Orion Energy Systems Annual Report 2018

Plain-text annual report

Orion Energy Systems, Inc. Shareholders’ Letter and Annual Report on Form 10-K Fiscal Year Ended March 31, 2018 To Our Valued Shareholders, Fiscal 2018 was a transformational year for Orion. We accomplished several key initiatives aimed at driving future sales growth while streamlining our operational costs to levels we believe will help us achieve our fiscal 2019 performance goals. We made progress building our pipeline of national account opportunities, reinvigorating our Energy Service Company (ESCO) and reseller relationships, and refining our agent driven distribution model. We were successful in expanding our base of significant national account opportunities during fiscal 2018, including the completion of approximately $14 million of projects with global automotive industry customers. We have developed several exciting upcoming projects in the retail, healthcare and public sector industries as well as continued dialogues with our existing and potential new automotive customer base that we expect to benefit results in the current fiscal year. We believe our national account customers choose Orion because of our proven ability to deliver high‐quality products with custom‐engineered design capabilities and quick production turnaround, supported by our nationwide project management capabilities and unparalleled customer service commitment. As we have highlighted before, the agent driven distribution model component of our go‐to‐ market strategy has expanded our North American reach significantly from approximately 13% of the total commercial LED retrofit market, to approximately 77% of the market today. It has taken time and persistence to find the right agencies and to support them in getting up to speed on the quality and value proposition of our various product lines. This has required continuous sales, marketing and training support. We have also listened to their needs and developed products to meet the needs of their customers. Fortunately, we are seeing our efforts begin to bear fruit, making us confident that our agent strategy is on the right track to become an increasing contributor to our growth goals. Our focus on our historical ESCO and reseller market has been reinvigorated now that our agent driven distribution model is on track. The ESCO and reseller component of our go‐to‐market strategy will play a growing role in our sales growth going forward. Turning to the cost side of the business, Orion entered fiscal 2019 having eliminated approximately $6 million in annual operating expenses during fiscal 2018, representing a decrease of roughly 20% as compared to fiscal 2017 expense levels. The full benefit of these cost reductions will be reflected during fiscal 2019 and should play an important role in enabling Orion to deliver improving bottom‐line results. Overall, we will continue to build on the core elements of our competitive positioning and growth strategy, while maintaining cost controls required to drive improved profitability. I am proud of the work done every day by our highly talented and capable team and feel increasingly confident in our ability to achieve our fiscal 2019 goals reviewed below. Fiscal 2018 Highlights: Fiscal 2018 revenue declined to $60.3 million, from $70.2 million the prior year, reflecting slower than anticipated growth in LED lighting sales, as well as a decrease in legacy fluorescent lighting products. LED lighting continued to expand as a percentage of product sales, accounting for 90% of product sales in fiscal 2018, versus 81% in fiscal 2017, and less than 5% five years ago. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% LED Sales as a Percentage of Total Product Sales 70% 81% 90% 47% 7% FY14 FY15 FY16 FY17 FY18 Product Innovation: Our product development activity continues to center on listening to the needs of our customers and partners and then developing new products that directly address their requirements. Reflecting this approach, we have adapted many of our products to include a range of control integration options, through modular plug‐and‐play designs that enable the customization of lighting systems from basic controls to advanced IoT capabilities. We added several new control integration options during fiscal 2018, further broadening the options for our customers. We also launched our new value‐priced Harris Patriot‐branded LED lighting product line. The Harris Patriot line is a lightweight, sleek and lower cost design, ideal for new construction and more price‐sensitive procurements. The modular design of these products makes them easily upgradeable should the customer decide to deploy advanced controls, more efficient light engines or other enhancements down the road. The upgrade potential of the Harris line differs from most of the competing lines, providing Orion with a solid market differentiation as well as potential future revenue opportunities. Financial Strength Orion finished fiscal 2018 with net working capital of $13 million, including $9.4 million of cash and cash equivalents, and the Company had $3.9 million in long‐term borrowings under our revolving credit facility. We believe this financial position, combined with unused credit available under our revolving facility, provides us sufficient financial resources to execute our plans in fiscal 2019 and the foreseeable future. Outlook and Financial Goals: Based on the expected benefits of our efforts to drive revenue and profitability improvements, we have provided an initial fiscal 2019 revenue growth goal of approximately 10% over fiscal 2018. We believe this is an appropriate and realistic goal based on our current view of the business. We have also articulated our goals of achieving a 30% gross margin and breakeven Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) by the second quarter of fiscal 2019. We caution that our quarterly performance can vary materially on a sequential or year‐ over‐year basis due to economic and industry forces, as well as the size, timing and terms of customer contracts. Further, our gross margin and EBITDA are very much impacted by our revenue levels and related overhead absorption. In closing, after more than a year as your CEO, I am increasingly confident in Orion’s long‐term growth and profitability potential, as I see the strength of our brand, products and industry reputation building our sales momentum going forward. Thank you for your continuing support and confidence in Orion. Sincerely, Mike Altschaefl CEO and Board Chair Orion Energy Systems, Inc. July 23, 2018 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549______________________________ Form 10-KýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 For the fiscal year ended March 31, 2018or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT 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 39-1847269(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 2210 Woodland Drive, Manitowoc, WI 54220(Address of principal executive offices) (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 ClassName of Each Exchange on Which RegisteredCommon stock, no par valueThe Nasdaq Stock Market LLC(NASDAQ Captial Market)Common stock purchase rightsThe 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 ¨ No ýIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No ýIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes ý No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired 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 shorterperiod that the registrant was required to submit and post such files). Yes ý No ¨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, andwill 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 growthcompany" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer¨Accelerated filero Non-accelerated filero (Do not check if a smaller reporting company)Smaller reporting companyý Emerging growth companyoIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complyingwith any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ýThe aggregate market value of shares of the Registrant’s common stock held by non-affiliates as of September 30, 2017, the last business day of theRegistrant’s most recently completed second fiscal quarter, was approximately $25,759,637.As of May 31, 2018, there were 29,044,357 shares of the Registrant’s common stock outstanding.______________________________ DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant's Proxy Statement for the 2018 Annual Meeting of Shareholders to be held on September 6, 2018 are incorporated herein byreference in Part III of this Annual Report on Form 10-K.ORION ENERGY SYSTEMS, INC.ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED MARCH 31, 2018Table of Contents PagePART IItem 1 Business4Item 1A Risk Factors11Item 1B Unresolved Staff Comments19Item 2 Properties19Item 3 Legal Proceedings19Item 4 Mine Safety Disclosures20PART IIItem 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities20Item 6 Selected Financial Data23Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations25Item 7A Quantitative and Qualitative Disclosures About Market Risk41Item 8 Financial Statements and Supplementary Data42Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure74Item 9A Controls and Procedures75Item 9B Other Information77PART IIIItem 10 Directors, Executive Officers and Corporate Governance77Item 11 Executive Compensation77Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters78Item 13 Certain Relationships and Related Transactions, and Director Independence78Item 14 Principal Accountant Fees and Services78PART IVItem 15 Exhibits and Financial Statement Schedules78Item 16 10-K Summary82Signatures83FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K includes forward-looking statements that are based on Orion Energy Systems, Inc's ("Orion", "we", "us", "our" andsimilar 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 onassumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors thatwe believe are appropriate under the current circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond ourcontrol. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-lookingstatements contained in this Form 10-K. Important factors could cause actual results to differ materially from our forward-looking statements. Given theseuncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our beliefs andassumptions 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 thisForm 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 identifyall of these factors, they include, among others, the following:•our ability to achieve our expected revenue growth, gross margin and other financial objectives in fiscal 2019 and beyond;•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 ability to manage the ongoing decreases in the average selling prices of our products as a result of competitive pressures in the evolving lightemitting 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 keycontacts 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 reduction or elimination of investments in, or incentives to adopt, LED lighting technologies;•our increasing emphasis on selling more of our products through third party distributors and sales agents, including our ability to attract and retaineffective 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;•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;•the market acceptance of our products and services;•our ability to realize expected cost savings from our cost reduction initiatives;•our failure to comply with the covenants in our revolving credit agreement;•our fluctuating quarterly results of operations as we continue to implement cost reductions, and continue to focus investing in our third partydistribution sales channel;•our ability to recruit, hire and retain talented individuals in all disciplines of our company;•our ability to balance customer demand and production capacity;•our inability to timely and effectively remediate any material weakness in our internal controls and our failure to maintain an effective system ofinternal 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;•our ability to regain compliance with Nasdaq's minimum bid price rule;•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 actualresults could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.ITEM 1.BUSINESSAs used herein, unless otherwise expressly stated or the context otherwise requires, all references to “Orion,” “we,” “us,” “our,” “Company” andsimilar references are to Orion Energy Systems, Inc. and its consolidated subsidiaries.OverviewWe provide enterprise-grade LED lighting and energy project solutions. We research, develop, design, manufacture, market, sell and implement energymanagement systems consisting primarily of high-performance, energy-efficient commercial and industrial interior and exterior lighting systems and relatedservices. 