facilitate our ability to raise
public equity or debt capital to expand existing businesses, fund potential acquisitions, invest in other growth opportunities,
repay existing debt, or for other general corporate purposes.

Cash Flows

The following table summarizes our cash flows for our fiscal 2017, fiscal 2016 and fiscal 2015:

Operating activities

Investing activities

Financing activities

Increase (decrease) in cash and cash equivalents

Fiscal Year Ended March 31,

2017

2016

2015

(in thousands)

(1,903) $
1,649

2,019

1,765

(3,473) $
(372)
(615)
(4,460) $

(12,812)
(730)
15,976

2,434

Cash Flows Related to Operating Activities. Cash provided by or used in operating activities primarily consisted of a net
loss adjusted for certain non-cash items including depreciation and amortization, stock-based compensation expenses, provisions
for reserves, and the effect of changes in working capital and other activities.

Cash used in operating activities for fiscal 2017 was $1,903,000 and consisted of net cash provided by changes in operating
assets and liabilities of $3,676,000 and a net loss adjusted for non-cash expense items of $5,579,000. Cash provided by changes
in operating assets and liabilities consisted of a decrease of $1,687,000 in accounts receivable due to the timing of collections from
customers, a decrease in inventory of $1,220,000 due to decreasing inventory prices, a decrease in prepaid expenses and other
assets of $2,084,000 due to project billings that decreased unbilled revenue and an increase in deferred revenue of $300,000. Cash
used by changes in operating assets and liabilities included an increase in deferred contract costs of $899,000 due to projects still
in process, a decrease in accounts payable of $81,000 due to the increase in purchases to support our anticipated growth in lighting
product revenue, and decrease in accrued expenses and other of $635,000 for increased commissions as a result of Orion’s
distribution model changes.

Cash used in operating activities for fiscal 2016 was $3,473,000 and consisted of net cash provided by changes in operating
assets and liabilities of $3,621,000 and a net loss adjusted for non-cash expense items of $7,094,000. Cash provided by changes
in operating assets and liabilities consisted of a decrease of $7,116,000 in accounts receivable due to the increase in lighting revenue
and collections from customers, an increase in accounts payable of $713,000 due to the increase in inventory purchases to support
our growth in lighting product revenue during fiscal 2016, an increase of $1,803,000 in accrued expenses due to a loss contingency
reserve and accrued project installation costs, and a decrease in deferred contract costs of $137,000 due to the completion of solar
projects. Cash used by changes in operating assets and liabilities included an increase of $3,249,000 in inventory due to the increase
in purchases to support our anticipated growth in lighting product revenue, an increase in prepaid and other assets of $2,645,000
for project billings that increased unbilled revenue, and a decrease in deferred revenue of $254,000 due to project completions.

Cash used in operating activities for fiscal 2015 was $12,812,000 and consisted of net cash provided by changes in operating
assets and liabilities of $550,000 and a net loss adjusted for non-cash expense items of $13,362,000. Cash provided by changes
in operating assets and liabilities consisted of an increase in accounts payable of $2,475,000 due to the increase in inventory
purchases to support our growth in lighting product revenue during the fiscal 2015 back half, an increase of $838,000 in accrued
expenses due to increased warranty reserves and accrued project installation costs, a decrease in deferred contract costs of $651,000
due to the completion of solar projects and a decrease in prepaid and other assets of $1,261,000 for project billings that reduced
unbilled revenue related to financed projects. Cash used by changes in operating assets and liabilities included an increase of
$1,909,000 in accounts receivable due to the increase in lighting revenue during the fiscal 2015 back half, an increase of $2,356,000
in inventory due to the increase in purchases to support our anticipated growth in lighting product revenue for fiscal 2016 and a
decrease in deferred revenue of $410,000 due to project completions.

Cash Flows Related to Investing Activities. Cash provided by investing activities was $1,649,000 in fiscal 2017 which
consisted of spend of $660,000 for capital expenditures and $291,000 investment in patents, offset by $2,600,000 of proceeds
from the sale of the Manitowoc manufacturing facility.

Cash used in investing activities was $372,000 in fiscal 2016 that consisted of $401,000 for capital improvements related to
LED production. Cash provided by investing activities in fiscal 2016 included $35,000 related to the sale of property, plant, and
equipment.

Cash used in fiscal 2015 was $730,000 which included $2,006,000 invested for capital improvements related to new product
tooling, information technology systems and infrastructure investments to improve response time to customers and generate
business efficiencies and $234,000 for investment in patents. Cash provided from investing activities in fiscal 2015 included
$472,000 from the sale of short-term investments and $1,040,000 of proceeds from the sale of our facility in Plymouth, Wisconsin.

Cash Flows Related to Financing Activities. Cash provided by financing activities was $2,019,000 for fiscal 2017. This
included net proceeds from the revolving credit facility of $2,910,000, offset by $880,000 in cash used for the repayment of long-
term debt and $11,000 for stock option related tax settlements.

Cash used in financing activities was $615,000 for fiscal 2016. This included $1,901,000 cash used for the repayment of
long-term debt, partially offset by $1,218,000 of net proceeds from our Credit Facility and $104,000 received from stock option
exercises.

Cash provided by financing activities was $15,976,000 for fiscal 2015. This included $17,465,000 in net proceeds from our
February 2015 stock offering, $2,500,000 in borrowings against our revolving credit facility, $446,000 from the refinancing of
the JP Morgan OTA credit facility and $441,000 in proceeds from stock option and warrant exercises and stock note repayments.
Cash flows used in financing activities included $4,494,000 for repayment of long-term debt and $406,000 for financing costs
related to new debt agreements.

Working Capital

Our net working capital as of March 31, 2017 was $25,487,000, consisting of $43,883,000 in current assets and $18,396,000
in current liabilities. Our net working capital as of March 31, 2016 was $29,239,000, consisting of $48,530,000 in current assets
and $19,291,000 in current liabilities. Our current accounts receivable balance decreased by $1,718,000 from the fiscal 2016 year-
end due to strengthened emphasis on collection efforts in fiscal 2017. Our current inventory decreased from the fiscal 2016 year-
end by $3,431,000 due to increases in inventory reserves of $1,671,000 related to the write-down of fluorescent and LED exterior
inventory to net realizable value. In addition, we scrapped inventory that was fully reserved during fiscal 2017. Our deferred
contract costs increased by $898,000 due to projects not completed at year-end. Our prepaid and other current assets decreased
by $2,161,000 due to a decrease in unbilled projects in fiscal 2017. Our accounts payable decreased by $81,000 due to increased
sourced products and timing of payments. Our accrued expenses decreased from our fiscal 2016 year-end by $598,000 due to a
decrease in accrued contract costs related to projects and timing of payment of sales tax, offset by an increase in accrued
compensation and benefits.

We generally attempt to maintain at least a three-month supply of on-hand inventory of purchased components and raw
materials to meet anticipated demand, as well as to reduce our risk of unexpected raw material or component shortages or supply
interruptions. Our accounts receivables, inventory and payables may increase to the extent our revenue and order levels increase.

Indebtedness

Revolving Credit Agreement

In February 2015, we entered into a credit and security agreement ("Credit Agreement") with Wells Fargo Bank, National
Association. In fiscal 2017, we amended the credit agreement Credit Agreement to extend the maturity date to February 6, 2019
and eliminate a $5,000,000 excess availability reserve that had limited the amount available to be drawn under the Credit
Agreement by such amount. The credit agreement provides for a revolving credit facility ("Credit Facility") subject to a
borrowing base requirement based on eligible receivables and inventory. As of March 31, 2017, our borrowing base was
approximately $6,832,000. The Credit Facility includes a $2,000,000 sublimit for the issuance of letters of credit.

As of March 31, 2017, we had no outstanding letters of credit. Borrowings under the Credit Agreement outstanding as of
March 31, 2017, amounted to approximately $6,629,000. We estimate that as of March 31, 2017, we were eligible to borrow an
additional $203,000 under the Credit Facility based upon current levels of eligible inventory and accounts receivable. We were
in compliance with the covenants in the Credit Agreement as of March 31, 2017.

Subject in each case to our applicable borrowing base limitations, the Credit Agreement otherwise provides for a
$15,000,000 Credit Facility. This limit may increase to $20,000,000 based on a borrowing base requirement, if we satisfy
certain conditions. We did not meet the requirements to increase the borrowing limit to $20,000,000 as of July 31, 2016, the
most recent measurement date.

From and after any increase in the Credit Facility limit from $15,000,000 to $20,000,000, the Credit Agreement requires

that we maintain, as of the end of each month, a minimum ratio for the trailing twelve-month period of (i) earnings before
interest, taxes, depreciation and amortization, subject to certain adjustments, to (ii) the sum of cash interest expense, certain
principal payments on indebtedness and certain dividends, distributions and stock redemptions, equal to at least 1.10 to 1.00.
The Credit Agreement contains additional customary covenants, including certain restrictions on our ability to incur additional
indebtedness, consolidate or merge, enter into acquisitions, guarantee obligations of third parties, make loans or advances,

declare or pay any dividend or distribution on our stock, redeem or repurchase shares of our stock, or pledge or dispose of
assets.

Each of our subsidiaries is a joint and several co-borrower or guarantor under the Credit Agreement, and the Credit
Agreement is secured by a security interest in substantially all of our and each of our subsidiaries' personal property (excluding
various assets relating to customer Orion Throughput Agreements ("OTAs") and a mortgage on certain real property.

Borrowings under the Credit Agreement bear interest at the daily three-month LIBOR plus 3.0% per annum, with a
minimum interest charge for each year or portion of a year during the term of the Credit Agreement of $130,000, regardless of
usage. As of March 31, 2017, the interest rate was 4.15%. We must pay an unused line fee of 0.25% per annum of the daily
average unused amount of the Credit Facility and a letter of credit fee at the rate of 3.0% per annum on the undrawn amount of
letters of credit outstanding from time to time under the Credit Facility.

Capital Spending

Over the past three fiscal years, 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 $660,000 in fiscal 2017, $401,000 in fiscal 2016, and $2,006,000 in fiscal 2015. We plan to incur
approximately $658,000 in capital expenditures in fiscal 2018. Our capital spending plans predominantly consist of investments
related to new product development tooling and investments in information technology systems. We expect to finance these
capital expenditures primarily through our existing cash, equipment secured loans and leases, to the extent needed, long-term
debt financing, or by using our available capacity under our Credit Facility.

Contractual Obligations

Information regarding our known contractual obligations of the types described below as of March 31, 2017 is set forth in

the following table (dollars in thousands):

Bank debt obligations

Other debt obligations

Capital lease obligations

Cash interest payments on debt

Operating lease obligations

Purchase order and capital expenditure
commitments(1)

Total

Payments Due By Period

Total

Less than
1 Year

1-3 Years

3-5 Years

(in thousands)

More than
5 Years

6,629

— $

6,629

— $

327

287

1,241

4,218

137

143

654

4,218

161

144

587

—

12,723

5,168

7,526

—

—
—

(1) Reflects non-cancellable purchase commitments for certain inventory items entered into in order to secure better pricing

and ensure materials on hand.

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, 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: (i) there is persuasive evidence of
an arrangement; (ii) delivery has occurred and title has passed to the customer; (iii) the sales price is fixed and determinable and
no further obligation exists; and (iv) collectability is reasonably assured. Virtually all of our revenue is recognized when title and
risk of loss transfers to the 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 by
allocating the total contract revenue to each element based on their relative selling prices. In such circumstances, we use a hierarchy
to determine the selling price to be used for allocating revenue to deliverables: (1) vendor-specific objective evidence, or “VSOE”
of selling price, if available, (2) third-party evidence, or “TPE” of selling price if VSOE is not available, and (3) best estimate of
the selling price if neither VSOE nor TPE is available. We determine the selling price for our lighting and energy management
system products, installation and recycling services using management’s best estimate of selling price as VSOE or TPE evidence
does not exist. We consider external and internal factors including, but not limited to, pricing practices, margin objectives,
competition, geographies in which we offer our products and services, internal costs, and the scope and size of projects.

We have limited Power Purchase Agreement (“PPA”) contracts still outstanding. Those PPA’s outstanding are supply side
agreements for the generation of electricity for which we recognize revenue on a monthly basis over the life of the PPA contract,
typically in excess of 10 years. Prior to fiscal 2015, we sold solar PV systems that were recognized to revenue using the percentage-
of-completion method by measuring project progress by the percentage of costs incurred to date of the total estimated costs for
each contract as materials are installed. Revenue from sales of our solar PV systems is generally recognized over a period of three
to 15 months. There were no sales of solar PV systems in fiscal 2017, fiscal 2016 or fiscal 2015.

Historically we have offered our customers long-term financing through our OTA sales-type financing program. Under this
program we finance the customer’s purchase of our energy management systems. Our OTA contracts are sales-type capital leases
under GAAP and we record revenue at the net present value of the future payments at the time customer acceptance of the installed
and operating system is complete. Our OTA contracts under this sales-type financing are either structured with a fixed term,
typically 60 months, and contain a bargain purchase option at the end of term, or are 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 revenue that we are entitled to receive from the sale
of our lighting fixtures under our OTA 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.

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. In fiscal 2017 we recorded an addition to our
inventory reserve of $1,671,000 that represents a write down of our fluorescent and exterior LED inventory. During fiscal 2015,
we recorded an impairment charge of $12,130,000 to our wireless controls inventory. Our inventory obsolescence reserves at
March 31, 2017 were $3,473,000, or 20.4% of gross inventory, and $2,127,000, or 11.1% of gross inventory, at March 31, 2016.

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 $144,000, or 1.5% of gross receivables, at March
31, 2016 and $505,000, or 4.4% of gross receivables, at March 31, 2016.

Recoverability of Long-Lived Assets. We evaluate long-lived assets such as property, equipment and definite lived intangible
assets, such as patents, customer relationships, developed technology, and non-competition agreements, for impairment whenever
events or circumstances indicate that the carrying value of the assets recognized in our financial statements may not be recoverable.
Factors that we consider include whether there has been a significant decrease in the market value of an asset, a significant change
in the way an asset is being utilized, or a significant change, delay or departure in our strategy for that asset, such as the loss of a
customer in the case of customer relationships. Our assessment of the recoverability of long-lived assets involves significant
judgment and estimation. These assessments reflect our assumptions, which, we believe, are consistent with the assumptions
hypothetical marketplace participants use. Factors that we must estimate when performing recoverability and impairment tests
include, among others, the economic life of the asset. If impairment is indicated, we first determine if the total estimated future
cash flows on an undiscounted basis are less than the carrying amounts of the asset or assets. If so, an impairment loss is measured
and recognized.

As a result of our reoccurring losses, during fiscal 2017 we reviewed our definite lived assets for impairment in accordance
with the applicable accounting guidance. Under this guidance assets are identified to asset groups that are then tested for
recoverability by comparing the asset group’s carrying value to the sum of undiscounted cash flows to be generated through the
use and eventual disposition of the assets. An impairment and reduction in the asset value is recorded if the carrying value of the
assets exceeds the sum of these future undiscounted cash flows. In conjunction with the fiscal 2017 review, we determined that
our definite lived fixed and intangible assets represented two asset groups. The first asset group represents our solar power
generating assets that are installed at a customer location and generate distinct and separately identifiable cash flows under a long-
term contract with this customer for the use of the power they generate. The second asset group consists of all of our other definite
lived fixed and intangible assets. Due to the central nature of our operations, these assets support our full operations and are utilized
by all three of our reportable segments and do not generate separately identifiable cash flows below the total asset group level.
The primary asset within the asset group is the machinery and equipment with a remaining useful life of five years. As such, in
accordance with the accounting guidance, our review for recoverability of this asset group compared the carrying value of the
asset group to our expected undiscounted cash flows for the next five years plus estimated proceeds at the end of the five-year
period. We concluded that the undiscounted cash flows for both the solar assets and other definite lived asset group exceeded their
carrying values. As such the assets were deemed recoverable and no impairment was recorded.

During fiscal 2016, we recorded an impairment loss of $1,614,000 related to the write-down of our Manitowoc manufacturing
facility based upon the net realizable value of the pending sale leaseback transaction which occurred during the first fiscal quarter
of fiscal 2017. During fiscal 2015, we recorded an impairment loss of $1,030,000 related to development and licensing costs for
our wireless controls inventory.