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 account end-users,electrical distributors, energy service companies ("ESCOs") and electrical contractors. Currently, substantially all of our products are manufactured at ourleased production facility located in Manitowoc, Wisconsin, although as the LED market continues to evolve, we are increasingly sourcing products andcomponents from third parties in order to provide versatility in our product development.We believe the market for lighting products has shifted to LED lighting systems, and that the customer base for our legacy high intensity fluorescent("HIF") technology products will continue to decline. Compared to our legacy lighting systems, we believe that LED lighting technology allows for betteroptical performance, significantly reduced maintenance costs due to performance longevity and reduced energy consumption. Due to their size andflexibility in application, we also believe that LED lighting systems can address opportunities for retrofit applications that cannot be satisfied by fluorescentor other legacy technologies. Our LED lighting technologies have become the primary component of our revenue as we continue to strive to be a leader inthe LED market. Although we continue to sell some lighting products using our legacy HIF technology, we do not build to stock HIF products and insteadbuild to committed customer orders as received. We plan to maintain our primary 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 generatesubstantially 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". Wefrequently engage our customer’s existing electrical contractor to provide installation and project management services. We also sell our lighting systems ona 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 execution,customer service, margin enhancement and operating expense management, as well as other factors. In addition, the gross margins of our products can varysignificantly 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 amonghigher or lower margin products can cause our profitability to fluctuate from period to period.Our executive leadership team has developed a fiscal year 2019 Strategic Plan to reflect our current business environment and the continuingopportunities and challenges of the LED and connected lighting marketplace. The overall goal of the plan is to grow, become more profitable and increaseshareholder value, considering this environment as well as our current financial situation.Management Restructuring and Focus on ProfitabilityIn early fiscal 2018, our Board of Directors restructured our management team. As part of this restructuring, our Chief Executive Officer, John Scribante,left our Company and Mike Altschaefl, our then-current Board Chair, assumed the role of Chief Executive Officer. In addition, Scott Green, our then-currentExecutive Vice President, became our new Chief Operating Officer, with ongoing primary responsibility for improving our revenue generation. Mike Pottsand Marc Meade, our then-current Executive Vice Presidents, remained in their positions and were assigned primary responsibility for substantially reducingour cost structure and for streamlining operations. Bill Hull remained in his position as Chief Financial Officer.On August 30, 2017, Mike Potts retired as our Chief Risk Officer and Executive Vice President and continues to serve as a member of our Board ofDirectors and provides consulting services to us on an as needed basis.Our market and product strategies have not changed. We have renewed our focus on sales channel execution, including a reduction in our cost structure.Our management team continues to implement its plan to achieve breakeven earnings (excluding4employee separation costs) before interest, taxes, depreciation, and amortization, or EBITDA, through the implementation of the following cost reductionmeasures:•Constant monitoring and management of manufacturing overhead costs to ensure we continue to deliver strong gross margins amid an increasinglycompetitive market landscape;•Reduction of staff positions through a targeted reduction in existing headcount and judicious replacement of staff either retiring or resigning;•Reduced total compensation for 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-criticalback office programs and initiatives.We believe that the cost reduction plan actions taken during fiscal 2018 resulted in annualized cost savings of approximately $6.0 million, which weexpect to fully realize beginning in fiscal 2019. These cost reductions, coupled with our renewed focus on sales channel execution, will help to drive revenuegrowth and accelerate our path to profitability.Reportable SegmentsReportable segments are components of an entity that have separate financial data that the entity's chief operating decision maker ("CODM") regularlyreviews when allocating resources and assessing performance. Our CODM is our chief executive officer. We have three reportable segments: Orion U.S.Markets Division ("USM"), Orion Engineered Systems Division ("OES"), and Orion Distribution Services Division ("ODS").For financial results by reportable segment, please refer to Note 17, "Segment Data" in our consolidated financial statements included in Item 8. of thisAnnual Report.Orion U.S. Markets DivisionThe USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers includeESCOs and electrical contractors. During fiscal 2017 and 2018, a significant portion of the historic sales of this division migrated to distribution channelsales as a result of the implementation of our agent distribution strategy. The migrated sales are included in our ODS Division.Orion Engineered Systems DivisionThe OES segment develops and sells lighting products and provides construction and engineering services for our commercial lighting and energymanagement systems. OES provides turnkey solutions for large national accounts, governments, municipalities and schools.Orion Distribution Services DivisionThe 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 and 2018 as a result of increased sales through distributors as we continue to develop our agent driven distributionstrategy. This expansion includes the migration of customers from direct sales previously included in the USM division.Our Market OpportunityWe provide enterprise-grade LED lighting and energy project solutions. We are primarily focused on providing commercial and industrial facilitieslighting retrofit solutions in North America using solid-state LED technology. Although we continue to sell some lighting products using our legacy HIFtechnology, we believe the market for lighting products has shifted to LED lighting systems, and thus the customer base for our legacy HIF products willcontinue to decline. Compared to our legacy lighting systems, LED lighting technology allows for better optical performance, significantly reducedmaintenance costs due to performance longevity and reduced energy consumption. Due to their size and flexibility in application, we also believe that LEDlighting 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 oflight. We estimate that our energy management systems reduce our customers’ legacy lighting-related electricity costs by approximately 50% or greater,while increasing their quantity of light by approximately 50% to 80% and improving overall lighting quality when replacing traditional fixtures. Ourcustomers with legacy lighting systems typically realize a one to four-year payback period from electricity cost savings generated by our lighting systemswithout considering utility incentives or government subsidies. We have sold and installed our lighting products in over 14,500 facilities across NorthAmerica, representing approximately 2.2 billion square feet of commercial and industrial building space, including sales to 191 of the Fortune500 companies.5Energy-efficient lighting systems are cost-effective and environmentally responsible solutions allowing end users to reduce operating expenses. Basedon a July 2015 report published by the United States Department of Energy, or DOE, we estimate the potential North American LED retrofit market within ourprimary markets to be approximately 1.1 billion lighting fixtures. Our primary markets are: commercial office and retail, area lighting and industrialapplications.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 theopportunity 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 estimatesthat there are approximately 66 million area lighting fixtures within the United States and an additional 45 million roadway lighting fixtures in the UnitedStates.Industrial applications. Our market for industrial facilities includes manufacturing facilities, distribution and warehouse facilities, governmentbuildings and agricultural buildings. These facilities typically contain "high-bay" lighting fixtures. The DOE estimates that there are approximately 139million 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 andincandescent 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 reducelighting-related electricity costs by approximately 50% or greater compared to HID fixtures, while increasing the quantity of light by approximately 50% to80% and improving overall lighting quality.We believe that utilities within the United States recognize the importance of energy efficiency as an economical means to manage capacity constraintsand as a low-cost alternative when compared to the construction costs of building new power plants. Accordingly, many of these utilities are continuallyfocused 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. Our products are not solelydependent 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 Solution50/50 Value Proposition. We estimate our LED lighting systems generally reduce lighting-related electricity costs by approximately 50% or greater,compared to legacy fixtures, while increasing the quantity of light by approximately 50% to 80% and improving overall lighting quality. In the commercialoffice and retail markets, we estimate our lighting systems generally reduce electricity costs by 50% or greater compared to legacy fixtures. From December 1,2001 through March 31, 2018, we believe that the use of LED and HIF fixtures has saved our customers $4.2 billion in electricity costs and reduced theirenergy 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 andmaintain responsibility for entire multi-facility roll-outs of our energy management solutions across North American commercial and industrial facilityportfolios. 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 four year paybackperiod on our lighting systems. These returns are achieved without considering utility incentives or government subsidies (although subsidies and incentivesare 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-playarchitecture that allows for fast and easy installation and facilitates maintenance, which allows for easy integration of other components of our energymanagement system. Our office LED Troffer Door Retrofit ("LDRTM") products are designed to allow for a fast and easy installation without disrupting theceiling space or the office workspace. We believe our system’s design reduces installation time and expense compared to other lighting solutions, whichfurther improves our customers’ return on investment. We also believe that our use of standard components reduces our customers’ ongoing maintenancecosts.Expanded Product Offerings. We are committed to continue developing LED product offerings in all of the markets we serve. Our third generation ofISON® class of LED interior fixture delivers a market leading 214 lumens per watt. This advancement means our customers can get more light with lessenergy, and sometimes fewer fixtures, than with any other product on the market.6In fiscal 2017 and 2018, we launched a variety of new products, features and functionality targeting healthcare, food service, high and low temperatureenvironments 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 CO2emissions 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 tonsper year. Based on these figures, we estimate that the use of our products has reduced indirect CO2 emissions by approximately 34.1 million tons throughMarch 31, 2018.Our Competitive StrengthsCompelling Value Proposition. By permanently reducing lighting-related electricity usage, our systems enable our customers to achieve significantcost savings, without compromising the quantity or quality of light in their facilities. As a result, our products offer our customers a rapid return on theirinvestment, without relying on government subsidies or utility incentives. We also offer our customers a single source solution whereby we manage and areresponsible for the entire project, including installation across their entire North American real estate portfolio. Our ability to offer such a turnkey, nationalsolution 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 than14,500 commercial and industrial facilities across North America. We believe that the willingness of our blue-chip customers to install our products acrossmultiple facilities represents a significant endorsement of our value proposition, which in turn helps us sell our energy management systems to newcustomers. We intend to leverage our expertise in managing projects across multiple facilities within our new LED product markets, which now include newcustomer opportunities with banks, insurance companies, hospitals, fast food chains, retail storefronts, grocery and pharmacies.Innovative Technology. We have developed a portfolio of 80 United States patents primarily covering various elements of our products. We believethese innovations allow our products to produce more light output per unit of input energy compared to our competition. We also have 21 patents pendingthat primarily cover various elements of our newly developed LED products and certain business methods. To complement our innovative energymanagement products, we have introduced integrated energy management services to provide our customers with a turnkey solution either at a single facilityor across their North American facility footprints. Our demonstrated ability to innovate provides us with significant competitive advantages. Our lightingproducts offer significantly more light output as measured in foot-candles of light delivered per watt of electricity consumed when compared to HID ortraditional fluorescent fixtures. Beyond the benefits of our lighting fixtures, we believe that there is also an opportunity to utilize our system platform as a“digital” or “connected ceiling”, or a framework or network that can support the installation and integration of other business solutions on our digitalplatform. This anticipated potential growth opportunity is also known as the “Industrial Internet of Things” or IoT, 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.Expanded Sales and Distribution Network. In addition to selling directly to electrical distribution customers, we sell our lighting products and servicesto national accounts. We now have relationships with more than 200 resellers and distributors that are represented by a North American network ofindependent lighting agencies. As of the end of fiscal 2018, we had approximately 50 different lighting agencies representing us in substantially all of NorthAmerica. 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 astrong sales presence.Our Growth StrategiesExpanded Sales Network and Salesforce. We believe that partnering with an agency sales force focused on providing technical product and salessupport to our customers provides us with a greater potential for revenue growth. We sell our products in one of three ways: (i) directly with our relationshipswith our national account partners; (ii) indirectly through independent sales agencies and broadline North American distributors; and (iii) through wholesalecontractors, including ESCOs and electrical contractors. During fiscal 2016, we engaged more than 18 manufacturer representative agencies to expand ourreach with the broadline distributors and further enhance our ability to grow revenue. During fiscal 2017 and fiscal 2018, we engaged approximately 50manufacturer representative agencies, covering substantially all of North America. At the end of fiscal 2018, we now have relationships with more than 200resellers and distributors that are represented by a North American network of independent lighting agencies. We continue to expand our sales network andwe 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 bytransitioning from single-site facility implementations to comprehensive enterprise-wide rollouts of our lighting products. We also intend to leverage ourlarge 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.7Continue to Improve Operational Efficiencies. We are focused on continually improving the efficiency of our operations to increase the profitability ofour 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 continueto drive innovation, efficiency and deliver superior results to our customers.Products and ServicesOur primary focus has been, and will continue to be, emphasizing our LED lighting fixtures. Currently, substantially all of our products aremanufactured at our leased production facility location in Manitowoc, Wisconsin, although as the LED market continues to evolve, we also source productsand components from third parties in order to have versatility in our product development. We are focused on researching, developing and/or acquiring newinnovative LED products and technologies for the retrofit markets, such as the LDRTM. We plan to focus our efforts on developing creative new LED retrofitproducts in order to offer our customers a variety of integrated energy management services, such as system design, project management and installation.ProductsThe 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 arefrequently found in office or retail grid ceilings. Our LDRTM product is unique in that the LED optics and electronics are housed within the doorframe thatallows for installation of the product in approximately one to two minutes. Our LDRTM product also provides reduced maintenance expenses based uponimproved 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 bayproducts. Our ISON® class of LED interior fixture offers a full package of premium features, including low total cost of ownership, optics that currentlyexceed competitors in terms of lumen package, delivered light, modularity and advanced thermal management. Our third generation of ISON® class of LEDinterior fixture delivers up to an exceptional 214 lumens per watt. This advancement means our customers can get more light with less energy, and sometimesfewer fixtures, compared to other products on the market. Our ApolloTM class of LED interior fixtures is designed for new construction and retrofit projectswhere 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 energysavings and maintenance reductions. In addition, our LED interior lighting products are lightweight and easy to handle, which further reduces installationand 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 InteLiteTM brand, orprocured from third parties. These control systems provide both lighting control options (such as occupancy, daylight, or schedule control) and dataintelligence 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.Warranty Policy. Our warranty policy generally provides for a limited one-year warranty on our HIF products and a limited five-year warranty on ourLED products, although we do offer warranties ranging up to 10 years for certain LED products. Ballasts, lamps, drivers, LED chips and other electricalcomponents are excluded from our standard warranty as they are covered by separate warranties offered by the original equipment manufacturers. Wecoordinate and process customer warranty inquiries and claims, including inquiries and claims relating to ballast and lamp components, through ourcustomer service department.ServicesWe 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 utilityincentives or government subsidies;•engineering design, which involves designing a customized system to suit our customers' facility lighting and energy management needs, andproviding the customer with a written analysis of the potential energy savings and lighting and environmental benefits associated with thedesigned system;8•project management, which involves us working with the electrical contractor in overseeing and managing all phases of implementation fromdelivery 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 qualityand remote monitoring and control of our installed systems. We also sell and distribute replacement lamps and fixture components into the after-market.Our CustomersWe primarily target commercial, institutional and industrial customers who have warehousing, manufacturing, and office facilities. In fiscal 2018, twocustomers accounted for 11.7% and 10.8% of total revenue. In fiscal 2017 and fiscal 2016, there was no single customer that accounted for more than 10% ofour total revenue.Sales and MarketingWe believe that partnering with an agency sales force focused on providing technical product and sales support to our customers provides us with agreater potential for revenue growth. We sell our products in one of three ways: (i) directly with our relationships with our national account partners; (ii)indirectly through independent sales agencies and broadline North American distributors; and (iii) through wholesale contractors, including ESCOs andelectrical contractors. Our ODS segment focuses on developing and expanding customer relationships with independent manufacturer’s agents and broadlinedistributors. During fiscal 2017 and fiscal 2018, we engaged approximately 50 manufacturer representative agencies to expand our reach with broadlinedistributors and further enhance our ability to increase our revenue. We attempt to leverage the customer relationships of these distributors to further extendthe geographic scope of our selling efforts. We work cooperatively with our indirect channels through participation in national trade organizations and byproviding training on our sales methodologies. We intend to continue to selectively expand our independent sales agent network, focusing on thosegeographic 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 educationand active participation in trade shows and energy management seminars. These efforts have included participating in national, regional and local tradeorganizations, exhibiting at trade shows, executing targeted direct mail campaigns, advertising in select publications, public relations campaigns, socialmedia and other lead generation and brand-building initiatives.CompetitionThe market for energy-efficient lighting products and services is fragmented. We face strong competition primarily from manufacturers and distributorsof lighting products and services as well as electrical contractors. We compete primarily on the basis of technology, cost, performance, quality, customerexperience, 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 companiessuch as Acuity Brands, Inc., Carmanah Technology Corporation, Energy Focus, Inc., Eaton Corporation plc, Cree, Inc., LSI Industries, Inc., RevolutionLighting Technologies Inc., TCP International Holdings, Inc., and Hubbell Incorporated are some of our main competitors within the commercial office, retailand industrial markets. We are also facing increased competition from manufacturers in low-cost countries.We also face competition from companies who provide energy management services. Some of these competitors, such as Ameresco, Inc., JohnsonControls, Inc. and Honeywell International, provide basic systems and controls designed to further energy efficiency.Intellectual PropertyAs of March 31, 2018, we had been issued 80 United States patents and have applied for 21 additional United States patents. The patented and patentpending technologies cover various innovative elements of our products, including our HIF and LED fixtures. Our patented LDRTM product allows for asignificantly quicker installation when compared to competitor's commercial office lighting products. Our smart lighting controls allow our lighting fixturesto 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 thermaland optical performance of our LED and HIF lighting products are material to our business, and that the loss of these patents could significantly andadversely affect our business, operating results and prospects.9BacklogBacklog represents the amount of revenue that we expect to realize in the future as a result of firm, committed orders. Our backlog as of March 31, 2018and March 31, 2017 totaled $3.3 million and $7.3 million, respectively. We generally expect our backlog to be recognized as revenue within one year.Manufacturing and DistributionWe lease approximately 197,000 square foot manufacturing and distribution facility located in Manitowoc, Wisconsin, where substantially all of ourproducts are manufactured.We generally maintain a significant supply of raw material and purchased and manufactured component inventory. We contract with transportationcompanies to ship our products and manage all aspects of distribution logistics. We generally ship our products directly to the end user.Research and DevelopmentOur 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. Over the last three fiscalyears, we have focused our development on additional LED products, resulting in our development and commercialization of several new suites of LEDinterior high bay products.Our research and development expenditures were $1.9 million, $2.0 million and $1.7 million for fiscal years 2018, 2017 and 2016, respectively.We operate research and development lab and test facilities in our Jacksonville, Florida and Manitowoc, Wisconsin locations.Regulatory MattersOur operations are subject to federal, state, and local laws and regulations governing, among other things, emissions to air, discharge to water, theremediation of contaminated properties and the generation, handling, storage, transportation, treatment, and disposal of, and exposure to, waste and othermaterials, as well as laws and regulations relating to occupational health and safety. We believe that our business, operations, and facilities are beingoperated 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 ofelectrical fixtures are subject to compliance with electrical codes in virtually all jurisdictions in the United States. In cases where we engage independentcontractors 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 InformationWe 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 Reportson 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 theExchange Act, are available through the investor relations page of our internet website free of charge as soon as reasonably practicable after we electronicallyfile such material with, or furnish it to, the Securities and Exchange Commission, or the SEC.EmployeesAs of March 31, 2018, we had 153 full-time and 61 temporary employees, of which 126 work in manufacturing. Our employees are not represented byany labor union, and we have never experienced a work stoppage or strike. We consider our relations with our employees to be good.10ITEM 1A.RISK FACTORSYou should carefully consider the risk factors set forth below and in other reports that we file from time to time with the Securities and ExchangeCommission and the other information in this Annual Report on Form 10-K. The matters discussed in the following risk factors, and additional risks anduncertainties 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 tosuccessfully complete and execute our strategic plan and our previously announced cost reduction initiatives. There is no guarantee that we will be able toachieve profitability or positive cash flows in the future. Our inability to successfully achieve profitability and positive cash flows will likely result in ourexperiencing a serious liquidity deficiency and could threaten our viability.Our financial performance is dependent on our ability to execute on our strategy, including implementing cost reduction initiatives, and achieveprofitability.Our ability to achieve our desired growth and profitability goals depends on our ability to effectively engage distribution and sales agents, developrecurring revenue streams, and improve our marketing, new product development, project execution, customer service, margin enhancement and operatingexpense 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, thenour business and financial performance will likely be materially adversely affected.We may not be able to obtain equity capital or debt financing necessary to fund our ongoing operations, effectively pursue our strategy and sustainour 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 sustainour growth initiatives. As of March 31, 2018, we had $9.4 million of cash and approximately $3.9 million of outstanding borrowings and only $0.1 millionof remaining borrowing capacity available under our revolving credit facility, compared to $17.3 million of cash and approximately $6.6 million ofoutstanding borrowings and $0.2 million of remaining borrowing availability as of March 31, 2017. If we require additional capital resources, we may not beable 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 suchequity capital or debt financing on acceptable terms or conditions. Factors affecting the availability to us of equity capital or debt financing on acceptableterms and conditions include:•Our current and future financial results and position.•The collateral availability and softening of our otherwise unsecured assets.•The market’s, investors and lenders' 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.•The price, volatility and trading volume and history of our common stock.Our inability to obtain the equity capital or debt financing necessary to fund our ongoing operations or pursue our strategies could force us to scaleback our operations or our sales initiatives. If we are unable to pursue our strategy and sustain our growth initiatives, our business and operating results willbe materially adversely affected.Our financial performance is dependent on our ability to achieve growth in our average sales margins on our products.The gross margins of our products can vary significantly, with margins ranging from 15% to 50%. While we continue to implement our strategy oftransitioning to higher-margin products and reducing the material cost of our products, a change in the total mix of our sales toward lower margin products, adecrease in the margins on our products as a result of competitive pressures driving down the average selling price of our products, lower sales volumes andpromotional programs to increase sales volumes could reduce our profitability and result in a material adverse effect on our business and financialperformance. Furthermore, average selling prices may be negatively impacted by market over-supply conditions, product feature cannibalization bycompetitors or component providers, low-cost non-traditional sales methods by new market entrants, and comparison of our retrofit fixture products withreplacement lamp equivalents. In a competitive lighting industry, we must be able to innovate and release new products on a regular basis with features andbenefits that generate increases in average selling price or average margins.11We 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 electricalcontractors. We are also facing increased competition from manufacturers in low-cost countries. 