After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established. Subsequent changes

in facts and circumstances do not result in the reversal of a previously recognized impairment loss.

Our impairment loss calculations require that we apply judgment in identifying asset groups, estimating future cash flows,
determining asset fair values, and estimating asset’s useful lives. To make these judgments, we may use internal discounted cash
flow estimates, quoted market prices, when available, and independent appraisals, as appropriate, to determine fair value.

If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair

values, we may be required to recognize future impairment losses which could be material to our results of operations.

Goodwill. As of March 31, 2016, we no longer carry goodwill on our balance sheet. Prior to that date, we tested goodwill
for impairment at least annually as of the first day of the fiscal fourth quarter, or when indications of potential impairment existed.
In addition, we monitored for the existence of potential impairment indicators throughout the fiscal year. We conducted impairment
testing for goodwill at the reporting unit level. Reporting units, as defined by Accounting Standards Codification (“ASC”) 350,
Intangibles - Goodwill and Other, may be operating segments as a whole or an operation one level below an operating segment,
referred to as a component. For fiscal 2016 and fiscal 2015, our reporting units consisted of our segments: USM and OES. The
ODS segment had no goodwill.

We performed a quantitative test for impairment in conjunction with our fiscal 2016 annual goodwill impairment review,
due to the decline in our stock price, continued operating losses and a decline in our enterprise market capitalization to below our
book value. As a result of that test, during fiscal 2016, we recorded an impairment loss of $4,409,000 related to all of our goodwill
which was determined to be in excess of its implied fair value based upon the second step of the goodwill impairment test. As a
result we no longer carry a goodwill balance on our balance sheet and further goodwill impairment tests are not required.

Indefinite Lived Intangible Assets. We test indefinite lived intangible assets for impairment at least annually on the first day
of our fiscal fourth quarter, or when indications of potential impairment exist. We monitor for the existence of potential impairment
indicators throughout the fiscal year. Our annual impairment test may begin with a qualitative test to determine whether it is more
likely than not that an indefinite lived intangible asset's carrying value is greater than its fair value. If our qualitative assessment
reveals that asset impairment is more likely than not, we perform a quantitative impairment test by comparing the fair value of the
indefinite lived intangible asset to its carrying value. Alternatively, we may bypass the qualitative test and initiate impairment
testing with the quantitative impairment test.

Determining the fair value of indefinite-lived intangible assets entails significant estimates and assumptions including, but
not limited to, estimating future cash flows from product sales, perpetuation of employment agreements containing non-competition
clauses, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the
intangible assets acquired.

If the fair value of the indefinite lived intangible asset exceeds its carrying value, we conclude that no indefinite lived
intangible asset impairment has occurred. If the carrying value of the indefinite lived intangible asset exceeds its fair value, we
recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. Once an impairment loss is
recognized, the adjusted carrying value becomes the new accounting basis of the indefinite lived intangible asset.

We performed a qualitative assessment in conjunction with our annual impairment test for our indefinite lived intangible
assets as of January 1, 2017. This qualitative assessment considered our operating results for the first nine months of our fiscal
2017 in comparison to prior years as well as our anticipated fourth quarter results and fiscal 2018 plan. As a result of the conditions
that exited as of the assessment date, an asset impairment was not deemed to be more likely than not. As such, a quantitative
analysis was not required.

During the fourth quarter of fiscal 2017, we achieved lower than anticipated operating results, made a strategic shift in our
manufacturing strategy and approach to the fluorescent and LED exterior lighting market, and revised our fiscal 2018 forecast.
As a result we believe a triggering event occurred requiring us to reassess our indefinite lived intangible assets for impairment.
As such we performed a quantitative impairment review of our indefinite lived intangible asset related to our Harris trade name
as of March 31, 2017 using the royalty replacement method to determine the asset’s fair value. Under the royalty replacement
method, the fair value of the Harris trade name was determined based on a market participant’s view of the royalty that would be
paid to license the right to use the trade name. This quantitative analysis incorporated several assumptions including forecasted
future revenues and cash flows, estimated royalty rate, based on similar licensing transactions and market royalty rates, and discount
rate, which incorporates assumptions such as weighted-average cost of capital and risk premium. As a result of this quantitative
test the carrying value of the Harris trade name exceeded its estimated fair value and an impairment of $250,000 was recorded to
Impairment of assets during the fourth quarter to reduce the asset’s carrying value to its calculated fair value.

During fiscal 2016, we also performed a quantitative test on indefinite lived intangible assets related to our Harris trade name
and determined that its fair value exceeded its carrying value and was not impaired. This test was performed in conjunction with
our annual impairment test of goodwill after determining the goodwill was impaired.

An additional impairment loss could result from a future annual or interim impairment test. Such a loss could have a material

adverse effect on our results of operations.

Stock-Based Compensation. We currently issue restricted stock awards to our employees, executive officers and directors.
Prior to fiscal 2015, we also issued stock options to these individuals. We apply the provisions of ASC 718, Compensation - Stock
Compensation, to these restricted stock and stock option awards which requires us to expense the estimated fair value of stock
options and similar awards based on the fair value of the award on the date of grant. Compensation costs for equity incentives are
recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period.

We last issued stock options during fiscal 2014. The fair value of each option for financial reporting purposes was estimated
on the date of grant using the Black-Scholes option-pricing model. 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.

We determined volatility based upon the historical market price of our common share price.

Since the closing of our IPO in December 2007, we have solely used the closing sale price of our common shares as reported
by the national securities exchange on which we were listed on the date of grant to establish the exercise price of our stock options.

As of March 31, 2017, $2,094,000 of total stock-based compensation cost was expected to be recognized by us over a weighted
average period of 2.2 years. We expect to recognize $1,189,000 of stock-based compensation expense in fiscal 2018 based on
restricted stock awards outstanding as of March 31, 2017. This expense will increase further to the extent we have granted, or will
grant, additional stock options or restricted stock awards in the future.

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 2017, 2016, and 2015 we have recorded a full valuation allowance
against our net federal and net state deferred tax assets due to our cumulative three year taxable losses. In making these
determinations, 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 carry-forwards, but we do not believe the ownership change affects the use of the full amount
of the net operating loss carry-forwards. As a result, our ability to use our net operating loss carry-forwards 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.

As of March 31, 2017, we had net operating loss carry-forwards of approximately $65,746,000 for federal tax purposes and
$56,231,000 for state tax purposes. Included in these loss carry-forwards were $2,977,000 for federal and $3,324,000 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 carry-forwards of $1,403,000 and state tax credit carry-forwards of $724,000, which are fully
reserved for as part of our valuation allowance. Both the net operating losses and tax credit carry-forwards will begin to expire in
varying amounts between 2020 and 2036. 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 carry-forwards, 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, 2017, the balance of gross
unrecognized tax benefits was approximately $113,000, all of which would reduce our effective tax rate if recognized. We believe
that our 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 2 —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 historically 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. 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, 2017, $6,629,000 of our $6,977,000 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 $66,300 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. A hypothetical 8% fluctuation in aluminum prices would have an impact of $440,000
on earnings in fiscal 2018.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Page
Number

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Orion Energy Systems, Inc.

Manitowoc, Wisconsin

We have audited the accompanying consolidated balance sheets of Orion Energy Systems, Inc. as of March 31, 2017 and 2016
and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each
of the three years in the period ended March 31, 2017. In connection with our audits of the financial statements, we have also
audited the financial statement schedule II, Valuation and Qualifying Accounts for each of the three years in the period ended
March 31, 2017. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule. 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 financial position
of Orion Energy Systems, Inc. at March 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 2017, in conformity with accounting principles generally accepted in the United States of
America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, present 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, 2017, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated June 13, 2017 expressed an adverse opinion thereon.

/s/BDO USA, LLP

Milwaukee, Wisconsin

June 13, 2017

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Orion Energy Systems, Inc.

Manitowoc, Wisconsin

We have audited Orion Energy Systems, Inc.’s internal control over financial reporting as of March 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). 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 “Item 9A, Management’s Report on Internal Control Over Financial Reporting”. Our responsibility
is to express an opinion on the company’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, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included 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.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented
or detected on a timely basis. A material weakness regarding management’s control activities and information and communication
over the accounting close process has been identified and included in management’s assessment in Item 9A. This material weakness
was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 financial statements,
and this report does not affect our report dated June 13, 2017 on those financial statements.

In our opinion, Orion Energy Systems, Inc. did not maintain, in all material respects, effective internal control over financial
reporting as of March 31, 2017, based on the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken
by the company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Orion Energy Systems, Inc. as of March 31, 2017 and 2016, and the related consolidated statements
of operations and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended
March 31, 2017 and our report dated June 13, 2017 expressed an unqualified opinion thereon.

/s/BDO USA, LLP

Milwaukee, Wisconsin

June 13, 2017

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

Assets
Cash and cash equivalents

Accounts receivable, net

Inventories, net

Deferred contract costs

Prepaid expenses and other current assets

Total current assets

Property and equipment, net

Other intangible assets, net

Long-term accounts receivable

Other long-term assets

Total assets

Liabilities and Shareholders’ Equity
Accounts payable

Accrued expenses and other

Deferred revenue, current

Current maturities of long-term debt

Total current liabilities

Revolving credit facility

Long-term debt, less current maturities

Deferred revenue, long-term

Other long-term liabilities

Total liabilities

Commitments and contingencies

Shareholders’ equity:

Preferred stock, $0.01 par value: Shares authorized: 30,000,000 shares at March 31, 2017
and 2016; no shares issued and outstanding at March 31, 2017 and 2016

Common stock, no par value: Shares authorized: 200,000,000 at March 31, 2017 and 2016;
shares issued: 37,747,227 and 37,192,559 at March 31, 2017 and 2016; shares outstanding:
28,317,490 and 27,767,138 at March 31, 2017 and 2016

Additional paid-in capital

Treasury stock: 9,429,737 and 9,425,421 common shares at March 31, 2017 and 2016

Shareholder notes receivable

Retained deficit

Total shareholders’ equity

March 31,

2017

2016

17,307

9,171

13,593

935

2,877

43,883

13,786

4,207

170

62,051

11,635

5,988

621

152

18,396

6,629

190

944

442

26,601

15,542

10,889

17,024

5,038

48,530

17,004

5,048

108

185

70,875

11,716

6,586

243

746

19,291

3,719

302

1,022

558

24,892

—

153,901
(36,081)
(4)
(82,366)
35,450

—

152,140
(36,075)
(4)
(70,078)
45,983

Total liabilities and shareholders’ equity

62,051

70,875

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share and per share amounts)

Fiscal Year Ended March 31,
2016

2015

2017

66,224

64,897

Product revenue

Service revenue

Total revenue

Cost of product revenue

Cost of service revenue

Total cost of revenue

Gross profit (loss)

Operating expenses:

General and administrative

Impairment of assets

Acquisition and integration related expenses

Sales and marketing

Research and development

Total operating expenses

Loss from operations

Other income (expense):

Other income

Interest expense

Interest income

Total other expense

Loss before income tax

Income tax (benefit) expense

Net loss and comprehensive loss

Basic net loss per share attributable to common shareholders

Weighted-average common shares outstanding

Diluted net loss per share

Weighted-average common shares and share equivalents
outstanding

3,987

70,211

49,630

3,244

52,874

17,337

14,777

250

—

12,833

2,004

29,864
(12,527)

215
(273)
36
(22)
(12,549)
(261)
(12,288) $

2,745

67,642

49,630

2,015

51,645

15,997

16,884

6,023

—

11,343

1,668

35,918
(19,921)

—
(297)
128
(169)
(20,090)
36
(20,126) $

65,881

6,329

72,210

68,388

4,959

73,347
(1,137)

14,908

—

13,290

2,554

30,799
(31,936)

—
(376)
300
(76)
(32,012)
49
(32,061)

(0.44) $

(0.73) $

28,156,382

27,627,693

(0.44) $

(0.73) $

(1.43)
22,353,419
(1.43)

28,156,382

27,627,693

22,353,419

Stock-based compensation

170,055

1,499

Balance, March 31, 2014

Issuance of common stock for cash, net of
issuance costs

Issuance of stock for services

Exercise of stock options and warrants for cash

Shares issued under Employee Stock Purchase
Plan

Collection of shareholder notes receivable

Employee tax withholdings on stock-based
compensation

Net loss

Balance, March 31, 2015

Issuance of stock for services

Exercise of stock options and warrants for cash

Shares issued under Employee Stock Purchase
Plan

Stock-based compensation

Employee tax withholdings on stock-based
compensation

Net loss

Balance, March 31, 2016

Issuance of stock for services

Shares issued under Employee Stock Purchase
Plan

Stock-based compensation

Employee tax withholdings on stock-based
compensation

Net loss

Balance, March 31, 2017

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)

Common Stock

Shareholders’ Equity

Additional
Paid-in
Capital

Treasury
Stock

Shareholder
Notes
Receivable

Retained
Earnings
(Deficit)

Total
Shareholders’
Equity

21,588,326

$ 130,987

$ (36,034) $

(50) $ (17,891) $

77,012

5,462,500

17,465

— $

17,465

131

430

1,499

(22)

(32,061)

64,511

1,462

(34)

(20,126)

45,983

156

1,605

(14)

(12,288)

35,450

27,931

178,387

1,486

—

131

430

—

(7,152)

—

(22)

—

(32,061)

27,421,533

$ 150,516

$ (36,049) $

(4) $ (49,952) $

35,290

46,410

3,925

270,303

(10,323)

—

(1)

1,462

—

(34)

—

(20,126)

27,767,138

$ 152,140

$ (36,075) $

(4) $ (70,078) $

110,566

5,156

444,102

(9,472)

—

156

—

1,605

—

(14)

—

(12,288)

28,317,490

$ 153,901

$ (36,081) $

(4) $ (82,366) $

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Operating activities

Net loss

Adjustments to reconcile net loss to net cash used in

operating activities:

Depreciation

Amortization

Stock-based compensation expense

Impairment of assets

Loss (gain) on sale of property and equipment

Provision for inventory reserves

Provision for bad debts

Other

Changes in operating assets and liabilities:

Accounts receivable, current and long-term

Inventories, current

Deferred contract costs

Prepaid expenses and other current assets

Accounts payable

Accrued expenses and other

Deferred revenue, current and long-term

Net cash used in operating activities

Investing activities

Purchase of property and equipment

Purchase of short-term investments

Sale of short-term investments

Additions to patents and licenses

Proceeds from sales of property, plant and equipment
Net cash provided by (used in) investing activities

Financing activities

Payment of long-term debt

Proceeds from revolving credit facility

Repayments of revolving credit facility

Proceeds from long-term debt

Proceeds from repayment of shareholder notes

Proceeds from issuance of common stock, net of issuance costs

Payments to settle employee tax withholdings on stock-based compensation

Deferred financing costs

Net proceeds from employee equity exercises

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:

Fiscal Year Ended March 31,
2015
2016
2017

$ (12,288) $ (20,126) $ (32,061)

1,451

881

1,605

250

2,212

132

177

1,687

1,220
(899)
2,084
(81)
(635)
300
(1,903)

(660)
—

—
(291)
2,600

1,649

(880)
87,935
(85,025)
—

—

—
(19)
—

2,019

1,765

15,542

2,950

1,215

1,462

6,023

509

575

258

7,116
(3,249)
137
(2,645)
713

1,803
(254)
(3,473)

(401)
—

—
(6)
35
(372)

(1,901)
65,767
(64,549)
—

—
(2)
(34)
—

104
(615)
(4,460)
20,002

2,853

1,327

1,499

12,130
(21)
361

285

265

(1,909)
(2,356)
651

1,261

2,475

838
(410)
(12,812)

(2,006)
(2)
472
(234)
1,040
(730)

(4,494)
2,500

—

446

17,465
(22)
(406)
441

15,976

2,434

17,568

17,307

15,542

20,002

Cash paid for interest

Cash (received) paid for income taxes

Supplemental disclosure of non-cash investing and financing activities:

Vendor financed capital lease addition

164
$
(153) $

191

175

396

287

—

ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF BUSINESS

Organization

Orion includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated subsidiaries. Orion is a
developer, manufacturer and seller of lighting and energy management systems to commercial and industrial businesses, and
federal and local governments, predominantly in North America.