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 LEDproducts, 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 extensiveengineering, manufacturing, sales and marketing capabilities. In addition, the LED market has seen increased convergence in recent years, resulting in ourcompetition gaining increased market share and resources. Competitors could focus their substantial resources on developing a competing business model orenergy management products or services that may be potentially more attractive to customers than our products or services. In addition, we may facecompetition from other products or technologies that reduce demand for electricity. Our competitors may also offer energy management products and servicesat reduced prices in order to improve their competitive positions. Any of these competitive factors could make it more difficult for us to attract and retaincustomers, require us to lower our average selling prices in order to remain competitive, and reduce our revenue and profitability, any of which could have amaterial adverse effect on our results of operations and financial condition.The success of our business depends upon our adaptation to the quickly changing market conditions in the lighting industry and on market acceptanceof our lighting retrofit solutions using new LED technologies.The market for lighting products has experienced a significant technology shift to LED lighting systems. As a result, we are focusing our businessprimarily on providing lighting retrofit solutions using new LED technologies in lieu of traditional HIF lighting upon which our business has historicallyrelied. We are also looking at utilizing our system platform as a “digital” or “connected ceiling”, or a framework or network that can support the installationand integration of other business solutions on our digital platform.As a result, our future success depends significantly upon the adoption rate of LED products within our primary markets and our ability to participate inthis ongoing market trend. To be an effective participant in the growing LED market, we must keep up with the evolution of LED technology, which has beenmoving at a fast pace. We may be unable to successfully develop and market new LED products or services that keep pace with technological or industrychanges, differentiate ourselves from our competition, satisfy changes in customer demands or comply with present or emerging government and industryregulations and technology standards. The development and introduction of new LED products may result in increased warranty expenses and other newproduct introduction expenses. In addition, we will likely continue to incur substantial costs to research and develop new LED products, which will increaseour expenses, without guarantee that our new products and services will be commercially viable. We may also spend time and resources to develop andrelease new LED products only to discover that a competitor has also introduced similar new products with superior performance. Moreover, if new sources oflighting are developed, our current products and technologies could become less competitive or obsolete, which could result in reduced revenue, reducedearnings or increased losses and/or inventory and other impairment charges. Additionally, as the lighting retrofit market continues to shift to LED lightingproducts from HIF and other traditional lighting products, customer purchasing decisions have been delayed as they evaluate the relative advantages anddisadvantages 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 vendorsupply chain as LED product portfolio and our product revenue continue to increase and we place most of our focus on this product line. We currentlybelieve that our continuing efforts to negotiate further lower material input costs will help maintain or improve our LED product gross margins. However, wemay 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 thefuture 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 productlines, 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 toquarter as customers may continue to delay purchasing decisions as they evaluate their return on investment from purchasing new LED products compared toalternative 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 ouremphasis on promoting our LED technologies, our results of operations and financial condition will likely be materially adversely affected.12The 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 competitiveadvantage as the lighting retrofit solutions offered by us and our competitors generally have a product life of several years following installation. If we areunable to establish customer relationships and achieve market penetration in the LED market in a timely manner, we may lose the opportunity to market ourLED products and services to significant portions of the lighting systems retrofit market for several years and may be at a disadvantage in securing futurebusiness opportunities from customers that have previously established relationships with one or more of our competitors. These circumstances could reduceour revenue and profitability, which could have a material adverse effect on our results of operations and financial condition.The reduction or elimination of investments in, or incentives to adopt, LED lighting or the elimination of, or changes in, policies, incentives or rebatesin certain states or countries that encourage the use of LEDs over some traditional lighting technologies could cause the growth in demand for ourproducts to slow, which could materially and adversely affect our revenues, profits and margins.Reductions in (including as a result of any budgetary constraints), or the elimination of, government investment and favorable energy policies designedto accelerate the adoption of LED lighting could result in decreased demand for our products and decrease our revenues, profits and margins. Further, if ourproducts fail to qualify for any financial incentives or rebates provided by governmental agencies or utilities for which our competitors’ products qualify,such programs may diminish or eliminate our ability to compete by offering products at lower prices than ours.We are increasing our emphasis on indirect distribution channels to sell our products and services. If we are unable to attract, incentivize and retainour third-party distributors and sales agents, or our distributors and sales agents do not sell our products and services at the levels expected, ourrevenues 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 arenot exclusive, which means that these sales agents and distributors may sell other third-party products and services in direct competition with us. Since manyof our competitors use sales agents and distributors to sell their products and services, competition for such agents and distributors is intense and mayadversely affect our product pricing and gross margins. Additionally, due to mismanagement, industry trends, macro-economic developments, or otherreasons, our sales agents and distributors may be unable to effectively sell our products at the levels desired or anticipated. In addition, we have historicallyrelied on direct sales to sell our products, which were often made in competition with sales agents and distributors. In order to attract and form lastingpartnerships with sales agents and distributors, we will be required to overcome our historical perception as a direct sales competitor. As a result, we may havedifficulty attracting and retaining sales agents and distributors and any inability to do so could have a negative effect on our ability to attract and obtaincustomers, which could have an adverse impact on our business.We do not have major sources of recurring revenue and depend upon a limited number of customers in any given period to generate a substantialportion 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 asubstantial portion of our revenue by securing large retrofit and multi-facility roll-out projects from new and existing customers and our dependence onindividual 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 top10 customers accounted for approximately 42%, 33%, and 37% respectively, of our total revenue for fiscal 2018, 2017 and 2016. In fiscal 2018, twocustomers accounted for 11.7% and 10.8% of total revenue. In fiscal 2017 and fiscal 2016, there was no single customer that accounted for more than 10% ofour revenue. While we are making efforts to increase our sources of recurring revenue, we expect large retrofit and rollout projects to continue to remain asignificant component of our total revenue. Additionally, commercial office lighting retrofits provide for single large project opportunities. As a result, wemay continue to experience customer concentration in future periods. The loss of, or substantial reduction in sales to, any of our significant customers, or amajor customer, could have a material adverse effect on our results of operations in any given future period.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. Ourbusiness, prospects, results of operations, financial condition or cash flows could be materially adversely affected if our manufacturers were to experienceproblems with product quality, credit or liquidity issues, or disruptions or delays in the manufacturing process or delivery of the finished products andcomponents or the raw materials used to make such products and components.13Adverse conditions in the global economy have negatively impacted, and could in the future 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. Ourlighting systems are often purchased as capital assets and therefore are subject to capital availability. Uncertainty around such availability has led customersto delay purchase decisions, which has elongated the duration of our sales cycles. Weak economic conditions in the past have adversely affected ourcustomers’ capital budgets, purchasing decisions and facilities managers and, therefore, have adversely affected our results of operations. The return to arecessionary state of the global economy could potentially have negative effects on our near-term liquidity and capital resources, including slowercollections of receivables, delays of existing order deliveries and postponements of incoming orders. Our business and results of operations will be adverselyaffected to the extent these adverse economic conditions affect our customers’ purchasing decisions.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 earthminerals, electronic drivers, chips, ballasts, power supplies and lamps. In particular, our cost of aluminum can be subject to commodity price fluctuation. Wealso source certain finished goods externally. Limitations inherent within the supply chain of certain of these component parts, including competitive,governmental, and legal limitations, natural disasters, and other events, could impact costs, and future increases in the costs of these items could adverselyaffect our profitability, as there can be no assurance that future price increases will be successfully passed through to customers. Further, suppliers' inventoriesof 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 ofcertain components that are critical to our product manufacturing and were in excess of our estimated near-term requirements as a result of supplier deliveryconstraints 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 devoteadditional working capital to support component and raw material inventory that may not be used over a reasonable period to produce saleable products, andwe may be required to increase our excess and obsolete inventory reserves to provide for these excess quantities, particularly if demand for our products doesnot meet our expectations. Also, any shortages or interruptions in supply of our components or raw materials could disrupt our operations. If any of theseevents occur, our results of operations and financial condition could be materially adversely affected.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 currentand potential customers of the advantages of our lighting systems and energy management products and services, then our ability to sell our lighting systemsand energy management products and services will be limited. In addition, because the market for energy management products and services is rapidlyevolving, 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 ourproducts, then our ability to grow our business could be limited and we may not be able to increase our revenue or achieve profitability.Our ability to balance customer demand and capacity and increased employee turnover could negatively impact our business.In addition, as customer demand for our products changes, we must be able to adjust our production capacity, including increasing or decreasing ouremployee workforce, to meet demand. We are continually taking steps to address our manufacturing capacity needs for our products. If we are not able toincrease or decrease our production capacity at our targeted rate or if there are unforeseen costs associated with adjusting our capacity levels, our ability toexecute our operating plan could be adversely affectedWe have, from time to time, experienced increased employee turnover. The increased turnover has resulted in the loss of numerous long-termemployees, along with their institutional knowledge and expertise, and the reallocation of certain employment responsibilities, all of which could adverselyaffect operational efficiencies, employee performance and retention. Such turnover has also placed a significant burden on our continuing employees, hasresulted in higher recruiting expenses as we have sought to recruit and train employees, and introduced increased instability in our operations asresponsibilities were reallocated to new or different employees. To the extent that we are unable to effectively reallocate employee responsibilities, retain keyemployees and reduce employee turnover, our operations and our ability to execute our operating plan could be adversely affected.Our inability to attract and retain key employees, our reseller network or manufacturer representative agencies could adversely affect ouroperations 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 oursales 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 our14distribution channels and network of manufacturer representative agencies. If we are unable to attract and retain key employees, resellers, and manufacturerrepresentative agencies because of competition or, in the case of employees, inadequate compensation or other factors, our results of operations and ourability to execute our operating plan could be 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 orproperty 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 ornot product liability claims will be brought against us in the future or result in negative publicity about our business or adversely affect our customerrelations. Moreover, we may not have adequate resources in the event of a successful claim against us. A successful product liability claim against us that isnot covered by insurance or is in excess of our available insurance limits could require us to make significant payments of damages and could materiallyadversely 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 adverselyaffect 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 employeeand third-party nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for anyreason 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 assuranceabout the degree of protection which existing or future patents may afford us. Likewise, we offer no assurance that our patent applications will result in issuedpatents, that our patents will be upheld if challenged, that competitors will not develop similar or superior business methods or products outside theprotection of our patents, that competitors will not infringe upon our patents, or that we will have adequate resources to enforce our patents. Effectiveprotection of our United States patents may be unavailable or limited in jurisdictions outside the United States, as the intellectual property laws of foreigncountries sometimes offer less protection or have onerous filing requirements. In addition, because some patent applications are maintained in secrecy for aperiod 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 otherwiselearn of our unpatented technology. To protect our trade secrets and other proprietary information, we generally require employees, consultants, advisors andcollaborators 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 otherproprietary 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 ourtrademarks may conflict with trademarks of other companies. Failure to obtain trademark registrations could limit our ability to protect our trademarks andimpede our sales and marketing efforts. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequateresources 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 makinginfringement 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 ormore 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 validor 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 redesignor, 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 operationsor 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 theevent of non-compliance, could limit our borrowing availability under the credit agreement, resulting in our being unable to borrow under our creditagreement and materially adversely impact our liquidity.Our credit agreement with Wells Fargo Bank, National Association contains provisions that limit our future borrowing availability, and may from timeto time require us to maintain a minimum fixed charge coverage ratio. The credit agreement also contains other customary covenants, including certainrestrictions on our ability to incur additional indebtedness, consolidate or15merge, 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 withthese 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, couldresult in the acceleration of the maturity of any indebtedness then outstanding under the credit agreement, which would require us to pay all amounts thenoutstanding. Such an event could materially adversely affect our financial condition and liquidity. Additionally, such events of non-compliance couldimpact the terms of any additional borrowings and/or any credit renewal terms. Any failure to comply with such covenants would be a disclosable event andmay 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 security measures are breached or fail, our products may be perceived as not being secure, customers maycurtail or stop buying our products, we may incur significant legal and financial exposure, our business, results of operations and financial conditioncould be materially adversely affected.Our information technology systems involve the storage of customers’ personal and proprietary information in our equipment, networks and corporatesystems. Security breaches expose us to a risk of loss of this information, litigation and increased costs for security measures, loss of revenue, damage to ourreputation and potential liability. Security breaches or unauthorized access may in the future result in a combination of significant legal and financialexposure, increased remediation and other costs, damage to our reputation and a loss of confidence in the security of our products, services and networks thatcould have an adverse effect upon our business. We take steps to prevent unauthorized access to our corporate systems, however, because the techniques usedto obtain unauthorized access, disable or sabotage systems change frequently or may be designed to remain dormant until a triggering event, we may beunable to anticipate these techniques or implement adequate preventative measures. In addition, hardware, software or applications we procure from thirdparties may contain defects in design or manufacture or other problems that could unexpectedly compromise network and data security.If our information technology systems fail, or if we experience an interruption in their operation, then our business, results of operations and financialcondition 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 andaccounting records. The failure of our information technology systems, our inability to successfully maintain, enhance and/or replace our informationtechnology systems, or any compromise of the integrity or security of the data we generate from our information technology systems, could adversely affectour results of operations, disrupt our business and product development and make us unable, or severely limit our ability, to respond to customer demands. Inaddition, 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, customerdissatisfaction and potential lawsuits, any of which could have a material adverse effect on our results of operations or financial condition.Our retrofitting process frequently involves responsibility for the removal and disposal of components containing hazardous materials.When we retrofit a customer’s facility, we typically assume responsibility for removing and disposing of its existing lighting fixtures. Certaincomponents of these fixtures typically contain trace amounts of mercury and other hazardous materials. Older components may also contain trace amounts ofpolychlorinated biphenyls, or PCBs. We currently rely on contractors to remove the components containing such hazardous materials at the customer jobsite. The contractors then arrange for the disposal of such components at a licensed disposal facility. Failure by such contractors to remove or dispose of thecomponents containing these hazardous materials in a safe, effective and lawful manner could give rise to liability for us, or could expose our workers orother 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.16The cost of compliance with environmental laws and regulations and any related environmental liabilities could adversely affect our results ofoperations 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, theremediation of contaminated properties and the generation, handling, storage, transportation, treatment and disposal of, and exposure to, waste and othermaterials, as well as laws and regulations relating to occupational health and safety. These laws and regulations frequently change, and the violation of theselaws or regulations can lead to substantial fines, penalties and other liabilities. The operation of our manufacturing facility entails risks in these areas andthere 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 financialcondition.We expect our quarterly revenue and operating results to fluctuate. If we fail to meet the expectations of market analysts or investors, the marketprice 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 onequarter are not an indication of our future performance. Our revenue and operating results may fall below the expectations of market analysts or investors insome future quarter or quarters. Our failure to meet these expectations could cause the market price of our common stock to decline substantially. If the priceof 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 typeof 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 ownershipchanges.We have significant federal net operating loss carry-forwards and state net operating loss carry-forwards. While our federal and state net operating losscarry-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 changefor federal income tax purposes. An ownership change may limit a company’s ability to use its net operating loss carry-forwards attributable to the periodprior 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 useof 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 incomewill be subject to limitations in a particular year, which could potentially result in increased future tax liability for us.We have material weakness in our internal control over financial reporting; if we do not remedy the material weakness or if we fail to establish andmaintain effective internal controls over financial reporting, our business and financial results could be harmed.Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financialreporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accountingprinciples generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provideabsolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. As of March 31, 2018, 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 materialweaknesses. The material weakness identified as of March 31, 2017 was the result of operating ineffectiveness of controls related to management's reviewover the accounting close process, contract costs, and forecasts used to support certain fair value estimates. This material weakness was not fully remedied asof March 31, 2018 and therefore remains a material weakness as of that date. The material weaknesses identified as of March 31, 2016 were a result of ourinsufficient review of non-routine revenue transactions and the related accounting entries and were remediated during fiscal 2017. These material weaknesseswere 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 theannual or interim financial statements will not be prevented or detected on a timely basis. If the remedial measures implemented are determined to beinsufficient to address our current material weakness, if we are unable to successfully remediate our current material weakness related to our accounting closeprocess, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financialstatements may contain material misstatements and we could be required to restate our financial results. Our failure to maintain an effective system of internalcontrol over financial reporting could limit our ability to report our financial results accurately and in a timely manner or to detect and prevent fraud, couldresult in a restatement of our financial statements, and could also cause a loss of investor confidence and decline in the market price of our common stock.17If securities or industry analysts do not continue to publish research or publish inaccurate or unfavorable research about our business, our stockprice 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 aboutour 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 ourstock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceasescoverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and tradingvolume 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 executiveofficers 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 predictthe 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.If our stock price does not increase, our common stock may be subject to delisting from the NASDAQ Capital Market.Our common stock is currently listed on The NASDAQ Capital Market. Continued listing of a security on The NASDAQ Capital Market is conditionedupon compliance with certain continued listing requirements and continued listing standards set forth in the NASDAQ Listing Rules.On November 28, 2017, we received written notice from the Listing Qualifications Department of The NASDAQ Stock Market LLC notifying us that wewere is not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq CapitalMarket due to the shares of our common stock trading below the minimum bid price of $1.00 per share for a period of thirty (30) consecutive business days.To regain compliance, the bid price of our common stock must have a closing bid price of at least $1.00 per share for a minimum of ten (10) consecutivebusiness days. We were unable to regain compliance with the minimum bid price requirement during the initial 180-day compliance period. On May 30,2018, we were granted an additional 180-day compliance period following our written notification to NASDAQ of our intention to cure the deficiency duringthe second compliance period. If we fail to regain compliance during the second 180-day period, then NASDAQ will notify us of its determination to delistour common stock, at which point we would have an opportunity to appeal the delisting determination to a hearings panel.If we are unable to regain compliance with the minimum bid price requirement and our common stock is delisted from Nasdaq, this could, among otherthings, reduce the liquidity and trading price of our common stock, negatively impact our ability to raise additional funds and result in a loss of institutionalinvestor interest.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 tofund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms ofour existing revolving credit agreement restrict the payment of cash dividends on our common stock. Any future determination to pay dividends will be atthe discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, contractual restrictions andother factors that our board of directors deems relevant. The restriction on and decision not to pay dividends may impact our ability to attract investors andraise 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 orbylaws and the common share purchase rights that accompany shares of our common stock could delay or prevent a change of control of ourcompany, which could adversely impact the value of our common stock and may prevent or frustrate attempts by our shareholders to replace orremove 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 ouroutstanding common stock. These and other provisions in our amended and restated articles of incorporation, including our staggered board of directors andour ability to issue “blank check” preferred stock, as well as the provisions of our amended and restated bylaws and Wisconsin law, could make it moredifficult for shareholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board ofdirectors, 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 sharepurchase right. The rights are attached to, and trade with, the shares of common stock and generally are not exercisable. The rights will become exercisable ifa person or group acquires, or announces an intention to acquire, 20% or18more of our outstanding common stock. The rights have some anti-takeover effects and generally will cause substantial dilution to a person or group thatattempts to acquire control of us without conditioning the offer on either redemption of the rights or amendment of the rights to prevent this dilution. Therights 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, includingaccelerated vesting of stock options and restricted stock awards, upon a change of control and a subsequent qualifying termination. These provisions couldlimit 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 commonstock. 