Orion’s corporate offices and leased primary manufacturing operations are located in Manitowoc, Wisconsin. Orion

leases office space in Jacksonville, Florida; Chicago, Illinois; and Houston, Texas. Orion also leases warehouse space in
Manitowoc, Wisconsin and Augusta, Georgia.

NOTE 2 — 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

Where appropriate, certain reclassifications have been made to prior years’ financial statements to conform to the current

year presentation.

Use of Estimates

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

Cash and Cash Equivalents

Orion considers all highly liquid, short-term investments with original maturities of three months or less to be cash

equivalents.

Fair Value of Financial Instruments

Orion’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other, revolving credit facility and long-term debt. The carrying amounts of Orion’s financial instruments
approximate their respective fair values due to the relatively short-term nature of these instruments, or in the case of long-term
debt and revolving credit facility, because of the interest rates currently available to Orion for similar obligations. 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 — Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in

markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3 — Valuations are based on prices or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. Inputs reflect management's best estimate of what market participants would
use in valuing the asset or liability at the measurement date.

Allowance for Doubtful Accounts

Orion performs ongoing evaluations of its customers and continuously monitors collections and payments and estimate an
allowance for doubtful accounts based upon the aging of the underlying receivables, historical experience with write-offs and

specific customer collection issues that have been identified. See Note 3 - Accounts Receivable for further discussion of the
allowance for doubtful accounts

Long-Term Receivables

Orion records a long-term receivable for the non-current portion of its sales-type capital lease OTA contracts. The receivable
is recorded at the net present value of the future cash flows from scheduled customer payments. Orion uses the implied cost of
capital from each individual contract as the discount rate.

Deferred Contract Costs

Deferred contract costs consist primarily of the costs of products delivered, and services performed, that are subject to
additional performance obligations or customer acceptance. These deferred contract costs are expensed at the time the related
revenue is recognized. Deferred costs amounted to $935,000 as of March 31, 2017 and $37,000 as of March 31, 2016.

Incentive Compensation

Orion’s compensation committee approved an Executive Fiscal Year 2017 Annual Cash Incentive Program under its 2004
Stock and Incentive Plan. The plan provided for performance cash bonus payments ranging from 35-100% of the fiscal 2017 base
salaries of Orion’s named executive officers and other key employees. The plan provided for bonuses to be paid out on the basis
of the achievement in fiscal 2017 of at least (i) $500,000 of profit before taxes and (ii) revenue growth of 10% more than fiscal
year 2016. Based upon the results for the year ended March 31, 2017, Orion did not accrue any expense related to this plan.

Orion’s compensation committee approved an Executive Fiscal Year 2016 Annual Cash Incentive Program under its 2004
Stock and Incentive Awards Plan. The plan provided for performance cash bonus payments ranging from 35-100% of the fiscal
2016 base salaries of Orion’s named executive officers and other key employees. The plan provided for bonuses to be paid out on
the basis of the achievement in fiscal 2016 of at least (i) $110,000 of profit before taxes and (ii) revenue growth of 10% more than
fiscal year 2015. Based upon the results for the year ended March 31, 2016, Orion did not accrue any expense related to this plan.

Orion’s compensation committee approved an Executive Fiscal Year 2015 Annual Cash Incentive Program under its 2004
Stock and Incentive Awards Plan. The plan provided for performance cash bonus payments ranging from 35-100% of the fiscal
2015 base salaries of Orion’s named executive officers and other key employees. The plan provided for bonuses to be paid out on
the basis of the achievement in fiscal 2015 of at least (i) $2,300,000 of profit before taxes and (ii) revenue of at least $90,400,000.
Based upon the results for the year ended March 31, 2015, Orion did not accrue any expense related to this plan.

Revenue Recognition

Revenue is recognized on the sales of Orion's lighting and related energy-efficiency systems and products 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 Orion’s product-only revenue upon delivery of the product and title passing to the

customer. At that time, Orion 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 of Orion’s lighting and energy management technologies under multiple element arrangements, consisting of a
combination of product sales and services, Orion determines revenue by allocating the total contract revenue to each element
based on their relative selling prices in accordance with ASC 605-25, Revenue Recognition - Multiple Element Arrangements.
In such circumstances, Orion uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables:
(1) vendor-specific objective evidence ("VSOE") of fair value, if available, (2) third-party evidence ("TPE") of selling price if
VSOE is not available, and (3) best estimate of the selling price if neither VSOE nor TPE is available (a description as to how
Orion determines estimated selling price is provided below).

The nature of Orion’s multiple element arrangements for the sale of its lighting and energy management technologies is
similar to a construction project, with materials being delivered and contracting and project management activities occurring
according to an installation schedule. The significant deliverables include the shipment of products and related transfer of title
and the installation.

To determine the selling price in multiple-element arrangements, Orion establishes the selling price for its energy
management system products using management's best estimate of the selling price, as VSOE and TPE do not exist. Product
revenue is recognized when title and risk of loss for the products transfers. For product revenue, management's best estimate of
selling price is determined using a cost plus gross profit margin method.

In addition, Orion records in service revenue the selling price for its installation and recycling services using

management’s best estimate of selling price, as VSOE and TPE do not exist. Service revenue is recognized when services are
completed and customer acceptance has been received. Recycling services provided in connection with installation entail the
disposal of the customer’s legacy lighting fixtures. Orion’s service revenues, other than for installation and recycling that are
completed prior to delivery of the product, are included in product revenue using management’s best estimate of selling price,
as VSOE and TPE do not exist. These services include comprehensive site assessment, site field verification, utility incentive
and government subsidy management, engineering design, and project management. For these services, along with Orion's
installation and recycling services, under a multiple-element arrangement, management’s best estimate of selling price is
determined using a cost plus gross profit margin method with consideraion given to other relevant economic conditions and
trends, customer demand, pricing practices, and margin objectives. The determination of an estimated selling price is made
through consultation with and approval by management, taking into account the preceding factors.

Orion offers a financing program, called an Orion Throughput Agreement, or OTA, for a customer’s lease of Orion’s
energy management systems. The OTA is structured as a sales-type lease and upon successful installation of the system and
customer acknowledgment that the system is operating as specified, revenue is recognized at Orion’s net investment in the
lease, which typically is the net present value of the future cash flows.

Orion has limited Power Purchase Agreement (“PPA”) contracts still outstanding. Those PPA’s outstanding are supply side
agreements for the generation of electricity for which we recognize revenue on a monthly basis over the life of the PPA contract,
typically in excess of 10 years. Prior to fiscal 2015, Orion sold solar PV systems which were recognized to revenue using the
percentage-of-completion method by measuring project progress by the percentage of costs incurred to date of the total estimated
costs for each contract as materials are installed. Revenue from sales of Orion's solar PV systems is generally recognized over a
period of three to 15 months. There were no sales of solar PV systems in fiscal 2017, fiscal 2016 or fiscal 2015.

Deferred revenue relates to advance customer billings, investment tax grants received related to PPAs and long term

maintenance contracts on OTAs and is classified as a liability on the condensed consolidated balance sheet. The fair value of
the maintenance is readily determinable based upon pricing from third-party vendors. Deferred revenue related to maintenance
services is recognized when the services are delivered, which occurs in excess of a year after the original OTA contract is
executed.

Shipping and Handling Costs

Orion 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 $94,000, $4,000 and $149,000 for fiscal 2017, 2016 and 2015, respectively, were charged to operations

as incurred.

Research and Development

Orion expenses research and development costs as incurred. Amounts are included in the Statement of Operations and

Comprehensive Income on the line item Research and development.

Income Taxes

Orion 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
carry-forwards. 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. For the fiscal year ended March 31, 2017, Orion recorded a full valuation
allowance of $4,627,000 against its deferred tax assets.

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. Orion 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.
Orion recognizes penalties and interest related to uncertain tax liabilities in income tax expense. Penalties and interest are immaterial
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 (expense) from the exercise of stock options were $0, for the fiscal
years 2017, 2016 and 2015.

Stock Based Compensation

Orion’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.

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. Orion realized no such tax benefits during the years ended
March 31, 2017, 2016 and 2015.

Historically, Orion uses the Black-Scholes option-pricing model for issued stock options. Orion calculated volatility based
upon the historical market price of its common stock. 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 was based
upon the vesting term of Orion’s options and expected exercise behavior.

Orion accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation. Under
the fair value recognition provisions of ASC 718, stock-based compensation is measured at the grant date based on the fair value
of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures. As more fully
described in Note 9, Orion currently awards non-vested restricted stock to employees, executive officers and directors. Orion did
not issue any stock options during fiscal 2017, fiscal 2016 or fiscal 2015.

Orion has not paid dividends in the past and does not plan to pay any dividends in the foreseeable future. Orion estimates

its forfeiture rate of unvested stock awards based on historical experience.

Concentration of Credit Risk and Other Risks and Uncertainties

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

Orion purchases components necessary for its lighting products, including ballasts, lamps and LED components, from

multiple suppliers. For fiscal 2017, 2016 and 2015, no supplier accounted for more than 10% of total cost of revenue.

In fiscal 2017 and fiscal 2016, no customer accounted for 10% of revenue. In fiscal 2015, one customer accounted for 12%

of revenue.

As of March 31, 2017, one customer accounted for 11.6% of accounts receivable and as of March 31, 2016, one customer

accounted for 10.3% of accounts receivable.

Recent Accounting Pronouncements

Issued: Not Yet Adopted

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-15, "Classification of Certain Cash Receipts and Cash Payments," which provides clarification and additional guidance as
to the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The ASU
provides guidance, as to the classification of a number of transactions including: contingent consideration payments made after
a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life
insurance policies, and distributions received from equity method investees. The new standard will be effective for Orion in the
first quarter of fiscal 2019 and will be applied through retrospective adjustment to all periods presented. Orion does not expect
the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842)." This ASU requires that lessees recognize
right-of-use assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and disclose
additional quantitative and qualitative information about leasing arrangements. Under this ASU, leases will be classified as
either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to
classify leases as sales-type, finance or operating leases, with classification affecting the pattern of income recognition.
Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive
control have been transferred through the lease contract. This ASU also provides guidance on the presentation of the effects of
leases in the income statement and statement of cash flows. This guidance will be effective for Orion on April 1, 2019. Early
adoption of the standard is permitted and a modified retrospective transition approach is required for leases existing at, or

entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical
expedients available. The Company has not yet completed its review of the full provisions of this standard against its
outstanding lease arrangements and is in the process of quantifying the lease liability and related right of use asset which will be
recorded to its consolidated balance sheets upon adoption of the standard. In addition, management continues to assess the
impact of adoption of this standard on its consolidated statements of operations, cash flows, and the related footnote
disclosures.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This ASU is a comprehensive new
revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer
at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In addition, the ASU
requires enhanced and expanded financial statement disclosures. Since the issuance of this ASU, the FASB has issued further
ASU’s to provide additional guidance and clarification as to the application of ASU 2014-09 and delaying its original effective
date. The ASU allows companies to elect either a full retrospective or modified retrospective approach to adoption.

Orion will adopt ASU 2014-09 and the related updates with their effective date on April 1, 2018. Orion has begun the process
of implementing this standard, including performing a review of its revenue streams to identify any differences in the timing,
measurement, or presentation of revenue recognition. The Company is in the process of reviewing the provisions of these standards
against its customer contracts, including evaluating and identifying distinct performance obligations. The Company continues to
evaluate its customer contracts to determine the impact on the timing and presentation of revenue. In addition, the Company is
evaluating any necessary changes to its revenue related processes and controls as a result of the new standard, including the related
footnote disclosures. Under ASU 2014-09 incremental contract costs, including sales commissions, may be required to be capitalized
and expensed over the period these costs are recovered. Although Orion incurs commission costs, its contracts are typically
completed within one year. As such, the Company will elect to apply the practical expedient for contract costs recovered within
one year and will continue to recognize commissions as cost of sales immediately rather than capitalizing and expensing these
costs over the contract period. Orion currently plans to elect the modified retrospective adoption method but continues to evaluate
both of the available transition methods.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes,” to simplify the presentation of deferred taxes. The amendments in this update require that deferred tax assets and liabilities
be classified as non-current on the balance sheet. This ASU is effective for Orion's annual reporting period, and interim periods
therein, as of April 1, 2017. The adoption of this standard will have no impact on Orion’s consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which
changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value for
entities that measure inventory using first-in, first-out ("FIFO") or average cost. Net realizable value is defined as the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This
ASU is effective for Orion on April 1, 2017. The Company believes the adoption of this standard will not have a material impact
on Orion’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting," which changes how companies account for certain aspects of share-based payment
awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well
as the classification of related matters in the statement of cash flows. The ASU is effective for Orion as of April 1, 2017. The
adoption of this standard is not expected to have a material impact on Orion’s consolidated financial statements.

Recently Adopted Standards

As of April 1, 2016, Orion adopted the provisions of ASU 2015-03 “Interest-Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs” and the related ASU 2015-15 “Interest-Imputation of Interest (Subtopic
835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements-
Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update).” This guidance
requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a reduction of the carrying
amount of that debt liability, consistent with debt discounts, with the exception of debt issuance costs associated with line of credit
agreements which may remain classified as an asset and amortized ratably over the term of the line-of-credit arrangement, regardless
of whether there are any outstanding borrowings on the line-of-credit arrangement. As Orion’s only deferred debt issuance costs
relate to its revolving line of credit, upon adoption of these standards a reclassification of the deferred financing costs was not
required and there was no impact on Orion’s condensed consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements - Going Concern" ("ASU 2014-15").
ASU 2014-15 requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the entity's ability to continue as a going concern and if those conditions exist prescribes the

necessary disclosures. Orion incorporated the provisions of this standard in performing its going concern analysis as of March 31,
2017. The adoption of this standard did not have an impact on Orion’s consolidated financial statements or footnote disclosures.

NOTE 3 — ACCOUNTS RECEIVABLE

Orion’s accounts receivable are due from companies in the commercial, governmental, industrial and agricultural industries,
as well as 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 and/or guarantees. Accounts receivable are generally due within 30-60 days. Accounts receivable are
stated at the amount Orion expects to collect from outstanding balances. Orion 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 Orion has used reasonable collection efforts are written off through a charge to
the allowance for doubtful accounts and a credit to accounts receivable. Orion's accounts receivable and allowance for doubtful
accounts balances were as follows (dollars in thousands):

Accounts receivable, gross

Allowance for doubtful accounts

Accounts receivable, net

NOTE 4 — FINANCING RECEIVABLES

2017

2016

9,315
(144)
9,171

11,394
(505)
10,889

Orion considers its lease balances included in consolidated current and long-term accounts receivable from its OTA, sales-
type leases to be financing receivables. Additional disclosures on the credit quality of Orion’s financing receivables are as follows:

Age Analysis as of March 31, 2017 (dollars in thousands):

Not Past Due

1-90 days
past due

Greater than 90
days past due

Total past due

Total sales-type
leases

Lease balances included in consolidated
accounts receivable—current

Lease balances included in consolidated
accounts receivable—long-term

Total gross sales-type leases

Allowance

Total net sales-type leases

— $

—

— $

—

Age Analysis as of March 31, 2016 (dollars in thousands):

Not Past Due

1-90 days
past due

Greater than 90
days past due

Total past due

Total sales-type
leases

Lease balances included in consolidated
accounts receivable—current

Lease balances included in consolidated
accounts receivable—long-term

Total gross sales-type leases

Allowance

Total net sales-type leases

294

101

395

—

395

—

10
(9)
1

—

14
(9)
5

308

101

409
(9)
400

Allowance for Credit Losses on Financing Receivables

Orion’s allowance for credit losses is based on management’s assessment of the collectability of customer accounts. A
considerable amount of judgment is required in order to make this assessment including a detailed analysis of the aging of the
lease receivables and the current credit worthiness of Orion's customers and an analysis of historical bad debts and other adjustments.
If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than historical experience, the
estimate of the recoverability of amounts due could be adversely affected. Orion reviews in detail the allowance for doubtful
accounts on a quarterly basis and adjusts the allowance estimate to reflect actual portfolio performance and any changes in future
portfolio performance expectations. Orion’s provision for write-offs and credit losses against the OTA sales-type lease receivable
balances in fiscal 2017, fiscal 2016 and fiscal 2015, respectively, was as follows (dollars in thousands):

March 31,
2017 Allowance for Doubtful Accounts on financing receivables
2016 Allowance for Doubtful Accounts on financing receivables
2015 Allowance for Doubtful Accounts on financing receivables

NOTE 5 — INVENTORIES

Balance at
beginning of
period

Provisions
charged to
expense

Write offs
and other

Balance at
end of
period

156

(in Thousands)
— $

177

—

— $

156

Inventories consist of raw materials and components, such as drivers, metal sheet and coil stock and molded parts; work in
process inventories, such as frames and reflectors; and finished goods, including completed fixtures and systems, and accessories.
All inventories are stated at the lower of cost or market value with cost determined using the first-in, first-out (FIFO) method.
Orion reduces the carrying value of its inventories for differences between the cost and estimated net realizable value, taking into
consideration usage in the preceding 9 to 24 months, expected demand, and other information indicating obsolescence. Orion
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, 2017 and 2016, Orion's inventory balances were as follows (dollars in thousands):

As of March 31, 2017

Raw materials and components

Work in process

Finished goods

Total

As of March 31, 2016

Raw materials and components

Work in process

Finished goods

Total

Cost

Obsolescence
Reserve

Net

8,104

1,918

7,044

17,066

(1,807) $
(329)
(1,337)
(3,473) $

6,297

1,589

5,707

13,593

10,556

2,045
6,550

19,151

(1,052) $
(119)
(956)
(2,127) $

9,504

1,926
5,594

17,024

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.

In fiscal 2017, Orion increased its obsolescence reserve by $1,346,000. The reserve was increased by $1,671,000 related
to its fluorescent and LED exterior products. The reserve increase was reduced by disposals during the year of fully reserved
inventory items along with other inventory related activities. Orion’s customer preference is for higher performing LED lighting
technologies rather than lower-priced earlier generation solutions.

NOTE 6 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist primarily of prepaid insurance premiums, prepaid license fees, purchase
deposits, advance payments to contractors, unbilled receivables, prepaid taxes and miscellaneous receivables. Prepaid expenses
and other current assets include the following (dollars in thousands):

Unbilled accounts receivable

Other prepaid expenses

Total

NOTE 7 — PROPERTY AND EQUIPMENT

March 31,
2017

March 31,
2016

2,226

651

2,877

4,307

731

5,038

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.

Orion periodically reviews the carrying values of property and equipment for impairment in accordance with ASC 360,

Property, Plant and Equipment, if 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.

In fiscal 2017, no fixed asset impairment charges were required.

On June 30, 2016, Orion completed the sale of its Manitowoc manufacturing and distribution facility for gross cash
proceeds of $2,600,000, which approximated the assets' net carrying values. In conjunction with the sale, Orion entered into an
agreement with the buyer to leaseback approximately 197,000 square feet of the building for not less than three years, subject to
mutual options to reduce the amount of leased space.

In conjunction with the anticipated sale of this facility, in fiscal 2016, the Company reviewed the carrying value of the
manufacturing and distribution facility assets for impairment performing a probability weighted analysis of expected future cash
flows. Based on that analysis, the Company concluded that the assets' carrying values were no longer supported. As such, Orion
recorded an impairment charge of $1,614,000 in fiscal 2016 to write the assets down to their fair value, which approximates the
expected selling price. The impairment charge was recorded to all three of Orion’s reportable segments as follows: Orion U.S.
Markets $689,000, Orion Engineered Systems $804,000, and Orion Distribution Services $121,000.

In fiscal 2015, an impairment charge of $1,030,000 was recorded in connection with the assessment of carrying costs related

to the wireless controls product offering.

Property and equipment were comprised of the following (dollars in thousands):

Land and land improvements

Buildings and building improvements

Furniture, fixtures and office equipment

Leasehold improvements

Equipment leased to customers under Power Purchase Agreements

Plant equipment

Construction in progress

Less: accumulated depreciation and amortization

Net property and equipment

Equipment included above under capital leases was as follows (dollars in thousands):

Equipment

Less: accumulated depreciation and amortization

Net equipment

March 31, 2017

March 31, 2016

424

9,245

7,056

324

4,997

11,627

33,734
(19,948)
13,786

421

11,849

7,233

148

4,997

10,805

128

35,581
(18,577)
17,004

March 31, 2017

March 31, 2016

581
(202)
379

408
(65)
343

Depreciation is recognized over the estimated useful lives of the respective assets, using the straight-line method. Orion
recorded depreciation expense of $1,451,000, $2,950,000 and $2,853,000 for the years ended March 31, 2017, 2016 and 2015,
respectively.

Depreciable lives by asset category are as follows:

Land improvements

Buildings and building improvements

Furniture, fixtures and office equipment

Leasehold improvements

Equipment leased to customers under Power Purchase Agreements

Plant equipment

10-15 years

10-39 years

2-10 years

Shorter of asset life or life of lease

20 years

3-10 years

No interest was capitalized for construction in progress during fiscal 2017 or fiscal 2016.

NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS

The costs of specifically identifiable intangible assets that do not have an indefinite life are amortized over their estimated

useful lives. Goodwill and intangible assets with indefinite lives are not amortized.

As of March 31, 2016 and March 31, 2017, Orion had no goodwill on its Consolidated Balance Sheet. Prior to March 31,
2016, Orion had allocated goodwill to its reporting units which were also two of its reportable segments as follows: $2,371,000
to the U.S. Markets ("USM") and $2,038,000 to Orion Engineered Systems ("OES"). The Orion Distribution Services ("ODS")
segment had no goodwill. Orion tests goodwill for impairment at least annually as of the first day of the fiscal fourth quarter, or
when indications of potential impairment exist. Orion performed its last annual goodwill impairment test as of January 1, 2016.
In accordance with ASC 350, Intangibles - Goodwill and Other, Step 1 of the impairment test compares the fair value of the
reporting unit with its carrying value. Orion determined the fair value of each reporting unit using a discounted cash flow method
and the guideline public entity method. After completing a Step 1 evaluation, the estimated fair value of both reporting units was
determined to be lower than their carrying values. As such, each unit failed Step 1 of the goodwill impairment test and Step 2 of
the goodwill impairment test was performed. In conjunction with the Step 2 test, Orion performed a hypothetical purchase price
allocation for each of its reporting units to determine the implied fair value of goodwill and compared the implied fair value of
goodwill to the carrying amount of goodwill. A third-party valuation firm was engaged to assist in the Step 2 valuation process.
The fair value determination was categorized as Level 3 in the fair value hierarchy (see “Fair Value of Financial Instruments” for
the definition of Level 3 inputs). As a result of Step 2 of the goodwill impairment tests as of January 1, 2016, Orion’s USM segment
recorded a goodwill impairment charge of $2,371,000 and Orion’s OES segment recorded a goodwill impairment charge of
$2,038,000. Therefore, as of March 31, 2017 and March 31, 2016, Orion had no goodwill on its Consolidated Balance Sheets.

The change in the carrying value of goodwill during fiscal 2016 was as follows (dollars in thousands):

Balance at March 31, 2015

Impairments
Balance at March 31, 2016

4,409
(4,409)
—

Amortizable intangible assets are amortized over their estimated economic useful life to reflect the pattern of economic

benefits consumed based upon the following lives and methods:

Patents

Licenses

Customer relationships

Developed technology

Non-competition agreements

10-17 years

7-13 years

5-8 years

8 years

5 years

Straight-line

Accelerated based upon the pattern of economic benefits consumed

Straight-line

Intangible assets that have a definite life are evaluated for potential impairment whenever events or circumstances

indicate that the carrying value may not be recoverable based primarily upon whether expected future undiscounted cash flows
are sufficient to support the asset recovery. If the actual useful life of the asset is shorter than the estimated life, the asset may be
deemed to be impaired and accordingly a write-down of the value of the asset determined by a discounted cash flow analysis or
shorter amortization period may be required.

Indefinite lived intangible assets are evaluated for impairment at least annually on the first day of Orion’s fiscal fourth quarter,
or when indications of potential impairment exist. This annual impairment review may begin with a qualitative test to determine
whether it is more likely than not that an indefinite lived intangible asset's carrying value is greater than its fair value. If the
qualitative assessment reveals that asset impairment is more likely than not, a quantitative impairment test is performed comparing
the fair value of the indefinite lived intangible asset to its carrying value. Alternatively, the qualitative test may be bypassed and
the quantitative impairment test may be immediately performed. If the fair value of the indefinite lived intangible asset exceeds
its carrying value, the indefinite lived intangible asset is not impaired and no further review is performed. If the carrying value
of the indefinite lived intangible asset exceeds its fair value, an impairment loss would be recognized in an amount equal to such
excess. Once an impairment loss is recognized, the adjusted carrying value becomes the new accounting basis of the indefinite
lived intangible asset.

Orion performed a qualitative assessment in conjunction with its annual impairment test of its indefinite lived intangible
assets as of January 1, 2017. This qualitative assessment considered Orion’s operating results for the first nine months of fiscal
2017 in comparison to prior years as well as its anticipated fourth quarter results and fiscal 2018 plan. As a result of the conditions
that existed as of the assessment date, an asset impairment was not deemed to be more likely than not and a quantitative analysis
was not required.

During the fourth quarter of fiscal 2017, Orion achieved lower than anticipated operating results, made a strategic shift in
its manufacturing strategy and approach to the fluorescent and LED exterior lighting market, and revised its fiscal 2018 forecast.
As a result, a triggering event occurred requiring the Company to reassess its indefinite lived intangible assets for impairment. As
such Orion performed a quantitative impairment review of its indefinite lived intangible assets related to the Harris trade name
applying the royalty replacement method to determine the asset’s fair value as of March 31, 2017. Under the royalty replacement
method, the fair value of the Harris tradename was determined based on a market participant’s view of the royalty that would be
paid to license the right to use the tradename. This quantitative analysis incorporated several assumptions including forecasted
future revenues and cash flows, estimated royalty rate, based on similar licensing transactions and market royalty rates, and discount
rate, which incorporates assumptions such as weighted-average cost of capital and risk premium. As a result of this impairment
test, the carrying value of the Harris trade name exceeded its estimated fair value and an impairment of $250,000 was recorded to
Impairment of assets during the fourth quarter to reduce the asset’s carrying value to its calculated fair value. This fair value
determination was categorized as Level 3 in the fair value hierarchy (see “Fair Value of Financial Instruments” for the definition
of Level 3 inputs).

The components of, and changes in, the carrying amount of other intangible assets were as follows (dollars in thousands):

March 31, 2017

March 31, 2016

Gross Carrying
Amount

Accumulated
Amortization

Net

Gross Carrying
Amount

Accumulated
Amortization

Net

Patents

Licenses

Trade name and trademarks

Customer relationships
Developed technology

Non-competition agreements

2,658

1,715

3,600
900

100

Total

9,031

(1,211) $
(58)
—
(3,054)
(426)
(75)
(4,824) $

1,447

2,377

—

1,715

546
474

1,956

3,600
900

100

4,207

8,991

(1,053) $
(58)
—
(2,512)
(265)
(55)
(3,943) $

1,324

—

1,956

1,088
635

5,048

As of March 31, 2017, the weighted average useful life of intangible assets was 6.0 years. The estimated amortization expense

for each of the next five years is shown below (dollars in thousands):

Fiscal 2018

Fiscal 2019

Fiscal 2020

Fiscal 2021

Fiscal 2022

Thereafter

621

445

359

285

167

615
2,492

Amortization expense is set forth in the following table (dollars in thousands):

Amortization included in cost of sales:

Patents

Total

Amortization included in operating expenses:

Customer relationships

Developed technology

Non-competition agreements

Patents

Total

Total amortization

Fiscal Year Ended March 31,

2017

2016

2015

158

542

161

—

723

881

139

891

156

1,076

1,215

132

1,085

—

1,195

1,327

Orion’s management periodically reviews the carrying value of patent applications and related costs. When a patent
application is probable of being unsuccessful or a patent is no longer in use, Orion writes off the remaining carrying value as a
charge to general and administrative expense within its Consolidated Statement of Operations. Such write-offs recorded in fiscal
2017, 2016 and 2015 were $0, $78,000 and $120,000, respectively.

Included in other income in fiscal 2017 are product royalties received from licensing agreements for our patents.

NOTE 9 — OTHER LONG-TERM ASSETS

Other long-term assets include the following (dollars in thousands):

Deferred financing costs

Security deposits

Other

Total

March 31, 2017

March 31, 2016

— $

117

170

185

Deferred financing costs related to debt issuances are allocated to interest expense over the life of the debt (1 to 3 years).

For the years ended March 31, 2017, 2016 and 2015, the expense was $110,000, $114,000 and $156,000 respectively.

NOTE 10 — ACCRUED EXPENSES AND OTHER

Accrued expenses and other include the following (dollars in thousands):

Compensation and benefits

Sales tax

Contract costs

Legal and professional fees (1)

Warranty (2)

Other accruals

Total

March 31, 2017

March 31, 2016

2,431

213

223

2,262

449

410

5,988

1,794

913

586

2,348

554

391

6,586

(1) Includes a $1,400 loss contingency recorded in fiscal 2016.

(2) See table below for additional long-term warranty liability.

Orion generally offers a limited warranty of one to ten years on its lighting 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 Orion's lighting products.

Changes in Orion’s warranty accrual (both current and long-term) were as follows (dollars in thousands):

Beginning of year (1)

Provision to product cost of revenue

Charges

End of year (1)

March 31,

2017

2016

864
(102)
(3)
759

1,015

159
(310)
864

(1) Includes a $310 reserve related to solar operating system warranties.

NOTE 11 — NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shareholders
by the weighted-average number of common shares outstanding for the period and does not consider common stock equivalents.

Diluted net income (loss) per common share reflects the dilution that would occur if warrants and stock options were exercised
and restricted shares vested. In the computation of diluted net income (loss) per common share, Orion uses the treasury stock
method for outstanding options, warrants and restricted shares. Diluted net loss per common share is the same as basic net loss
per common share for the years ended March 31, 2017, March 31, 2016 and March 31, 2015 because the effects of potentially
dilutive securities would be anti-dilutive. The effect of net income (loss) per common share is calculated based upon the following
shares:

Numerator:
Net loss (dollars in thousands)
Denominator:
Weighted-average common shares outstanding

Weighted-average common shares and share equivalents outstanding

Net loss per common share:

Basic

Diluted

Fiscal Year Ended March 31,

2017

2016

2015

(12,288) $

(20,126) $

(32,061)

28,156,382

27,627,693

22,353,419

(0.44) $
(0.44) $

(0.73) $
(0.73) $

(1.43)
(1.43)

The following table indicates the number of potentially dilutive securities as of the end of each period:

Common stock options

Restricted shares

Total

NOTE 12 — ACQUISITION

2017

1,520,953

1,704,543

3,225,496

March 31,

2016

2,017,046

1,053,389

3,070,435

2015

2,426,836

704,688

3,131,524

On July 1, 2013, Orion acquired all of the equity interests of Harris Manufacturing, Inc. and Harris LED, LLC (collectively,
"Harris"). Harris was a Florida-based lighting company which engineered, designed, sourced and manufactured energy-efficient
lighting systems, including fluorescent and LED lighting solutions, and day-lighting products.

The acquisition was consummated pursuant to a Stock and Unit Purchase Agreement, dated as of May 22, 2013 ("Purchase
Agreement"), by and among Harris, the shareholders and members of Harris ("Harris Shareholders"), and Orion. The acquisition
consideration paid to the Harris Shareholders was valued under the Purchase Agreement at an aggregate of $10,801,000, plus an
adjustment of approximately $200,000 to reflect Orion's acquisition of net working capital in excess of a targeted amount, plus an
additional $612,000 for the contingent consideration earn-out value assigned to non-employee Harris shareholders.