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 COMMENTSNone.ITEM 2.PROPERTIESOn March 31, 2016, we entered into a purchase and sale agreement with a third party to sell and leaseback our manufacturing and distribution facilitylocated in Manitowoc, Wisconsin. The transaction closed on June 30, 2016. Pursuant to the agreement, a lease was entered into on June 30, 2016, in whichwe 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 amountof leased space after March 1, 2017. On March 22, 2018, we renewed the lease for our manufacturing and distribution facility for an additional 18 monthsuntil December 31, 2020.We own our approximately 70,000 square foot technology center and corporate headquarters adjacent to our leased Manitowoc manufacturing anddistribution facility, of which we lease a portion to a third party. We also lease 10,500 square feet of office space in Jacksonville, Florida.In fiscal 2018, we did not renew the leases for our 5,600 square foot of office space in Houston, Texas and our 3,100 square foot of office space inChicago, Illinois. The leases terminate as of April 30, 2018 and May 31, 2018, respectively.Facilities noted above are utilized by all our business segments.ITEM 3.LEGAL PROCEEDINGSWe 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 currentlyassess whether the final resolution of any of such claims or legal proceedings may have a material adverse effect on our future results of operations. Inaddition to ordinary-course litigation, we were 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 left the company inNovember 2012, in the United States District Court for the Eastern District of Wisconsin (Green Bay Division). The plaintiff alleged, among other things, thatwe breached certain agreements entered into with the plaintiff, including the plaintiff’s employment agreement, and violated certain laws. The complaintsought, among other relief, unspecified pecuniary and compensatory damages, fees and such other relief as the court may deem just and proper.On January 11, 2018, a three-judge panel of the United States Court of Appeals Seventh Circuit unanimously affirmed the dismissal of all of theplaintiff’s claims against us. With the conclusion of this case during the fourth quarter of fiscal 2018, we released our loss contingency accrual of $1.4 milliondollars, the impact of which is included in our general and administrative expenses on the face of our consolidated statement of operations.On November 10, 2017, a purported shareholder, Stephen Narten, filed a civil lawsuit in the Circuit Court for Manitowoc County against thoseindividuals who served on our Board of Directors during fiscal years 2015, 2016, and 2017 and certain current and former officers during the same period.The plaintiff, who purports to bring the suit derivatively on behalf of our company, alleged that the director defendants breached their fiduciary duties inconnection with granting certain stock-based incentive awards under our 2004 Stock and Incentive Awards Plan and that the directors and current and formerofficers breached their fiduciary duties by accepting those awards. On January 22, 2018, we moved to dismiss the lawsuit on the grounds that the complaintfailed to state a claim upon which relief may be granted. Subsequent to the end of fiscal 2018, the parties reached a settlement of the claims, filed astipulation for dismissal of the case and the judge is expected to approve the settlement. The settlement did not, and will not, have a material impact on ourresults of operations or financial condition.19ITEM 4.MINE SAFETY DISCLOSURESNone.ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESPrice Range of our Common StockOur common stock is currently listed on The NASDAQ Capital Market under the symbol “OESX”. The following table sets forth the range of high andlow sales prices per share as reported on The NASDAQ Capital Market for the periods indicated. High LowFiscal 2018 First Quarter$1.95 $1.24Second Quarter$1.32 $0.85Third Quarter$1.08 $0.83Fourth Quarter$0.93 $0.77Fiscal 2017 First Quarter$1.55 $1.13Second Quarter$1.45 $1.18Third Quarter$2.49 $1.17Fourth Quarter$2.31 $1.76ShareholdersAs of May 31, 2018, there were approximately 216 record holders of the 29,044,357 outstanding shares of our common stock. The number of recordholders does not include shareholders for whom shares are held in a “nominee” or “street” name.Dividend PolicyWe have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings tofund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms ofour existing credit agreement restrict the payment of cash dividends on our common stock. Any future determination to pay dividends will be at thediscretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, contractual restrictions (includingthose under our loan agreements) and other factors that our board of directors deems relevant.Securities Authorized for Issuance under Equity Compensation PlansThe following table represents shares outstanding under our 2003 Stock Option Plan, our 2004 Stock and Incentive Awards Incentive Plan, and our2016 Omnibus Incentive Plan as of March 31, 2018. Equity Compensation Plan InformationPlan Category Number ofSecurities to be IssuedUpon Exercise ofOutstanding Optionsand Vesting ofRestricted Shares Weighted Average ExercisePrice ofOutstanding Options andRestricted Shares Number of SecuritiesRemaining Available forFuture Issuances Under theEquity Compensation Plans(1)Equity Compensation plans approved by security holders 2,115,466 $2.01 601,064Equity Compensation plans not approved by security holders — — —Total 2,115,466 $2.01 601,064 ______________________________(1)Excludes shares reflected in the column titled “Number of Securities to be Issued Upon Exercise of Outstanding Options and Vesting of RestrictedShares”.20Issuer Purchase of Equity SecuritiesWe did not purchase shares of our common stock during the fiscal fourth quarter ended March 31, 2018.Unregistered Sales of SecuritiesWe did not make any unregistered sales of our common stock during the year ended March 31, 2018 that were not previously disclosed in a QuarterlyReport on form 10-Q or a current report on Form 8-K during such period.21Stock Price Performance GraphThe following graph shows the total shareholder return of an investment of $100 in cash on March 31, 2013 through March 31, 2018, for (1) ourcommon stock, (2) the Russell 2000 Index and (3) The NASDAQ Clean Edge Green Energy Index. Data for the Russell 2000 Index and the NASDAQ CleanEdge Green Energy Index assume reinvestment of dividends. The stock price performance graph should not be deemed filed or incorporated by reference intoany 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 thestock performance graph by reference in another filing.22ITEM 6.SELECTED FINANCIAL DATAYou should read the following selected consolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our consolidated financial statements and the related notes included in Item 8. "Financial Statements andSupplementary Data" of this report. The selected historical consolidated financial data are not necessarily indicative of future results. Fiscal Year Ended March 31, 2018 2017 2016 2015 2014 (in thousands, except per share amounts)Consolidated statements of operations data: Product revenue$55,595 $66,224 $64,897 $65,881 $71,954Service revenue4,705 3,987 2,745 6,329 16,669Total revenue60,300 70,211 67,642 72,210 88,623Cost of product revenue (1)(2)41,415 49,630 49,630 68,388 54,423Cost of service revenue4,213 3,244 2,015 4,959 11,220Total cost of revenue45,628 52,874 51,645 73,347 65,643Gross profit14,672 17,337 15,997 (1,137) 22,980General and administrative expenses (1)(3)13,159 14,777 16,884 14,908 14,951Impairment of assets (4)710 250 6,023 — —Acquisition and integration related expenses (5)— — — 47 819Sales and marketing expenses (1) (6)11,879 12,833 11,343 13,290 13,527Research and development expenses (1) (7)1,905 2,004 1,668 2,554 2,026Loss from operations(12,981) (12,527) (19,921) (31,936) (8,343)Other income248 215 — — —Interest expense(425) (273) (297) (376) (481)Dividend and interest income15 36 128 300 567Loss before income tax(13,143) (12,549) (20,090) (32,012) (8,257)Income tax (benefit) expense (8)(15) (261) 36 49 (2,058)Net loss and comprehensive loss$(13,128) $(12,288) $(20,126) $(32,061) $(6,199)Net loss per share attributable to common shareholders: Basic$(0.46) $(0.44) $(0.73) $(1.43) $(0.30)Diluted$(0.46) $(0.44) $(0.73) $(1.43) $(0.30)Weighted-average shares outstanding: Basic28,784 28,156 27,628 22,353 20,988Diluted28,784 28,156 27,628 22,353 20,988______________________________(1)Includes stock-based compensation expense recognized under Financial Accounting Standards Board Accounting Standards Codification Topic 718,or ASC Topic 718, as follows: Fiscal Year Ended March 31, 2018 2017 2016 2015 2014 (in thousands)Cost of product revenue$12 $30 $36 $50 $70General and administrative expenses929 1,337 1,148 1,056 1,025Sales and marketing expenses155 139 235 360 485Research and development expenses6 99 43 33 13Total stock-based compensation expense$1,102 $1,605 $1,462 $1,499 $1,593 23(2)In fiscal 2018, includes expenses of $34 related to restructuring expense. In fiscal 2017, includes expenses of $2,209 related to an increase ininventory reserves and other inventory adjustments. In fiscal 2015, includes expenses of $12,130 related to the impairment of wireless controlinventory, fixed assets and intangible assets.(3) In fiscal 2018, includes a $1,822 restructuring expense and a $1,400 accrual for a loss contingency reversal. In fiscal 2016, includes a $1,400 losscontingency. In fiscal 2014, includes a $1,507 loss on the sale of a leased corporate jet.(4)In fiscal 2018, includes an intangible asset impairment of $710. In fiscal 2017, includes an intangible asset impairment of $250. In fiscal 2016,includes 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.(5)In fiscal 2014, includes expenses of $515 related to the acquisition and integration of Harris.(6)In fiscal 2018, includes expenses of $211 related to restructuring.(7)In fiscal 2018, includes expenses of $79 related to restructuring.(8)In fiscal 2014, includes a $2,315 benefit for deferred tax liabilities created by the acquisition of Harris.______________________________ As of March 31, 2018 2017 2016 2015 2014 (in thousands)Consolidated balance sheet data: Cash and cash equivalents$9,424 $17,307 $15,542 $20,002 $17,568Short-term investments— — — — 470Total assets45,325 62,051 70,875 87,805 98,940Long term borrowings4,013 6,819 4,021 3,222 3,151Shareholder notes receivable— (4) (4) (4) (50)Total shareholders’ equity23,424 35,450 45,983 64,511 77,01224ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidatedfinancial statements and related notes included in this Annual Report on Form 10-K for the fiscal year ended March 31, 2018. See also “Forward-LookingStatements” and Item 1A “Risk Factors”.OverviewWe provide enterprise-grade LED lighting and energy project solutions. We research, develop, design, manufacture, market, sell and implement energymanagement systems consisting primarily of high-performance, energy-efficient commercial and industrial interior and exterior lighting systems and relatedservices. 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 account end-users,electrical distributors, energy service companies ("ESCOs") and electrical contractors. Currently, substantially all of our products are manufactured at ourleased production facility location in Manitowoc, Wisconsin, although as the LED market continues to evolve, we are increasingly sourcing products andcomponents from third parties in order to provide versatility in our product development.We believe the market for lighting products has shifted to LED lighting systems, and that the customer base for our legacy high intensity fluorescent("HIF") technology products will continue to decline. Compared to our legacy lighting systems, we believe that LED lighting technology allows for betteroptical performance, significantly reduced maintenance costs due to performance longevity and reduced energy consumption. Due to their size andflexibility in application, we also believe that LED lighting systems can address opportunities for retrofit applications that cannot be satisfied by fluorescentor other legacy technologies. Our LED lighting technologies have become the primary component of our revenue as we continue to strive to be a leader inthe LED market. Although we continue to sell some lighting products using our legacy HIF technology, we do not build to stock HIF products and insteadbuild to committed customer orders as received. We plan to maintain our primary 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 generatesubstantially 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". Wefrequently engage our customer’s existing electrical contractor to provide installation and project management services. We also sell our lighting systems ona 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 execution,customer service, margin enhancement and operating expense management, as well as other factors. In addition, the gross margins of our products can varysignificantly 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 amonghigher 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 just completed fiscal year, which ended on March 31, 2018, as “fiscal 2018”, and our prior fiscal yearwhich ended 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.Reportable segments are components of an entity that have separate financial data that the entity's chief operating decision maker ("CODM") regularlyreviews 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").Market Shift to Light Emitting Diode ProductsThe 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 transitioninclude:•Rapidly declining LED component costs and LED product end user customer pricing pressure.25•Improving LED product performance and reducing customer return on investment payback periods resulting in increased customer preference forLED 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 requiringrapid new product introduction and new methods of product and company differentiation.