On October 21, 2013, Orion executed a letter agreement amending the Purchase Agreement. The letter agreement
established a fixed future consideration of $1,371,000 for the previously existing earn-out component of the Purchase Agreement

and eliminated the requirement that certain revenue targets must be achieved. Under the letter agreement, on January 2, 2014,
Orion issued $571,000, or 83,943 shares, of Orion's unregistered common stock. The fixed consideration was determined based
upon the existing share calculation at a fair value of $3.80 per common share. On January 2, 2015, Orion would pay $800,000 in
cash to settle all outstanding obligations related to the earn-out component of the Purchase Agreement. In December 2014, Orion
amended the letter agreement to defer the January 2, 2015 payment of $800,000 in cash until February 13, 2015, to settle all
outstanding obligations related to the earn-out component of the Purchase Agreement. The final payment was made on February
12, 2015.

The Purchase Agreement contained customary representations and warranties, as well as indemnification obligations,

and limitations thereon, by Orion and the Harris Shareholders. On December 31, 2014, Harris was merged with and into Orion.

Orion recorded $612,000 for the non-employee Harris Shareholder portion of the contingent consideration liability on
the acquisition date. During the year ended March 31, 2015, Orion expensed $147,000 in compensation expense as contingent
consideration for employee Harris shareholders.

NOTE 13 — RELATED PARTY TRANSACTIONS

During fiscal 2017, 2016 and 2015, Orion purchased goods and services from an entity in the amount of $41,000, $21,000,
and $38,000, respectively, for which a director of Orion serves as a minority owner and serves as president and chairman of the
board of directors. In fiscal 2017, Orion purchased services in the amount of $43,000 from an immediate family member of a
named executive officer who is now currently employed by Orion.

NOTE 14 — LONG-TERM DEBT

Long-term debt as of March 31, 2017 and 2016 consisted of the following (dollars in thousands):

Revolving credit facility

Harris seller's note

Equipment lease obligations

Customer equipment finance notes payable

Other long-term debt

Total long-term debt

Less current maturities

Long-term debt, less current maturities

Revolving Credit Agreement

March 31,

2017

2016

6,629

3,719

—

321

6,971
(152)
6,819

546

345

4,767
(746)
4,021

Orion has an amended credit agreement ("Credit Agreement") that provides for a revolving credit facility ("Credit Facility")
subject to a borrowing base requirement based on eligible receivables and inventory. As of March 31, 2017 Orion's borrowing
base was approximately $6,832,000. The Credit Facility has a maturity date of February 6, 2019 and includes a $2,000,000
sublimit for the issuance of letters of credit. As of March 31, 2017, Orion had no outstanding letters of credit. Borrowings
outstanding as of March 31, 2017, amounted to approximately $6,629,000 and are included in non-current liabilities in the
accompanying Consolidated Balance Sheet. Orion estimates that as of March 31, 2017, it was eligible to borrow an additional
$203,000 under the Credit Facility based upon current levels of eligible inventory and accounts receivable.

Subject in each case to Orion's applicable borrowing base limitations, the Credit Agreement otherwise provides for a
$15,000,000 Credit Facility. This limit may increase to $20,000,000 based on a borrowing base requirement, if Orion satisfies
certain conditions. Orion did not meet the requirements to increase the borrowing limit to $20,000,000 as of July 31, 2016, the
most recent measurement date.

From and after any increase in the Credit Facility limit from $15,000,000 to $20,000,000, the Credit Agreement requires
that Orion maintain, as of the end of each month, a minimum ratio for the trailing twelve-month period of (i) earnings before
interest, taxes, depreciation and amortization, subject to certain adjustments, to (ii) the sum of cash interest expense, certain principal
payments on indebtedness and certain dividends, distributions and stock redemptions, equal to at least 1.10 to 1.00. The Credit
Agreement contains additional customary covenants, including certain restrictions on Orion’s ability to incur additional
indebtedness, consolidate or merge, enter into acquisitions, guarantee obligations of third parties, make loans or advances, declare
or pay any dividend or distribution on Orion’s stock, redeem or repurchase shares of Orion’s stock, or pledge or dispose of assets.
Orion was in compliance with its covenants in the Credit Agreement as of March 31, 2017.

Each subsidiary of Orion is a joint and several co-borrower or guarantor under the Credit Agreement, and the Credit

Agreement is secured by a security interest in substantially all of Orion’s and each subsidiary’s personal property (excluding
various assets relating to customer OTAs) and a mortgage on certain real property.

Borrowings under the Credit Agreement bear interest at the daily three-month LIBOR plus 3.0% per annum, with a minimum
interest charge for each year or portion of a year during the term of the Credit Agreement of $130,000, regardless of usage. As of
March 31, 2017, the interest rate was 4.15%. Orion must pay an unused line fee of 0.25% per annum of the daily average unused
amount of the Credit Facility and a letter of credit fee at the rate of 3.0% per annum on the undrawn amount of letters of credit
outstanding from time to time under the Credit Facility.

Harris Seller's Note

On July 1, 2013, Orion issued an unsecured and subordinated promissory note in the principal amount of $3,124,000 to
partially fund the acquisition of Harris Manufacturing, Inc. and Harris LED, LLC (collectively, "Harris"). The note is included in
the table above as Harris seller's note. The notes interest rate was 4% per annum. Principal and interest were payable quarterly.
The note matured in July 2016 and was paid in full upon maturity.

Equipment Lease Obligation

In March 2016 and June 2015, Orion entered into lease agreements with a financing company in the principal amount of
$19,000 and $377,000, respectively, to fund certain equipment. The leases are secured by the related equipment. The leases bear
interest at a rate of 5.94% and 3.6% and mature in February 2018 and June 2020. Both leases contain a one dollar buyout option.

Customer Equipment Finance Notes Payable

In December 2014, Orion entered into a secured borrowing agreement with a financing company in the principal amount of
$446,000 to fund completed customer contracts under its OTA finance program that were previously funded under the OTA credit
agreement. The loan amount is secured by the OTA-related equipment and the expected future monthly payments under the
supporting 25 individual OTA customer contracts. The borrowing agreement bears interest at a rate of 8.36% and matures in April
2018.

In June 2011, Orion entered into a note agreement with a financial institution that provided Orion with $2,831,000 to fund
completed customer contracts under Orion’s OTA finance program. This note is included in the table above as customer equipment
finance notes payable in the prior year. The note is collateralized by the OTA-related equipment and the expected future monthly
payments under the supporting 40 individual OTA contracts. The note bears interest at 7.85%. The note matured in April 2016
and was paid in full upon maturity.

Other Long-Term Debt

In September 2010, Orion entered into a note agreement with the Wisconsin Department of Commerce that provided Orion
with $260,000 to fund Orion’s rooftop solar project at its Manitowoc manufacturing facility. This note is included in the table
above as other long-term debt. The note is collateralized by the related solar equipment. The note allowed for two years without
interest accruing or principal payments due. Beginning in July 2012, the note bears interest at 2% and require monthly payments
of $4,600. The note matures in June 2017. The note agreement requires Orion to maintain a certain number of jobs at its Manitowoc
facilities during the note’s duration. Orion was in compliance with all covenants in the note agreement as of March 31, 2017.

Aggregate Maturities

As of March 31, 2017, aggregate maturities of long-term debt were as follows (dollars in thousands):

Fiscal 2018

Fiscal 2019

Fiscal 2020

Fiscal 2021

Fiscal 2022

Thereafter

152

6,707

—

6,971

NOTE 15 — INCOME TAXES

The total provision (benefit) for income taxes consists of the following for the fiscal years ending (dollars in thousands):

Current

Deferred

Federal

State

Fiscal Year Ended March 31,

2017

2016

2015

(261) $
—
(261) $

2017

2016

(283) $
22
(261) $

—

2015

A reconciliation of the statutory federal income tax rate and effective income tax rate is as follows:

Statutory federal tax rate

State taxes, net

Federal tax credit

State tax credit

Change in valuation reserve

Permanent items

Change in tax contingency reserve

Federal Refunds

Other, net

Effective income tax rate

Fiscal Year Ended March 31,

2017

2016

2015

34.0 %

3.5 %

— %

(37.6)%

(0.5)%

1.0 %

1.4 %

0.3 %

2.1 %

34.0 %

2.8 %

— %

(29.1)%

(7.5)%

(0.1)%

— %

(0.3)%

(0.2)%

34.0 %

3.6 %

0.2 %

0.1 %

(37.0)%

(0.1)%

— %

(1.0)%

(0.2)%

The net deferred tax assets and liabilities reported in the accompanying consolidated financial statements include the following

components (dollars in thousands):

Inventory, accruals and reserves

Other

Deferred revenue

Valuation allowance

Total net current deferred tax assets and liabilities

Federal and state operating loss carry-forwards

Tax credit carry-forwards

Non-qualified stock options

Deferred revenue

Fixed assets

Intangible assets

Valuation allowance

Total net long-term deferred tax assets and liabilities

Total net deferred tax assets

March 31,

2017

2016

4,016

54
(141)
(3,929)

— $

23,927

1,403

3,265
(51)
(1,360)
(1,034)
(26,150)

— $

3,686

187

73
(3,946)
—

19,727

1,475

3,125
(31)
(1,493)
(1,297)
(21,506)
—

—

Orion is eligible for tax benefits associated with the excess of the tax deduction available for exercises of non-qualified stock
options, or NQSOs, 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 $0 were recorded in fiscal 2017, fiscal 2016 and fiscal 2015, 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, 2017, Orion has federal net operating loss carryforwards of approximately $65,746,000, of which $2,977,000
are associated with the exercise of NQSOs that have not yet been recognized by Orion in its financial statements. Orion also has
state net operating loss carry-forwards of approximately $56,231,000, of which $3,324,000 are associated with the exercise of
NQSOs. Orion also has federal tax credit carry-forwards of approximately $1,403,000 and state tax credits of $724,000. Orion's
net operating loss and tax credit carry-forwards will begin to expire in varying amounts between 2030 and 2037. For the fiscal
year ended March 31, 2017, Orion has recorded a valuation allowance of $30,078,000, equaling the net deferred tax asset due to
the uncertainty of its realization value in the future. For the fiscal years ended March 31, 2017 and March 31, 2016, the valuation
allowance against Orion's net federal and net state deferred tax assets increased $4,627,000 and $5,740,000, respectively. Orion
considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation
allowance. In the event that Orion determines that the deferred tax assets are able to be realized, an adjustment to the deferred tax
asset would increase income in the period such determination is made.

Generally, a change of more than 50% in the ownership of Orion's stock, by value, over a three year period constitutes an
ownership change for federal income tax purposes as defined under Section 382 of the Internal Revenue Code. As a result, Orion's
ability to use its net operating loss carry-forwards, attributable to the period prior to such ownership change, to offset taxable
income can be subject to limitations in a particular year, which could potentially result in increased future tax liability for Orion.
There was no limitation of net operating loss carry-forwards that occurred for fiscal 2017, fiscal 2016, or fiscal 2015.

Orion records its tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates.
Where Orion believes that a tax position is supportable for income tax purposes, the item is included in their income tax returns.
Where treatment of a position is uncertain, a liability is recorded based upon the expected most likely outcome taking into
consideration the technical merits of the position based on specific tax regulations and facts of each matter. These liabilities may
be affected by changing interpretations of laws, rulings by tax authorities, or the expiration of the statute of limitations.

Orion files income tax returns in the United States federal jurisdiction and in several state jurisdictions. The Company's
federal tax returns for tax years beginning April 1, 2013 or later are open. For states in which Orion files state income tax returns,
the statue of limitations is generally open for tax years ended March 31, 2013 and forward.

State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return.
The state effect of any federal changes remains subject to examination by various states for a period of up to two years after formal
notification to the states. Orion currently has no state income tax return positions in the process of examination, administrative
appeals or litigation.

Orion has settled with the Wisconsin Department of Revenue with respect to an assessment regarding the proper classification
of our products for tax purposes under Wisconsin law. The issue under review is whether the installation of our lighting systems
is considered a real property construction activity under Wisconsin law. We have resolved this matter with the Wisconsin Department
of Revenue in fiscal 2017 for the amount of $460,000.

Uncertain tax positions

As of March 31, 2017, the balance of gross unrecognized tax benefits was approximately $113,000, all of which would

reduce Orion’s effective tax rate if recognized.

Orion has classified the amounts recorded for uncertain tax benefits in the balance sheet as other liabilities (non-current) to
the extent that payment is not anticipated within one year. Orion recognizes penalties and interest related to uncertain tax liabilities
in income tax expense. Penalties and interest are included in the unrecognized tax benefits. Orion had the following unrecognized
tax benefit activity (dollars in thousands):

Unrecognized tax benefits as of beginning of fiscal year

Additions based on tax positions related to the current period positions

Reduction for tax positions of prior years
Unrecognized tax benefits as of end of fiscal year

Fiscal Year Ended March 31,

2017

2016

2015

227

2
(116) $
$
113

212

— $

227

210

—

212

NOTE 16 — COMMITMENTS AND CONTINGENCIES

Operating Leases

Orion leases office space and equipment under operating leases expiring at various dates through 2020. Rent expense under
operating leases was $854,000, $502,000 and $398,000 for fiscal 2017, 2016 and 2015, respectively. Total annual commitments
under non-cancelable operating leases with terms in excess of one year at March 31, 2017 are as follows (dollars in thousand):

Fiscal 2018

Fiscal 2019

Fiscal 2020

654

473

114

1,241

On March 1, 2016, Orion entered into a lease agreement as a lessor for excess office space at its corporate headquarters in
Manitowoc, Wisconsin. The initial term of the lease is 24 months and the tenant has the option to extend the term for up to three
additional twelve month periods. The monthly rental payment Orion receives is $21,000 and is included in general and
administrative expenses.

On March 31, 2016, Orion entered into a purchase and sale agreement ("Agreement") with third party to sell and

leaseback Orion's manufacturing and distribution facility for gross cash proceeds of $2,600,000. The transaction closed on June
30, 2016. Pursuant to the Agreement, a lease was entered into on June 30, 2016, in which Orion is leasing approximately
197,000 square feet of the building for not less than three years, with rent at $2.00 per square foot per annum. Orion's monthly
payment under this lease is approximately $38,000. The lease contains options by either party to reduce the amount of leased
space after March 1, 2017.

Purchase Commitments

Orion 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, 2017, Orion had entered into $4,218,000 of purchase
commitments related to fiscal 2018 for inventory purchases.

Retirement Savings Plan

Orion 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 contributions
by Orion. In fiscal 2017, 2016 and 2015, Orion made matching contributions of approximately $9,000, $10,000 and $23,000,
respectively.

Litigation

Orion is subject to various claims and legal proceedings arising in the ordinary course of business. As of the date of this
report, Orion is unable to currently assess whether the final resolution of any of such claims or legal proceedings may have a
material adverse effect on our future results of operations. In addition to ordinary-course litigation, Orion is a party to the
proceedings described below.

On March 27, 2014, Orion was named as a defendant in a civil lawsuit filed by Neal R. Verfuerth, a Former Chief
Executive Officer who was terminated for cause in November 2012, in the United States District Court for the Eastern District
of Wisconsin (Green Bay Division). The plaintiff alleged, among other things, that Orion breached certain agreements entered
into with the plaintiff, including the plaintiff’s employment agreement, and violated certain laws. The complaint sought, among
other relief, unspecified pecuniary and compensatory damages, fees and such other relief as the court may deem just and proper.
On November 4, 2014, the court granted Orion's motion to dismiss six of the plaintiff's claims. On January 9, 2015, the plaintiff
filed an amended complaint re-alleging claims that were dismissed by the court, including, among other things, a retaliation
claim and certain claims with respect to prior management agreements and certain intellectual property rights. On January 22,
2015, Orion filed a motion to dismiss and a motion to strike certain of the claims made in the amended complaint. On May 18,
2015, the court dismissed the intellectual property claims re-alleged in the January 9, 2015 amended complaint. At the court's
direction, the parties attempted to mediate the matter in May 2016, but were unsuccessful in resolving the matter.

On August 25, 2016, the Chief Judge of the United States District Court for the Eastern District of Wisconsin (Green Bay
Division) dismissed all claims against Orion brought by the plaintiff, including his claims that Orion had allegedly breached the
plaintiff’s employment agreement and had allegedly violated the plaintiff's whistleblower rights. On September 22, 2016, the
plaintiff filed an appeal to the United States Court of Appeals challenging the judgment rendered on August 25, 2016. After the
court-mandated mediation was unsuccessful, the plaintiff moved forward with his appeal focusing only on the District Court's
dismissal of his whistleblower claims.

Orion intends to continue to defend against the claims vigorously. Orion believes it has substantial legal and factual
defenses to the claims and allegations remaining in the case and that Orion will prevail in this proceeding. Based upon the
current status of the lawsuit, Orion does not believe that it is reasonably possible that the lawsuit will have a material adverse
impact on its future continuing results of operations.

State Tax Assessment

Orion negotiated a settlement with the Wisconsin Department of Revenue with respect to an assessment regarding the

proper classification of its products for tax purposes under Wisconsin law. Orion resolved this matter with the Wisconsin
Department of Revenue in June 2016 for $460,000.

NOTE 17 — SHAREHOLDERS’ EQUITY

Common Stock Transactions

On February 20, 2015, Orion completed an underwritten public offering of 5,462,500 shares of its common stock, at an

offering price to public of $3.50 per share. Net proceeds of the offering approximated $17,465,000.

Share Repurchase Program and Treasury Stock

In October 2011, Orion’s Board of Directors approved a share repurchase program authorizing Orion to repurchase in
aggregate up to a maximum of $1,000,000 of Orion’s outstanding common stock. In November 2011, Orion’s Board of Directors
approved an increase to the share repurchase program authorizing Orion to repurchase in aggregate up to a maximum of $2,500,000
of Orion’s outstanding common stock. In April 2012, Orion's Board approved another increase to the share repurchase program
authorizing Orion to repurchase in aggregate up to a maximum of $7,500,000 of Orion's outstanding common stock. As of March 31,
2017, Orion had repurchased 3,022,349 shares of common stock at a cost of $6,791,000 under the program. Orion did not repurchase
any shares in fiscal 2017, fiscal 2016 or fiscal 2015 and does not intend to repurchase any additional common stock under this
program in the near-term.

Shareholder Rights Plan

On January 7, 2009, Orion’s Board of Directors adopted a shareholder rights plan and declared a dividend distribution of
one common share purchase right (Right) for each outstanding share of Orion’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 Orion one share of Orion’s common stock at a price of $30.00 per share, subject to adjustment (Purchase Price).

The Rights will not be exercisable (and will be transferable only with Orion’s common stock) until a “Distribution Date”
occurs (or the Rights are earlier redeemed or expire). A Distribution Date generally will occur on the earlier of a public announcement
that a person or group of affiliated or associated persons (Acquiring Person) has acquired beneficial ownership of 20% or more
of Orion’s outstanding common stock (Shares Acquisition Date) or 10 business days after the commencement of, or the
announcement of an intention to make, a tender offer or exchange offer that would result in any such person or group of persons
acquiring such beneficial ownership.

If a person becomes an Acquiring Person, holders of Rights (except as otherwise provided in the shareholder rights plan)
will have the right to receive that number of shares of Orion’s common stock having a market value of two times the then-current
Purchase Price, and all Rights beneficially owned by an Acquiring Person, or by certain related parties or transferees, will be null
and void. If, after a Shares Acquisition Date, Orion is acquired in a merger or other business combination transaction or 50% or
more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right (except as
otherwise provided in the 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 Orion. At any time prior to a
person becoming an Acquiring Person, the Board of Directors of Orion may redeem the Rights in whole, but not in part, at a price
of $0.001 per Right. Unless they are extended or earlier redeemed or exchanged, the Rights will expire on January 7, 2019.

Employee Stock Purchase Plan

In August 2010, Orion’s Board of Directors approved a non-compensatory employee stock purchase plan, or ESPP. The
ESPP authorizes 2,500,000 shares to be issued from treasury or authorized shares to satisfy employee share purchases under the
ESPP. All full-time employees of Orion are eligible to be granted a non-transferable purchase right each calendar quarter to purchase
directly from Orion up to $20,000 of Orion’s common stock at a purchase price equal to 100% of the closing sale price of Orion’s
common stock on The NASDAQ Capital Market on the last trading day of each quarter. The ESPP allows for employee loans from
Orion, except for Section 16 officers, limited to 20% of an individual’s annual income and no more than $250,000 outstanding at
any one time. Interest on the loans is charged at the 10-year loan IRS rate and is payable at the end of each calendar year or upon

loan maturity. The loans are secured by a pledge of any and all Orion’s shares purchased by the participant under the ESPP and
Orion has full recourse against the employee, including offset against compensation payable. As of March 31, 2013, Orion had
halted the loan program. Orion had the following shares issued from treasury during fiscal 2017 and fiscal 2016:

Quarter Ended March 31, 2017

Quarter Ended December 31, 2016

Quarter Ended September 30, 2016

Quarter Ended June 30, 2016

Total

Quarter Ended March 31, 2016

Quarter Ended December 31, 2015

Quarter Ended September 30, 2015

Quarter Ended June 30, 2015

Total

Shares Issued
Under ESPP
Plan

Closing Market
Price

Shares Issued
Under Loan
Program

Dollar Value of
Loans Issued

Repayment of
Loans

As of March 31, 2017

1,034

840

1,511

1,771

5,156

$1.98

$2.17

$1.33

$1.16

— $

—

$1.16 - 2.17

— $

—

Shares Issued
Under ESPP
Plan

Closing Market
Price

Shares Issued
Under Loan
Program

Dollar Value of
Loans Issued

Repayment of
Loans

As of March 31, 2016

1,435

1,170

779

541

$1.39

$2.17

$1.80

$2.51

— $

—

3,925

$1.39 - 2.51

— $

—

In prior years, Orion issued loans to non-executive employees to purchase shares of its stock. As of March 31, 2017
and March 31, 2016, $4,000 of such loans remained outstanding and are reflected on Orion’s balance sheet as a contra-equity
account. No new loans were issued during the periods presented as the loan program was discontinued.

NOTE 18 — STOCK OPTIONS, RESTRICTED SHARES AND WARRANTS

At Orion's 2016 Annual Meeting of Shareholders held on August 3, 2016, Orion's shareholders approved the Orion

Energy Systems, Inc. 2016 Omnibus Incentive Plan (the "Plan"). The Plan authorizes grants of equity-based and incentive cash
awards to eligible participants designated by the Plan's administrator. Awards under the Plan may consist of stock options, stock
appreciation rights, performance shares, performance units, shares of Orion's common stock ("Common Stock"), restricted
stock, restricted stock units, incentive awards or dividend equivalent units. An aggregate of 1,750,000 shares of Common Stock
are reserved for issuance under the Plan.

Prior to shareholder approval of the Plan, the Company maintained its 2004 Stock and Incentive Awards Plan, as
amended, which authorized the grant of cash and equity awards to employees (the “Former Plan”). No new awards will be
granted under the Former Plan, however, all awards granted under the Former Plan that were outstanding as of August 3, 2016
will continue to be governed by the Former Plan. Forfeited awards originally issued under the Former Plan are canceled and
are not available for subsequent issuance under the 2016 Omnibus Plan.

Certain non-employee directors have elected to receive stock awards in lieu of cash compensation pursuant to
elections made under Orion’s non-employee director compensation program. The Plan and the Former Plan also permit
accelerated vesting in the event of certain changes of control of Orion as well as under other special circumstances.

Orion historically granted stock options and restricted stock under the Former Plan. Orion has not issued stock options

since fiscal 2014 and instead has issued restricted stock.

Orion accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation.

Under the fair value recognition provisions of ASC 718, stock-based compensation is measured at the grant date based on the
fair value of the award and is recognized as expense ratably over the requisite service period, net of estimated forfeitures

In fiscal 2017, an aggregate of 1,132,392 restricted shares were granted valued at a price per share between $1.35 and $2.22,
which was the closing market price as of each grant date. In fiscal 2016, an aggregate of 795,805 restricted shares were granted
valued at a price per share between $1.34 and $2.62, which was the closing market price as of each grant date. In fiscal 2015, an
aggregate of 410,496 restricted shares were granted valued at a price per share between $4.16 and $7.23, which was the closing
market price as of each grant date.

In fiscal 2017, Orion granted an aggregate of 53,501 shares from the 2004 Stock and Incentive Awards Plan and the 2016
Omnibus Incentive Plan to certain non-employee directors who elected to receive stock awards in lieu of cash compensation. The
shares were valued ranging from $1.38 to $1.85 per share, the closing market price as of the issuance dates. In fiscal 2016, Orion
granted 35,290 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 ranging from $1.20 to $2.62 per share, the closing market price
as of the issuance dates. Additionally, during fiscal 2016, Orion issued 2,500 shares to a consultant as part of a consulting
compensation agreement. The shares were valued at $2.00 per share, the closing market price as of the issuance date. In fiscal
2015, Orion granted 27,931 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 ranging from $4.20 to $5.23 per share, the closing
market price as of the issuance dates.

On June 7, 2016, Orion issued and sold 57,065 shares of its common stock to an executive. On August 5, 2016, Orion
sold an aggregate of 63,381 shares of its common stock, in equal amounts, to three recently retired members of Orion's board of
directors. In each case above, the purchase price for the shares was calculated based on the closing price of Orion's common
stock on the NASDAQ Capital Market of the date of the issuance. The shares of common stock were offered and sold pursuant
to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) and Rule
701.

The following amounts of stock-based compensation were recorded (dollars in thousands):

Cost of product revenue

General and administrative

Sales and marketing

Research and development

Fiscal Year Ended March 31,

2017

2016

2015

1,337

139

1,148

235

1,605

1,462

1,056

360

1,499

The number of shares available for grant under the plans were as follows:

Available at March 31, 2014

Granted stock options

Granted shares

Restricted Shares

Forfeited restricted shares

Forfeited stock options

Available at March 31, 2015

Granted stock options

Granted shares

Restricted Shares

Forfeited restricted shares
Forfeited stock options

Available at March 31, 2016

Shares reserved under new plan

Shares canceled from old plan

Granted stock options

Granted shares

Restricted shares

Forfeited restricted shares

Forfeited stock options

Available at March 31, 2017

1,291,996

—
(27,931)
(410,496)
74,957

150,074

1,078,600

—
(64,960)
(795,805)
206,471
363,380

787,686

1,750,000
(168,289)
—
(58,484)
(1,132,392)
52,500

67,200

1,298,221

The following table summarizes information with respect to outstanding stock options:

Outstanding at March 31, 2014

Granted

Exercised

Forfeited

Outstanding at March 31, 2015

Granted

Exercised

Forfeited

Outstanding at March 31, 2016

Granted

Exercised

Forfeited

Outstanding at March 31, 2017

Exercisable at March 31, 2017

Weighted
Average Fair
Value of
Options
Granted

1.32

Aggregate Intrinsic
Value

—

— $

53,760

49,536

Number of
Shares

Weighted
Average Exercise
Price

3.43
—

2.46

3.13

3.50

—

2.09

4.68

3.32

—

2.20

3.41

3.36

2,716,317

$
— $
(139,407) $
(150,074) $
$
2,426,836

— $
(46,410) $
(363,380) $
$
2,017,046

— $
(80,000) $
(416,093) $
$
1,520,953

1,405,653

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 Orion’s closing common stock price of $1.98 as of March 31,
2017.

The following table summarizes the range of exercise prices on outstanding stock options at March 31, 2017:

$1.62 - 2.20

$2.41 - 2.75

$2.86 - 4.28

$4.49 - 4.76

$5.35 - 5.44

$9.00

$10.14 - 11.61

March 31, 2017

Weighted
Average
Remaining
Contractual Life
(Years)

Weighted
Average
Exercise Price

5.33

5.99

2.97

1.44

2.01

0.87

0.98
3.90

$1.90

2.45

3.39

4.64

5.39

9.00

10.56
$3.36

Outstanding

460,584

212,640

650,674

25,000

75,204

27,000

69,851
1,520,953

Weighted
Average
Exercise
Price

$1.89

2.44

3.43

4.64

5.39

9.00

10.56
$3.42

Vested

406,484

209,440

592,674

25,000

75,204

27,000

69,851
1,405,653

During fiscal 2017, Orion granted restricted shares as follows (which are included in the above stock plan activity tables):

Balance at March 31, 2016

Shares issued

Shares vested

Shares forfeited

Shares outstanding at March 31, 2017

Per share price on grant date

Compensation expense

1,053,389

1,132,392
(375,738)
(105,500)
1,704,543

$1.35-6.80

1,680,362

As of March 31, 2017, the weighted average grant-date fair value of restricted shares granted was $1.43.

Unrecognized compensation cost related to non-vested common stock-based compensation as of March 31, 2017 is as follows

(dollars in thousands):

Fiscal 2018

Fiscal 2019

Fiscal 2020

Fiscal 2021

Fiscal 2022

Thereafter

Remaining weighted average expected term

1,189

673
186

—

2,094

2.2 years

Orion previously issued warrants in connection with various stock offerings and services rendered. The warrants granted
the holder the option to purchase common stock at specified prices for a specified period of time. No warrants were issued in fiscal
2017, 2016 or 2015. During fiscal 2015, all warrants outstanding for a total of 38,980 shares were exercised at $2.25 per share,
and as a result, none remain outstanding.

NOTE 19 — SEGMENT DATA

Orion has the following business segments: Orion U.S. Markets Division ("USM"), Orion Engineered Services Division

("OES") and Orion Distribution Services Division ("ODS"). The accounting policies are the same for each business segment as
they are on a consolidated basis. Business segment assets consist of all balance sheet assets except for cash and other long term
assets which are grouped in Corporate and Other.

Orion U.S. Markets Division

Orion Engineered Systems Division

The OES segment develops and sells lighting products and provides construction and engineering services for Orion's

commercial lighting and energy management systems. OES provides turnkey solutions for large national accounts,
governments, municipalities and schools.

Orion Distribution Services Division

The ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of

broadline North American distributors. This segment expanded in fiscal 2017 as a result of the expansion of sales through
distributors as a result of the implementation of Orion's distribution sales strategy. This expansion included the migration of
customers from direct sales previously included in Orion's USM division.

Corporate and Other

Corporate and Other is comprised of operating expenses not directly allocated to Orion’s segments and adjustments to

reconcile to consolidated results.

(dollars in thousands)

For the year ended March 31,

Revenues

Operating (Loss) Profit

For the year ended March 31,

2017

2016

2015

2017

2016

2015

Segments:
U.S. Markets
Engineered Systems
Distribution Services
Corporate and Other

17,852
29,501
22,858
—
70,211

38,841
26,325
2,476
—
67,642

37,778
33,454
978
—
72,210

Depreciation and Amortization

For the year ended March 31,

2017

2016

2015

359
1,249
148
576
2,332

1,711
1,404
32
1,036
4,183

1,168
1,987
71
939
4,165

(1,357) $
(3,647)
(927)
(6,596)
(12,527) $

(4,958) $
(6,982)
(632)
(7,349)
(19,921) $

(12,542)
(12,431)
(455)
(6,508)
(31,936)

Capital Expenditures

For the year ended March 31,

2017

2016

2015

150
224
184
102
660

72
43
10
276
401

626
495
40
845
2,006

Segments:
U.S. Markets
Engineered Systems
Distribution Services
Corporate and Other

Total Assets

Deferred Revenue

March 31, 2017 March 31, 2016 March 31, 2017 March 31, 2016

6,698
18,111
9,702
27,540
62,051

18,503
21,885
1,386
29,101
70,875

141
1,424
—
—
1,565

167
1,098
—
—
1,265

Orion’s revenue outside the United States is insignificant and Orion has no long-lived assets outside the United States.

NOTE 20 — SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are
issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed
at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-
recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance
sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued
and noted the following event requiring disclosure.

On May 25, 2017, Orion's Board of Directors restructured its management team. As part of this restructuring, Orion's

Chief Executive Officer left the Company and its current Board Chair assumed the role of Chief Executive Officer. Orion
estimates that the accrual needed for severance and other related costs for the departing CEO and other cost reduction initiatives
because of the management change to be approximately $1,500,000 to $2,000,000. These costs are expected to be principally
incurred in the first quarter of fiscal 2018.