•Significantly reduced product technology life cycles; significantly shorter product inventory shelf lives and the related increased risk of rapidlyoccurring 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 legacyproducts.•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 lightingindustry, we face intense competition from an increased number of other LED product companies, a number of which have substantially greater resources andmore experience and history with LED lighting products than we do.Management Restructuring and Focus on ProfitabilityIn early fiscal 2018, our Board of Directors restructured our management team. As part of this restructuring, our Chief Executive Officer, John Scribante,left our company and Mike Altschaefl, our then-current Board Chair, assumed the role of Chief Executive Officer. In addition, Scott Green, our then-currentExecutive Vice President, became our new Chief Operating Officer, with ongoing primary responsibility for improving our revenue generation. Mike Pottsand Marc Meade, our then-current Executive Vice Presidents, remained in their positions and were assigned primary responsibility for substantially reducingour cost structure and for streamlining operations. Bill Hull remained in his position as Chief Financial Officer.On August 30, 2017, Mike Potts retired as our Chief Risk Officer and Executive Vice President and continues to serve as a member of our Board ofDirectors and provides consulting services to us on an as needed basis.Our market and product strategies have not changed. We have renewed our focus on sales channel execution, and implemented a reduction in our coststructure. Our management team continues to implement its plan to achieve breakeven earnings (excluding employee separation costs) before interest, taxes,depreciation, and amortization, or EBITDA, through the implementation of the following cost reduction measures:•Constant monitoring and management of manufacturing overhead costs to ensure we continue to deliver strong gross margins amid an increasinglycompetitive market landscape;•Reduction of staff positions through a targeted reduction in existing headcount;•Reduced 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-criticalback office programs and initiatives.We believe that our cost reduction plan taken during fiscal 2018 resulted in annualized cost savings of approximately $6.0 million, which we expect tobe fully recognized beginning in fiscal 2019. These cost reductions, coupled with our renewed focus on sales channel execution, will help to drive revenuegrowth and accelerate our path to profitability.During fiscal 2018, we executed on this cost reduction plan by entering into separation agreements with multiple employees and recognized $2.1million of expense in fiscal 2018 in employee separation related costs. Our restructuring expense for fiscal 2018 is reflected within our consolidatedstatements of operations as follows (dollars in thousands):26 Year Ended March 31, 2018Cost of product revenue$34General and administrative1,822Sales and marketing211Research and development79Total$2,146Total restructuring expense by segment was recorded as follows (dollars in thousands): Year Ended March 31, 2018Orion Distribution Systems$117Corporate and Other2,029Total$2,146We recorded no restructuring expense to the Orion U.S. Markets or Orion Engineered Systems segments.Cash payments for employee separation costs in connection with our reorganization and cost reduction plan were $1.8 million for fiscal 2018. Theremaining reorganization of business accruals as of March 31, 2018 were $0.3 million, of which $0.2 million relates to employee separation costs that areexpected to be paid within one year. The remaining accrual of $0.1 million represents post-retirement medical benefits for one former employee which will bepaid over several years.Impairment of Intangible AssetsDuring the second quarter of fiscal 2018, we reviewed our definite and indefinite lived assets for impairment as a result of our lower than anticipatedoperating results and forecast revisions. As a result of these assessments, we determined that the carrying value of our indefinite lived intangible asset relatedto the Harris trade name exceeded the asset’s fair value. As a result, we recorded an impairment charge of $0.7 million. A change in these assumptions or achange in circumstances could result in an additional impairment charge in a future period.Fiscal 2019 OutlookDespite lower than anticipated results for fiscal year ended March 31, 2018, we remain optimistic about our near-term and long-term financialperformance. Our executive leadership team has developed a fiscal 2019 strategic plan to reflect our current business environment and the continuingopportunities and challenges of the LED and connected lighting marketplace. The overall goal of the plan is to grow, become more profitable and increaseshareholder value, considering this environment as well as our current financial situation.Our outlook for fiscal 2019 is positive as we believe that the following factors will directly or indirectly drive customer spending on lighting solutions:•LED adoption continues to grow in all sectors;•Commercial and industrial sentiment remains strong;•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.Beyond the benefits of our lighting fixtures, we believe that there is also an opportunity to utilize our system platform as a “digital” or “connectedceiling”, or a framework or network that can support the installation and integration of other business solutions on our digital platform. This anticipatedpotential growth opportunity is also known as the “Industrial Internet of Things” or IoT, and is still early in its development; however, we have alreadyparticipated in a few compelling applications that deliver cost savings and efficiency in areas outside of lighting.27Results of Operations: Fiscal 2018 versus Fiscal 2017The following table sets forth the line items of our consolidated statements of operations and as a relative percentage of our total revenue for eachapplicable period, together with the relative percentage change in such line item between applicable comparable periods (in thousands, except percentages): Fiscal Year Ended March 31, 2018 2017 2018 2017 Amount Amount %Change % ofRevenue % ofRevenueProduct revenue$55,595 $66,224 (16.1)% 92.2 % 94.3 %Service revenue4,705 3,987 18.0 % 7.8 % 5.7 %Total revenue60,300 70,211 (14.1)% 100.0 % 100.0 %Cost of product revenue41,415 49,630 (16.6)% 68.7 % 70.7 %Cost of service revenue4,213 3,244 29.9 % 7.0 % 4.6 %Total cost of revenue45,628 52,874 (13.7)% 75.7 % 75.3 %Gross profit14,672 17,337 (15.4)% 24.3 % 24.7 %General and administrative expenses13,159 14,777 (10.9)% 21.8 % 21.0 %Impairment of assets710 250 NM 1.2 % 0.3 %Sales and marketing expenses11,879 12,833 (7.4)% 19.7 % 18.3 %Research and development expenses1,905 2,004 (4.9)% 3.1 % 2.9 %Loss from operations(12,981) (12,527) (3.6)% (21.5)% (17.8)%Other income248 215 15.3 % 0.4 % 0.3 %Interest expense(425) (273) 55.7 % (0.7)% (0.4)%Interest income15 36 (58.3)% — % — %Loss before income tax(13,143) (12,549) (4.7)% (21.8)% (17.9)%Income tax (benefit) expense(15) (261) NM — % (0.4)%Net loss and comprehensive loss$(13,128) $(12,288) (6.8)% (21.8)% (17.5)%*NM = Not MeaningfulRevenue. Product revenue decreased 16.1%, or $10.6 million, for fiscal 2018 versus fiscal 2017. The decrease in product revenue was primarily a resultof the continued decline in fluorescent product sales, $6.5 million year over year, and a decrease of $3.9 million in LED lighting revenue. LED lightingrevenue decreased 6.2% from $53.1 million in fiscal 2017 to $49.8 million in fiscal 2018, primarily as a result of a decrease in our LED Troffer Door Retrofitproduct as well as the impact of our transition of our distribution sales channel to an agent driven model. Service revenue increased 18.0%, or $0.7 million,primarily due to the timing of installation projects in fiscal 2018 compared to fiscal 2017. Total revenue decreased by 14.1%, or $9.9 million, due to theitems discussed above.Cost of Revenue and Gross Margin. Cost of product revenue decreased 16.6%, or $8.2 million, in fiscal 2018 versus the comparable period in fiscal2017 primarily due to the decline in sales and the resulting lower overhead absorption compared to the prior year period. Cost of service revenue increased29.9%, or $1.0 million, in fiscal 2018 versus fiscal 2017 primarily due to the timing of completion and costs on large projects. Gross margin decreased from24.7% of revenue in fiscal 2017 to 24.3% in fiscal 2018. Our product gross margin decreased as a result of under-absorption within our manufacturing facilityand an increase in sales of products sourced from third party manufacturers.Operating ExpensesGeneral and Administrative. General and administrative expenses decreased 10.9%, or $1.6 million, in fiscal 2018 compared to fiscal 2017, primarilydue to decreases in employee costs of $1.6 million due to headcount reductions, the release of a loss contingency reserve for $1.4 million, and a decrease inamortization of $0.3 due to a lower intangible balance, partially offset by employee separation costs of $1.8 million. The decrease in employee costs of $1.6million included the reduction of stock-based compensation expense of $0.4 million. Excluding the employee separation costs and the loss contingencyrelease, general and administrative expenses decreased $2.0 million, or 13.8%.28Impairment of assets. During fiscal 2018 and fiscal 2017, we performed a review of our definite and indefinite-lived tangible and intangible assets forimpairment. In conjunction with this review, we determined that the carrying value of our Harris trade name intangible asset exceeded its fair value. As aresult, we recorded an impairment charge of $0.7 million and $0.3 million, respectively in fiscal 2018 and fiscal 2017.Sales and Marketing. Our sales and marketing expenses decreased 7.4%, or $0.9 million, in fiscal 2018 compared to fiscal 2017. The decrease wasprimarily due to lower employee costs and reduced consulting and professional fees related to special events and field sales, partially offset by $0.2 millionin employee separation costs.Research and Development. Research and development expenses decreased by 4.9%, or $0.1 million in fiscal 2018 compared to fiscal 2017 primarilydue to a decreased testing and supply costs, partially offset by $0.1 million in employee separation costs.Other income. Other income in fiscal 2018 and fiscal 2017 represented product royalties received from licensing agreements for our patents.Interest Expense. Interest expense in fiscal 2018 increased by 55.7%, or $0.1 million, from fiscal 2017. The increase in interest expense was due toincreased third party financing costs.Interest Income. Interest income in fiscal 2018 decreased by 58.3%, or twenty-one thousand dollars, from fiscal 2017. Our interest income decreased as aresult of the continued run-off legacy customer financed projects.Income Taxes. Income tax benefit in fiscal 2018 decreased $0.2 million from fiscal 2017. In fiscal 2017, we received refunds from previously filed taxreturns and reversed a valuation allowance resulting in a tax benefit in fiscal 2017. In fiscal 2018 we received refunds from previously filed tax returns. Bothperiods include income tax expense for minimum state tax liabilities. In fiscal 2018, the impact of the Tax Cuts and Jobs Act on tax expense was immaterialdue to the full valuation allowance.Results of Operations: Fiscal 2017 versus Fiscal 2016The following table sets forth the line items of our consolidated statements of operations and as a relative percentage of our total revenue for eachapplicable period, together with the relative percentage change in such line item between applicable comparable periods (in thousands, except percentages): Fiscal Year Ended March 31, 2017 2016 2017 2016 Amount Amount %Change % ofRevenue % ofRevenueProduct revenue$66,224 $64,897 2.0 % 94.3 % 95.9 %Service revenue3,987 2,745 45.2 % 5.7 % 4.1 %Total revenue70,211 67,642 3.8 % 100.0 % 100.0 %Cost of product revenue49,630 49,630 — % 70.7 % 73.4 %Cost of service revenue3,244 2,015 61.0 % 4.6 % 3.0 %Total cost of revenue52,874 51,645 2.4 % 75.3 % 76.4 %Gross profit17,337 15,997 8.4 % 24.7 % 23.6 %General and administrative expenses14,777 16,884 (12.5)% 21.0 % 25.0 %Impairment of assets250 6,023 NM 0.3 % 8.9 %Sales and marketing expenses12,833 11,343 13.1 % 18.3 % 16.8 %Research and development expenses2,004 1,668 20.1 % 2.9 % 2.4 %Loss from operations(12,527) (19,921) 37.1 % (17.8)% (29.5)%Other income215 — NM 0.3 % — %Interest expense(273) (297) 8.1 % (0.4)% (0.4)%Interest income36 128 (71.9)% — % 0.2 %Loss before income tax(12,549) (20,090) 37.5 % (17.9)% (29.7)%Income tax (benefit) expense(261) 36 NM (0.4)% 0.1 %Net loss and comprehensive loss$(12,288) $(20,126) 38.9 % (17.5)% (29.8)%Revenue. Product revenue increased 2.0%, or $1.3 million. The increase in product revenue in fiscal 2017 was primarily a result of strengthening salesvolume of LED fixtures and sales of new products introduced during the year. Our increase in product29revenue was partially offset by negative impacts resulting from the transition of our distribution sales channel to an agent driven model, that did not gaintraction until late in the second quarter of fiscal 2017. LED lighting revenue increased by 16.3% to $53.1 million in fiscal 2017 as compared to $45.7 millionin fiscal 2016. Service revenue increased 45.2%, or $1.2 million, primarily due to more installation project revenue in fiscal 2017 when compared to fiscal2016. Total revenue increased by 3.8%, or $2.6 million, 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. Ourfiscal 2017 gross margin includes the adverse impact of $2.2 million of charges to increase the inventory reserve by $1.7 million and an adjustment to writeoff supplies inventory of $0.5 million. The increase to the reserve reflects a growing customer preference for higher performing LED lighting technologiesand the related slowdown in demand for lower priced earlier generation solutions. Our cost of service revenue increased 61.0%, or $1.2 million in fiscal 2017versus fiscal 2016 primarily due to additional costs associated with our increased service revenue in fiscal 2017. Gross margin increased from 23.6% ofrevenue 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 LEDhigh bay fixtures, better absorption due to higher volumes, negotiated price decreases for lighting components, and the benefits of our cost containmentinitiatives.Operating ExpensesGeneral and Administrative. Our