NOTE 21 — QUARTERLY FINANCIAL DATA (UNAUDITED)

Summary quarterly results for the years ended March 31, 2017 and March 31, 2016 are as follows:

Total revenue

Gross profit

Net loss (1)

Basic net loss per share

Shares used in basic per share calculation

Diluted net loss per share

Shares used in diluted per share calculation

Total revenue

Gross profit

Net loss (2)

Basic net loss per share
Shares used in basic per share calculation

Diluted net loss per share

Shares used in diluted per share calculation

Three Months Ended

Mar 31,
2017

Dec 31,
2016

Sep 30,
2016

Jun 30,
2016

Total

(in thousands, except per share amounts)

$ 15,290

$ 20,617

$ 18,670

$ 15,634

70,211

912

$ 6,155

$ 6,244

$
$ (7,292) $ (1,086) $
$ (0.26) $ (0.04) $ (0.03) $ (0.11) $

$ 4,026

17,337
(970) $ (2,940) $ (12,288)
(0.44)
28,156
(0.44)
28,156

27,886

$ (0.26) $ (0.04) $ (0.03) $ (0.11) $

28,310

28,259

28,172

28,310

28,259

28,172

Three Months Ended

Mar 31,
2016

Dec 31,
2015

Sep 30,
2015

Jun 30,
2015

Total

(in thousands, except per share amounts)

$ 18,576

$ 16,751

$ 15,728

$ 16,587

67,642

$ 3,757

$ 4,708

$ 2,913

15,997
$ 4,619
$(10,871) $ (2,004) $ (3,600) $ (3,651) $ (20,126)
(0.73)
$ (0.39) $ (0.07) $ (0.13) $ (0.13) $
27,628
(0.73)
27,628

$ (0.39) $ (0.07) $ (0.13) $ (0.13) $

27,759

27,482

27,759

27,672

27,482

27,598

(1)

Includes intangible impairment of $250 and $2,209 related to inventory reserve and other inventory adjustments.

(2)

Includes $4,409 related to the impairment of goodwill, and $1,614 related to the write-down to fair value of the manufacturing
facility, and $1,400 reserve for a loss contingency.

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

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such

term is defined in Rule 13a-15(f) of the Exchange Act. 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, 2017,
pursuant to Exchange Act Rule 13a-15(b) and 15d-15. Based on that evaluation, our Chief Executive Officer and our Chief
Financial Officer have identified a material weakness in internal controls over financial reporting described below in
Management’s Report on Internal Control and have, therefore, concluded that our disclosure controls and procedures were not
effective as of March 31, 2017.

Notwithstanding the identified material weakness, management, including our Chief Executive Officer and Chief
Financial Officer, believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent
in all material respects our financial condition, results of operations and cash flows at and for the periods presented in
accordance with U.S. GAAP.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as

defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process
designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer, or persons performing similar
functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP
and includes those policies and procedures that:

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;

ii. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements

in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and

iii. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition

of our assets that could have a material effect on our financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,

projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief

Financial Officer, our management has assessed the effectiveness of our internal control over financial reporting based on the
criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).

BDO USA, LLP, independent registered public accounting firm, has issued an attestation report on our internal control

over financial reporting as of March 31, 2017. Their report is in Item 8 under the heading "Reports of Independent Registered
Public Accounting Firm" of this Annual Report on Form 10-K.

In connection with the assessment of our internal control over financial reporting as of March 31, 2017, management

identified the following material weaknesses that existed as of March 31, 2017:

•

Information & Communication. We determined that our controls pertaining to information and communication did
not operate effectively, resulting in a material weakness pertaining to these COSO components. Specifically, we did
not have sufficient communication of the status and evolution of a project to ensure timely and accurate recognition of

project costs. In addition, we did not have sufficient communication and resolution of matters identified through
management’s review impacting the accounting close as noted in the Control Activities discussion below.

• Control Activities - Accounting Close. The operating effectiveness of our controls were inadequate to ensure that

project costs were identified and recorded to expense in a timely manner. In addition, matters identified through
management review controls were not brought to a timely resolution.

A material weakness is a control deficiency or a combination of control deficiencies that results in more than a remote

likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Because of the material weaknesses described above, management concluded that we did not maintain effective internal
control over financial reporting as of March 31, 2017, based on the criteria in Internal Control - Integrated Framework (2013)
issued by COSO.

Plans for Remediation of March 31, 2017 Material Weaknesses

Our Board, the Audit & Finance Committee and management have identified additional resources to assist in the remediation
effort and are developing and implementing new processes, procedures and internal controls to remediate the material weakness
that existed in our internal control over financial reporting as it related to project cost accounting and the accounting close, and
our disclosure controls and procedures, as of March 31, 2017.

We have developed a remediation plan (the “Remediation Plan”) to address the material weakness for the affected areas
presented above. The Remediation Plan ensures that each area affected by a material control weakness is put through a
comprehensive remediation process. The Remediation Plan entails a thorough analysis which includes the following phases:

• Ensure a thorough understanding of the “as is” state, process owners, and procedural or technological gaps causing the

deficiency;

• Design and evaluate a remediation action for the review and analysis of project costs; validate or improve the related

policy and procedures; evaluate skills of the process owners with regard to the policy and adjust as required;

•

Implement specific remediation actions: train process owners, allow time for process adoption and adequate transaction
volume for next steps;

• Test and measure the design and effectiveness of the remediation actions; test and provide feedback on the design and

operating effectiveness of the controls, and:

• Review and acceptance of completion of the remediation effort by executive management and the Audit & Finance

Committee.

The following are steps we have taken or are in the process of taking toward the remediation plan:

• Developed a regular method for the evaluation of actual project costs incurred against budgeted costs and for the

communication of such costs and project status.

• Revisited the method in which projects are reviewed and evaluated by the accounting department to ensure the accurate

and timely recording of necessary adjustments.

The Remediation Plan is being administered by our Chief Financial Officer and involves key leaders from across the

organization.

We will continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the
material weaknesses described above and employ any additional tools and resources deemed necessary to ensure that our financial
statements are fairly stated in all material respects.

Remediation Actions and March 31, 2016 Material Weakness Status

As previously disclosed under "Item 9A. Controls and Procedures" in our Annual Report on Form 10-K for our fiscal year
ended March 31, 2016, we identified material weaknesses that existed as of March 31, 2016 related to risk assessment and monitoring
activities and revenue recognition control activities related to the review of revenue transactions involving contracts and the related

accounting entries. For the year ended March 31, 2016 and subsequent interim periods, we enhanced our closing procedures to
ensure that, in all material respects, our financial statements were presented in conformity with GAAP and free of material
misstatement as of and for all periods presented.

During fiscal 2017, we took several actions to strengthen our controls and organizational structure in order to remediate the
material weaknesses identified as of March 31, 2016. These actions as well as the revised and newly implemented controls are
described in more detail below within “Changes in Internal Control Over Financial Reporting.” We completed our remediation
plans for those material weaknesses during the quarter ended December 31, 2016. We have tested the design and operating
effectiveness of these newly implemented and enhanced controls related to the March 31, 2016 material weakness remediation
actions concluding that the controls are designed and operating effectively as of March 31, 2017.

We have reviewed and obtained acceptance of completion of the remediation effort by our Chief Executive Officer, our Chief
Financial Officer, and the Audit & Finance Committee. Based on the above remediation actions and our assessment using the
COSO criteria, management believes that, as of March 31, 2017, our internal control over financial reporting was effective as it
relates to the March 31, 2016 material weaknesses.

Changes in Internal Control over Financial Reporting

Subsequent to our March 31, 2016 fiscal year end, we took several actions to strengthen existing controls and implement
new controls in order to remediate the March 31, 2016 material weaknesses described above. Those actions included a redesign
of the process for the review and analysis of contract terms and the related revenue transactions, implementation of a sales order
audit validation and review; strengthened the credit approval process, added specific controls over the review and recognition of
certain revenue transactions, revised the sub-assertion process, implemented a formal disclosure committee, provided training to
process and control owners as well as individuals handling revenue generating transactions throughout the organization, and
updated related documentation including policies and procedures. In addition we enhanced our risk assessment process with regard
to control design deficiencies and are now performing a more robust assessment of risks impacting our accounting and financial
reporting. In addition, we have enhanced our documented controls and procedures related to our revenue cycle and other key
business cycles. Finally, we implemented an enterprise risk management program to highlight organizational risks and develop
strategies for monitoring and mitigating risks. Risk assessment and control monitoring remediation steps completed include the
implementation of a number of control enhancements.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2017 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than with respect
to the implementation of the remediation efforts described above.

ITEM 9B. OTHER INFORMATION

As previously reported, on May 25, 2017, we announced the restructuring of our management team, including the departure
of John H. Scribante, our former Chief Executive Officer. In connection with this management restructuring, Michael W. Altschaefl,
the current Chair of the Board of Directors (the “Board”), was appointed by the Board as our new Chief Executive Officer. In
addition, on June 6, 2017, the Board appointed Anthony L. Otten to serve as our independent Lead Director as a result of the
positions of Board Chair and Chief Executive Officer being combined due to Mr. Altschaefl’s appointment as our new Chief
Executive Officer.

Following the restructuring of our management team, we have implemented a series of actions focused on improved sales
execution and a number of cost reduction initiatives, with the intent to accelerate our path to profitability. These actions included,
among others, a reduction in the compensation of our executive officers and directors, the entry into an employment agreement
with Mr. Altschaefl, and the finalization of Mr. Scribante’s departure and his subsequent retirement from the Board.

Reduction in Executive Compensation

On June 6, 2017, the Board approved changes to the compensation of our named executive officers as part of our focus on
implementing cost reduction initiatives with the intent to accelerate our path to profitability. These changes included the approval
of the following compensation for our executive officers for Fiscal 2018:

Name

Michael W. Altschaefl
William T. Hull
Scott Green
Michael J. Potts
Marc Meade

Title

CEO
CFO/CAO/EVP
COO/EVP
CRO/EVP
EVP

Total:

FY18
Base Salary
$325,000
$283,500
$275,000
$260,000
$211,500
$1,355,000

Long-Term
Incentive Award
$260,000
$226,800
$220,000
N/A
$169,200
$876,000

The compensation levels for fiscal 2018 represent a 17% reduction in total annual base salary compared to fiscal 2017 and

a 43% reduction in the dollar value of the long term incentive awards compared to fiscal 2017.

In addition, the Board approved a new annual incentive cash bonus opportunity for our executive officers, based on our
ability to achieve positive EBITDA in fiscal 2018. If we achieve positive EBITDA in fiscal 2018, our executives will participate
in a bonus pool of up to 50% of our positive EBITDA (calculated after taking into account all bonuses) based on the following
allocation:

Name

Michael W. Altschaefl

William T. Hull

Scott Green

Marc Meade
Total

FY 18 Title

CEO

CFO/CAO/EVP

COO/EVP

EVP

Target FY 18 Bonus
% of FY 18 Base

Target
FY 18 $ Bonus

% of
Bonus Pool

100 %

50 %

$325,000

$141,750

$137,500

$105,750
$710,000

45.77%

19.96%

19.37%

14.90%
100.00%

The total amount of cash bonus payable under the fiscal 2018 cash bonus plan is capped at the target bonus level for each
executive officer, with the maximum possible bonus for all executives set at $710,000. This represents a 29% reduction in the total
executive bonus pool (assuming target bonus levels were met) approved in fiscal 2017.

In addition, if we achieve at least $500,000 in fiscal 2018 EBITDA, then we will make available a $150,000 bonus pool to
be allocated among our executive officers (but excluding our Chief Executive Officer) at the discretion of our Chief Executive
Officer based on his views on how best to award, motivate and incent his executive team members.

The Board also approved the implementation of a project based bonus pool for Michel J. Potts to be awarded if he completes
two cash-generating projects in fiscal 2018. The total potential bonus that may be awarded to Mr. Potts under the project-based
bonus is $75,000, and will be deducted from the amount available under the discretionary bonus pool described above.

Reduction in Director Compensation

On June 6, 2017, the Board approved revisions to our Non-Employee Director Compensation Plan (the “Director
Compensation Plan”), which provides for a 10% reduction in the retainer fees and annual restricted stock grants payable to non-
employee directors. The Board adopted these changes in furtherance of our cost reduction initiatives.

Under the revised Director Compensation Plan, each non-employee director will receive: (i) an annual retainer of $36,000
(instead of $40,000), payable in cash or shares of common stock at the election of the recipient and (ii) an annual restricted stock
grant, vesting ratably over three years, with a grant date fair value of $40,500 (instead of $45,000), that may, at the election of the
director, be paid 60% in three-year pro rata vesting restricted stock and 40% in three-year pro rata vesting restricted cash that vests
in tandem with the restricted stock at the election of the recipient.

In addition, the independent Lead Director and each committee chair receives additional fees according to the following

schedule:

Chairman of the Board
Lead Director
Audit and Finance Committee Chair
Compensation Committee Chair

Position

Nominating and Corporate Governance Committee Chair
Ad Hoc Litigation Committee Chair
Total

Retainer
N/A
$30,000
$25,000
$20,000

$20,000
$10,000
$105,000

The $105,000 in independent Lead Director fees and committee chair fees represent a 12.5% reduction in the Board and
committee chair fees that were approved in fiscal 2017. Lead Director fees and committee chair fees are payable in cash or shares
of Common Stock at the election of the recipient. Except as described above, the Director Compensation Plan otherwise remains
unchanged.

The foregoing description of the Director Compensation Plan is qualified in its entirety by reference to the full text of the

Director Compensation Plan, a copy of which is filed herewith as Exhibit 10.14 and is incorporated herein by reference.

Michael W. Altschaefl Employment Agreement

On June 8, 2017, we entered into an Executive Employment and Severance Agreement (the “Employment Agreement”) with
Michael W. Altschaefl, our new Chief Executive Officer. The Employment Agreement is for an initial term through June 8, 2019,
after which the Employment Agreement may be renewed by us and Mr. Altschaefl upon mutual consent for successive one year
periods.

The Board’s compensation committee and the Board determined Mr. Altschaefl’s compensation in connection with its overall
reduction in executive compensation to support our cost reduction initiatives, with the intent to accelerate our path to profitability.
The Employment Agreement provides for an annual base salary of $325,000 for Mr. Altschaefl (40% less than our prior Chief
Executive Officer) effective as of June 1, 2017, and for participation by Mr. Altschaefl in our annual and/or long-term bonus plans,
as well as our employee benefit plans made available to other senior executives. Mr. Altschaefl will participate in our fiscal 2018
cash bonus program for executives and will have a target maximum bonus equal to 100% of his base salary (with the actual dollar
amount being 40% less than the maximum bonus available to our prior Chief Executive Officer).

Mr. Altschaefl will not receive any additional compensation related to his continued service as our Board Chair.

The Board’s compensation committee has also awarded Mr. Altschaefl a long-term incentive grant of restricted stock in the
aggregate amount of $260,000 (52% less than our prior Chief Executive Officer) in connection with the compensation’s committee
annual approval of restricted stock awards for our executive officers. Mr. Altschaefl’s restricted stock award will be granted on
June 13, 2017 (the third business day following our fiscal 2017 earnings release) and will vest equally in one-year increments over
a three-year term.

The Employment Agreement entitles Mr. Altschaefl to certain pre-Change of Control (as defined in the Employment
Agreement) severance payments and other benefits upon a qualifying employment termination. If Mr. Altschaefl’s employment
is terminated without “Cause” (as defined in the Employment Agreement) or for “Good Reason” (as defined in the Employment
Agreement) prior to the end of his employment period and prior us experiencing a “Change of Control” (as defined in the
Employment Agreement), Mr. Altschaefl will be entitled to (i) a severance benefit payable in a lump sum equal to two times the
sum of his base salary plus the average of his prior three years’ bonuses; (ii) a pro rata bonus for the year of termination based on
Mr. Altschaefl’s annual target cash bonus opportunity (if any) for such year multiplied by a fraction representing the portion of
the annual performance period that has elapsed at the time of termination; and (iii) pay COBRA premiums at the active employee
rate for the duration of Mr. Altschaefl’s COBRA continuation coverage period. To receive these benefits, Mr. Altschaefl must
execute and deliver to us (and not revoke) a general release of claims acceptable to us.

The Employment Agreement also entitles Mr. Altschaefl to certain payments related to the occurrence of a Change of Control.
Mr. Altschaefl will become entitled to a change of control benefit in the event that (i) we undergo a Change of Control prior to the
end of Mr. Altschaefl’s employment period or (ii) prior to us undergoing a Change of Control, but following our entry into a legally
binding written agreement, arrangement or understanding that would result in a Change of Control, Mr. Altschaefl’s employment
is terminated by us without Cause (except in the case of death or disability) or Mr. Altschaefl terminates his employment with us
for Good Reason. The change of control benefit is payable in a lump sum equal to three times the sum of Mr. Altschaefl’s base
salary plus the average of his prior three years’ bonuses, plus certain other accrued benefits under the Employment Agreement.
77

The Employment Agreement also requires Mr. Altschaefl not to, during the term of his employment (and for two years
following his termination of employment), (i) disclose any of our confidential information; (ii) compete with us; or (iii) solicit the
employees or other persons with business relationships with us.

The Employment Agreement contains a “valley” excise tax provision that provides that all amounts payable to Mr. Altschaefl
under the Employment Agreement and any other of our agreements or plans that constitute change of control payments will be
cut back to one dollar less than three times Mr. Altschaefl “base amount,” as defined by Internal Revenue Code (“Code”) Section
280G, unless Mr. Altschaefl would retain a greater amount by receiving the full amount of the payment and personally paying the
excise taxes. Under the Employment Agreement, we would not be obligated to gross up Mr. Altschaefl for any excise taxes imposed
on excess parachute payments under Code Section 280G or 4999.

The foregoing description of the Employment Agreement is qualified in its entirety by reference to the full text of the

Employment Agreement, a copy of which is filed herewith as Exhibit 10.16 and is incorporated herein by reference.

Retirement of John H. Scribante

On May 25, 2017, John H. Scribante, our former Chief Executive Officer, departed as part of the Board’s restructuring of
our management team. On June 8, 2017, Mr. Scribante retired as a director of Orion, effective immediately. Mr. Scribante’s
retirement was not the result of a disagreement with us on any matter relating to our operations, policies or practices.

In connection with Mr. Scribante’s departure as Chief Executive Officer, we and Mr. Scribante entered into a Mutual
Termination and Severance Agreement and Complete and Permanent Release of All Claims (the “Severance Agreement”) on June
8, 2017. Pursuant to the Severance Agreement, we have affirmed our obligation to provide certain severance payments and benefits
required to be provided to Mr. Scribante pursuant to the terms of his Executive Employment and Severance Agreement with us,
including a lump sum severance payment in an amount equal to (i) two times Mr. Scribante’s base salary, plus (ii) Mr. Scribante’s
fiscal 2018 annual target bonus of one-hundred percent of his annual base salary (pro-rated based on the number of days that Mr.
Scribante was our Chief Executive Officer in fiscal 2018), less applicable taxes and other withholdings, payable within three
business days of the date of the Severance Agreement. We will also pay Mr. Scribante certain accrued salary and benefits through
the date of his departure (the “Termination Date”) and pay the employer’s portion of the premiums for Mr. Scribante’s COBRA
continuation coverage for 18 months after the Termination Date.

In addition, the Severance Agreement provides that Mr. Scribante will retain all vested restricted stock and stock option
awards that have vested as of the date of the Severance Agreement, and will be permitted to exercise any vested stock options
within 90 days of the Termination Date. We have also agreed that it will assign all the policies of insurance on Mr. Scribante’s
life currently in effect to Mr. Scribante and obtain a six-year tail director and officer insurance policy covering Mr. Scribante.

In consideration of the foregoing severance payments, Mr. Scribante agreed to a general release of claims against us and
any of our subsidiaries and affiliates, and our past, present and future employees, agents, representatives, attorneys, officers,
directors and shareholders. Mr. Scribante has also reaffirmed the application of certain covenants contained in his Executive
Employment and Severance Agreement, including a covenant not to sue, non-solicitation and non-competition covenants and a
nondisclosure and confidentiality covenant.

The foregoing description of the Severance Agreement is qualified in its entirety by reference to the full text of the Severance

Agreement, a copy of which is filed herewith as Exhibit 10.27 and is incorporated herein by reference.

William T. Hull Employment Agreement Amendment

On June 13, 2017, we entered into an amendment (the “Amendment”) to the Executive Employment and Severance Agreement
(the “Employment Agreement”) between us and William T. Hull, our Executive Vice President, Chief Financial Officer, Chief
Accounting Officer and Treasurer. The Amendment modifies the severance benefits payable to Mr. Hull upon a termination without
“Cause” or for “Good Reason” (each as defined in the Employment Agreement) to include the right to receive the employer portion
of the premiums for Mr. Hull’s COBRA continuation coverage for the length of such coverage at the same rate charged to our
active employees. Except as expressly modified by the Amendment, the Agreement continues in effect in accordance with its
terms.

A copy of the Amendment is attached hereto as Exhibit 10.19, and is incorporated by reference herein.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item with respect to directors, executive officers and corporate governance is incorporated
by reference to Orion's Proxy Statement for its 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days
after the end of the fiscal year ended March 31, 2017.

Code of Conduct

We have adopted a Code of Conduct that applies to all of our directors, employees and officers, including our principal
executive officer, our principal financial officer, our controller and persons performing similar functions. Our Code of Conduct is
available on our web site at www.orionlighting.com. Future material amendments or waivers relating to the Code of Conduct will
be disclosed on our web site referenced in this paragraph within four business days following the date of such amendment or
waiver.

ITEM 11.

EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to Orion's Proxy Statement for its 2017 Annual Meeting

of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2017.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS

See Item 5, Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchaser of Securities, under
the heading “Equity Compensation Plan Information” for information regarding our securities authorized for issuance under equity
compensation plans. The additional information required by this item is incorporated by reference to Orion's Proxy Statement for
its 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31,
2017.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to Orion's Proxy Statement for its 2017 Annual Meeting

of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2017.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to Orion's Proxy Statement for its 2017 Annual Meeting

of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2017.

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

March 31,
2017

2016

2015

2017

2016

2015

Allowance for Doubtful Accounts

Inventory Obsolescence Reserve

SCHEDULE II
VALUATION and QUALIFYING ACCOUNTS

Balance at
beginning of
period

Provisions
charged to
expense

Write offs
and other

Balance at
end of
period

505

458

384

2,127

1,619

2,527

(in Thousands)

132

575

285

2,212

509

10,505

493

528

211

866

11,413

144

505

458

3,473

2,127

1,619

Number

Exhibit Title

EXHIBIT INDEX

3.1 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, is hereby incorporated by reference.

3.2 Amended and Restated Bylaws of Orion Energy Systems, Inc., filed as Exhibit 3.2 to the Registrant’s Form 10-Q

filed November 8, 2013, is hereby incorporated by reference.

4.1 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, is hereby
incorporated by reference.

10.1 Credit and Security Agreement dated as of February 6, 2015 among Orion Energy Systems, Inc. and certain of its
subsidiaries, as borrowers and guarantors, and Wells Fargo Bank, National Association, as lender, filed as Exhibit
10.1 to Registrant’s Form 10-Q filed on February 9, 2015, is hereby incorporated by reference.

10.2 First Amendment to Credit Agreement and Security Agreement, dated as of December 27, 2016, by and among
Orion Energy Systems, Inc., the subsidiary Borrowers party thereto, the subsidiary Guarantors party thereto and
Wells Fargo Bank, National Association, filed as Exhibit 10.1 to Registrant’s Form 8-K filed on December 29, 2016,
is hereby incorporated by reference.

10.3 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, is hereby incorporated by reference.*

10.4 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, is hereby incorporated by reference.*

10.5 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, is hereby incorporated by reference.*

10.5(a) Amendment to Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan, filed September 9, 2011 as

Appendix A to the Registrant’s definitive proxy statement is hereby incorporated by reference.*

10.6 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, is hereby incorporated by reference.*

10.7 Form of Stock Option Agreement as of May 14, 2013 under the Orion Energy Systems, Inc. 2004 Stock and
Incentive Awards Plan, filed as Exhibit 10.7 to the Registrant’s Form 10-K filed on June 14, 2014, is hereby
incorporated by reference.*

10.8 Form of Restricted Stock Award Agreement as of May 14, 2013 under the Orion Energy Systems, Inc. 2004 Stock

and Incentive Awards Plan, filed as Exhibit 10.8 to the Registrant’s Form 10-K filed on June 14, 2014, is hereby
incorporated by reference.*

10.9 Orion Energy Systems, Inc. 2016 Omnibus Incentive Plan, filed as Annex A to the Registrant’s Form 8-K filed July

8, 2016, is hereby incorporated by reference.*

10.10 Form of Non-Employee Director Tandem Restricted Stock and Cash Award Agreement under the Orion Energy

Systems, Inc. 2016 Omnibus Incentive Plan, filed as Exhibit 4.5 to the Registrant’s Form S-8 filed August 10, 2016,
is hereby incorporated by reference.*

10.11 Form of Non-Employee Director Restricted Stock Award Agreement under the Orion Energy Systems, Inc. 2016
Omnibus Incentive Plan, filed as Exhibit 4.6 to the Registrant’s Form S-8 filed August 10, 2016, is hereby
incorporated by reference.*

10.12 Form of Executive Tandem Restricted Stock and Cash Award Agreement under the Orion Energy Systems, Inc.
2016 Omnibus Incentive Plan, filed as Exhibit 4.7 to the Registrant’s Form S-8 filed August 10, 2016, is hereby
incorporated by reference.*

10.13 Form of Executive Restricted Stock Award Agreement under the Orion Energy Systems, Inc. 2016 Omnibus

Incentive Plan, filed as Exhibit 4.8 to the Registrant’s Form S-8 filed August 10, 2016, is hereby incorporated by
reference.*

10.14 Orion Energy Systems, Inc. Non-Employee Director Compensation Plan, updated and effective as of June 6, 2017. *

10.15 Executive Employment and Severance Agreement, dated April 1, 2017, by and between Orion Energy Systems, Inc.

and Michael J. Potts, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed April 3, 2017, is hereby incorporated
by reference.*

10.16 Executive Employment and Severance Agreement, dated as of June 8, 2017, by and between Orion Energy Systems,

Inc. and Michael W. Altschaefl. * +

10.17 Executive Employment and Severance Agreement by and between Orion Energy Systems, Inc. and William T. Hull,

filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on October 5, 2015, is hereby incorporated by reference.*

10.18 Executive Employment and Severance Agreement, dated as of August 3, 2016, by and between Orion Energy

Systems, Inc. and Scott A. Green, filed as Exhibit 10.1 to Registrant’s Form 8-K filed on August 4, 2016, is hereby
incorporated by reference.*

10.19 Letter Agreement effective June 13, 2017 between Orion and William T. Hull. * +

10.20 Executive Employment and Severance Agreement, dated as of January 1, 2014, by and between Orion Energy

Systems, Inc. and Marc Meade filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on January 6, 2014, is hereby
incorporated by reference.*

10.21 Form of Executive Restricted Stock Award Agreement as of May 14, 2014 under the Orion Energy Systems, Inc.

2004 Stock and Incentive Awards Plan filed as Exhibit 10.17 to the Registrant’s Form 10-K filed on June 13, 2014,
is hereby incorporated by reference.*

10.22 Form of Non-Employee Director Restricted Stock Award Agreement as of May 14, 2014 under the Orion Energy
Systems, Inc. 2004 Stock and Incentive Awards Plan filed as Exhibit 10.18 to the Registrant’s Form 10-K filed on
June 13, 2014, is hereby incorporated by reference.*

10.23 Form of Executive Restricted Stock Award Agreement as of May 26, 2015 under the Orion Energy Systems, Inc.

2004 Stock and Incentive Awards Plan , filed as Exhibit 10.18 to the Registrant’s Form 10-K for the year ended
March 31, 2015, is hereby incorporated by reference.*

10.24 Form of Executive Tandem Restricted Stock and Cash Award Agreement as of May 26, 2015 under the Orion

Energy Systems, Inc. 2004 Stock and Incentive Awards Plan, filed as Exhibit 10.19 to the Registrant’s Form 10-K
for the year ended March 31, 2015, is hereby incorporated by reference.*

10.25 Form of Non-Employee Director Restricted Stock Award Agreement as of May 26, 2015 under the Orion Energy
Systems, Inc. 2004 Stock and Incentive Awards Plan, filed as Exhibit 10.20 to the Registrant’s Form 10-K for the
year ended March 31, 2015, is hereby incorporated by reference.*

10.26 Form of Non-Employee Director Tandem Restricted Stock and Cash Award Agreement as of May 26, 2015 under

the Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan, filed as Exhibit 10.21 to the Registrant’s
Form 10-K for the year ended March 31, 2015, is hereby incorporated by reference.*

10.27 Mutual Termination and Severance Agreement and Complete and Permanent Release of All Claims, dated June 8,

2017, by and between Orion Energy Systems, Inc. and John H. Scribante .* +

21.1 Subsidiaries of Orion Energy Systems, Inc.+

23.1 Consent of Independent Registered Public Accounting Firm. +

31.1 Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14

(a) promulgated under the Securities Exchange Act of 1934, as amended. +

31.2 Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a)

promulgated under the Securities Exchange Act of 1934, as amended. +

32.1 Certification of Chief Executive Officer 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. +

101

101.INS XBRL Instance Document+

101.SCH Taxonomy extension schema document

101.CAL Taxonomy extension calculation linkbase document

101.LAB Taxonomy extension label linkbase document

101.PRE Taxonomy extension presentation linkbase document

Documents incorporated by reference by Orion Energy Systems, Inc. are filed with the Securities and Exchange
Commission under File No. 001-33887.

Management contract or compensatory plan or arrangement.

Filed herewith

ITEM 16.

FORM 10-K SUMMARY

None.

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 13, 2017.

SIGNATURES

ORION ENERGY SYSTEMS, INC.
By:

/s/ MICHAEL W. ALTSCHAEFL

Michael W. Altschaefl
Chief Executive Officer and Board
Chair

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 on June 13, 2017.

Signature

Title

/s/ Michael W. Altschaefl

Chief Executive Officer and Board Chair (Principal

Michael W. Altschaefl

Executive Officer)

/s/ William T. Hull

Chief Financial Officer, Chief Accounting Officer and

Treasurer (Principal Financial Officer)

/s/ Anthony L. Otten

Lead Independent Director

William T. Hull

Anthony L. Otten

/s/ Kenneth L. Goodson, Jr.

Kenneth L. Goodson, Jr.

/s/ James R. Kackley.

/s/ Michael J. Potts

James R. Kackley

Michael J. Potts

/s/ Elizabeth Gamsky Rich

Elizabeth Gamsky Rich

Ellen B. Richstone

/s/ Ellen B. Richstone

/s/ Mark C. Williamson

Mark C. Williamson

Director

Executive Officers

Michael W. Altschaefl
Chief Executive Officer and Board Chair

Marc Meade
Executive Vice President

Scott Green
Executive Vice President and Chief
Operating Officer

William T. Hull
Executive Vice President, Chief Financial
Officer, Chief Accounting
Officer and Treasurer

Board of Directors

Michael W. Altschaefl (4)
Chief Executive Officer and
Board Chair

Kenneth L. Goodson, Jr. (1) (2a)
Retired Executive Vice-President
Herman Miller Inc.

James R. Kackley (1), (3)
Retired President and Chief Operating
Officer Orion Energy Systems, Inc.

Tony Otten (1), (3), (5)
Chief Executive Officer
Versar, Inc.

Michael J. Potts
Executive Vice President and
Chief Risk Officer
Orion Energy Systems, Inc.

Michael J. Potts
Executive Vice President and
Chief Risk Officer

Ellen B. Richstone (1a)
Director and Program Committee Chair
National Association of Corporate Directors
(NACD-New England), Director Superior
Industries, eMargin Corporation and BioAmber
Inc., Advisory Board Member American College
of Corporate Directors

Elizabeth Gamsky Rich (2), (3a)
Owner and Attorney, Elizabeth Gamsky
Rich & Associates S.C.

Mark C. Williamson (1), (2)
Partner, Putnam Roby Williamson
Communications of Madison, Wis.

(1) Audit and Finance Committee
(2) Compensation Committee
(3) Nominating and Corporate Governance

Committee
(4) Board Chair
(5) Lead Independent Director
(a) Committee Chair

NASDAQ Capital Market: OESX

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