general and administrative expenses decreased 12.5%, or $2.1 million, in fiscal 2017 primarily due to a reduction inlegal 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 aresult of this impairment test, we determined that $0.3 million of our intangible asset for the Harris trade name was impaired. In 2016, we performed ourannual goodwill impairment test in the fourth quarter and we determined that the entire amount of our recorded goodwill of $4.4 million was impaired. Alsoin fiscal 2016, our long-lived assets related to the pending sale and leaseback of our manufacturing facility were impaired by $1.6 million to properlyrepresent the fair value of the property being sold.Sales and Marketing. Our sales and marketing expenses increased 13.1%, or $1.5 million, in fiscal 2017 compared to fiscal 2016. The increase wasprimarily due to increased commissions related to our agency channel and rebranding costs, offset by a reduction in bad debt expense incurred in fiscal 2017when compared to fiscal 2016.Research and Development. Our research and development expenses increased 20.1% or $0.3 million, in fiscal 2017 primarily due to our investment inproduct 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 tothe decrease in our outstanding debt.Interest Income. Our interest income in fiscal 2017 decreased by 71.9% or $0.1 million from fiscal 2016. Our interest income decreased due to anincrease in customers opting to utilize outside third party finance providers.Income Taxes. Our income tax benefit decreased $0.3 million from fiscal 2017. In fiscal 2017, we received refunds from previously filed tax returns andreversed a valuation allowance resulting in a tax benefit in fiscal 2017. Our income tax expense is typically due to changes in expected minimum state taxliabilities.U.S. Markets DivisionThe USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers includeESCOs and electrical contractors. During fiscal 2017 and fiscal 2018, a significant portion of the historic sales of this division have migrated to distributionchannel sales as a result of the implementation of our agent distribution strategy. The migrated sales are included in our ODS Division.The following table summarizes our USM segment operating results (dollars in thousands): For the year ended March 31, 2018 2017 2016Revenues$8,567 $17,852 $38,841Operating loss$(3,123) $(1,357) $(4,958)Operating margin(36.5)% (7.6)% (12.8)%30Fiscal 2018 Compared to Fiscal 2017USM segment revenue decreased from fiscal 2017 by 52.0%, or $9.3 million. The decrease in revenue during fiscal 2018 compared to fiscal 2017included the continued transition to our distribution sales model through the migration of sales to our ODS segment. Sales made through independentmanufacturer representative agents are reflected within our ODS segment. The decrease also reflects a $1.3 million decline in sales to select large directcustomers.The USM segment’s operating loss increased $1.8 million in fiscal 2018 as compared to fiscal 2017. The segment's operating loss was the result of thesignificant decline in sales due to the migration of customers to the distribution sales channel resulting in lost operating expense leverage and an intangibleasset impairment in the second quarter of fiscal 2018 of $0.2 million.Fiscal 2017 Compared to Fiscal 2016USM segment revenue decreased from fiscal 2016 by 54.0%, or $21.0 million. The decrease in revenue during fiscal 2017 compared to fiscal 2016 wasprimarily 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 $3.6 million. The decrease in operating loss in fiscal 2017 was primarily due tothe non-recurrence of costs associated with the segment's fiscal 2016 goodwill impairment charge of $2.4 million and fiscal 2016 fixed asset impairmentcharge of $0.7 million.Engineered Systems DivisionThe OES segment develops and sells lighting products and provides construction and engineering services for Orion's commercial lighting and energymanagement 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): For the year ended March 31, 2018 2017 2016Revenues$23,827 $29,501 $26,325Operating income (loss)$(3,792) $(3,647) $(6,982)Operating margin(15.9)% (12.4)% (26.5)%Fiscal 2018 Compared to Fiscal 2017OES revenue decreased in fiscal 2018 by 19.2%, or $5.7 million, compared to fiscal 2017 primarily as a result of the timing of delivery of our turnkeyprojects and reduced florescent purchases by a large retail customer.OES segment operating loss in fiscal 2018 increased by $0.1 million from fiscal 2017. The segment's operating loss was the result of the decline in salesresulting in lost operating leverage and an intangible asset impairment in the second quarter of fiscal 2018 of $0.5 million.Fiscal 2017 Compared to Fiscal 2016OES revenue increased in fiscal 2017 by 12.1%, or $3.2 million compared to fiscal 2016. This increase in revenue was primarily driven by an increasein lighting revenue due to an increase in customer capital spending within the manufacturing and industrial sector. OES completed more turnkey jobs infiscal 2017 when compared to fiscal 2016OES segment operating loss decreased 47.8%, or $3.3 million from fiscal 2017 compared to fiscal 2016. The decreased loss was due to improvements tofiscal 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 $2.0 million and fiscal 2016 fixed asset impairment charge of $0.8 million.Orion Distribution Services DivisionThe ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of broadline North Americandistributors. This segment has expanded in fiscal 2017 and fiscal 2018 as a result of increased sales through distributors as Orion continues to develop itsagent distribution strategy. This expansion includes the migration of customers from direct sales previously included in the USM division.31The following table summarizes our ODS segment operating results (dollars in thousands): For the year ended March 31, 2018 2017 2016Revenues27,906 22,858 2,476Operating loss(325) (927) (632)Operating margin(1.2)% (4.1)% (25.5)%Fiscal 2018 Compared to Fiscal 2017ODS segment revenue increased in fiscal 2018 from fiscal 2017 by $5.0 million. The increase in revenue was primarily due to our transition to adistribution channel sales model migrating direct sales through our manufacturer representative agents. In addition, ODS revenue grew as a result of ourexpanding manufacturer representative agencies and the continued ramp of sales through these agencies. The total number of manufacturer representativeagencies were approximately 50 in fiscal 2017 and fiscal 2018.ODS segment operating loss decreased by $0.6 million in fiscal 2018 compared to fiscal 2017, primarily due to a decrease in selling expenses.Fiscal 2017 Compared to Fiscal 2016ODS segment revenue increased in fiscal 2017 from fiscal 2016 by $20.4 million. The increase in revenue in fiscal 2017 was due to our transition fromESCOs to distribution channel sales through manufacturer representative agents expanding our customer base. Sales further increased due to the shift ofcustomers 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 $0.3 million in fiscal 2017. The operating loss increase was minimized by our continuedinvestment in selling costs and increasing commission expenses due to our manufacturer representative agents as we complete our selling channel transition.Liquidity and Capital ResourcesOverviewWe had $9.4 million in cash and cash equivalents as of March 31, 2018, compared to $17.3 million at March 31, 2017. Our cash position decreasedprimarily as a result of our net loss, separation payments to terminated employees in conjunction with our management reorganization and cost reductioninitiatives, and the net repayment of $2.7 million on 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, weamended the Credit Agreement to extend the maturity date to February 6, 2019 and eliminate a $5.0 million excess availability reserve that had limited theamount available to be drawn under the Credit Agreement by such amount. In fiscal 2018, we again amended the Credit Agreement to extend the maturitydate to February 6, 2021. The Credit Agreement provides for a revolving credit facility ("Credit Facility") subject to a borrowing base requirement based oneligible receivables and inventory. As of March 31, 2018, our borrowing base was approximately $4.0 million. Borrowings under the Credit Agreementoutstanding as of March 31, 2018, amounted to approximately $3.9 million. As a result, we estimate that as of March 31, 2018, we were eligible to borrow anadditional $0.1 million under the Credit Facility based upon current levels of eligible inventory and accounts receivable. The Credit Facility includes a $2.0million sublimit for the issuance of letters of credit.Our future liquidity needs and forecasted cash flows are dependent upon many factors, including our relative revenue, gross margins, cash managementpractices, cost reduction initiatives, working capital management, capital expenditures, pending or future litigation results and cost containment measures. Inaddition, we tend to experience high working capital costs when we increase sales from existing levels. Based on our current expectations, while weanticipate realizing improved operating results in the future, we also currently believe that we may experience negative working capital cash flows duringsome interim periods.While we believe that we will likely have adequate available cash and equivalents and credit availability under our Credit Agreement to satisfy ourcurrently anticipated working capital and liquidity requirements during the next 12 months based on our current cash flow forecast, there can be no assuranceto that effect. We are pursuing various alternative sources of liquidity, including exploring a sale or mortgage of our tech center office building, to helpensure that we will have the best allocation of investing capital to satisfy our working capital needs. We are also implementing certain inventorymanagement practices that we anticipate will help to reduce our inventory levels and enhance our cash position. If we experience significant liquidityconstraints, we may be required to reduce our sales efforts, implement additional cost savings initiatives or undertake other efforts to conserve our cash.32In 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 $75.0 million of debt and/or equity securities, although, we are currentlylimited to selling an amount of securities equal to one-third of our public float on such registration statement. The filing of the shelf registration statementmay help facilitate our ability to raise public equity or debt capital to expand existing businesses, fund potential acquisitions, invest in other growthopportunities, repay existing debt, or for other general corporate purposes.On November 28, 2017, we received written notice from the Listing Qualifications Department of The NASDAQ Stock Market LLC notifying us that wewere is not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq CapitalMarket due to the shares of our common stock trading below the minimum bid price of $1.00 per share for a period of thirty (30) consecutive business days.To regain compliance, the bid price of our common stock must have a closing bid price of at least $1.00 per share for a minimum of ten (10) consecutivebusiness days. We were unable to regain compliance with the minimum bid price requirement during the initial 180-day compliance period. On May 30,2018, we were granted an additional 180-day compliance period following our written notification to NASDAQ of our intention to cure the deficiency duringthe second compliance period. If we fail to regain compliance during the second 180-day period, then NASDAQ will notify us of its determination to delistour common stock, at which point we would have an opportunity to appeal the delisting determination to a hearings panel. We would remain listed onNasdaq pending the hearings panel’s decision. There can be no assurance that, if we do appeal any delisting determination by Nasdaq to the hearings panel,that such appeal would be successful.We intend to continue to monitor the closing bid price of our common stock and may, if appropriate, consider implementing available options to regaincompliance with the minimum bid price requirement under the Nasdaq Listing Rules.Cash FlowsThe following table summarizes our cash flows for our fiscal 2018, fiscal 2017 and fiscal 2016: Fiscal Year Ended March 31, 2018 2017 2016 (in thousands)Operating activities$(4,415) $(1,903) $(3,473)Investing activities(585) 1,649 (372)Financing activities(2,883) 2,019 (615)(Decrease) increase in cash and cash equivalents$(7,883) $1,765 $(4,460)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 capitaland other activities.Cash used in operating activities for fiscal 2018 was $4.4 million and consisted of a net loss adjusted for non-cash expense items of $8.1 million and netcash provided by changes in operating assets and liabilities of $3.7 million. Cash used by changes in operating assets and liabilities consisted of a decreaseof $1.7 million in accrued expenses and other primarily due to the timing of payment of commissions and lower accrued bonuses in the current fiscal year, adecrease of $0.1 million in deferred revenue due to the timing of project completion and a decrease of $0.1 million in deferred contract costs due to thetiming of project completions. Cash provided by changes in operating assets and liabilities included a decrease of $0.4 million in accounts receivable due tothe decline in sales and the timing of customer collections, a decrease in inventory of $4.7 million as a result of increased focus on inventory management inconsideration of the lower sales volume, a decrease of $0.5 million in prepaid and other assets primarily due to the timing of project billings, and a negligibledecrease in accounts payable.Cash used in operating activities for fiscal 2017 was $1.9 million and consisted of net cash provided by changes in operating assets and liabilities of$3.7 million and a net loss adjusted for non-cash expense items of $5.6 million. Cash provided by changes in operating assets and liabilities consisted of adecrease of $1.7 million in accounts receivable due to the timing of collections from customers, a decrease in inventory of $1.2 million due to decreasinginventory prices, a decrease in prepaid expenses and other assets of $2.1 million due to project billings that decreased unbilled revenue and an increase indeferred revenue of $0.3 million. Cash used by changes in operating assets and liabilities included an increase in deferred contract costs of $0.9 million dueto projects still in process, a decrease in accounts payable of $0.1 million due to the increase in purchases to support our anticipated growth in lightingproduct revenue, and decrease in accrued expenses and other of $0.6 million for increased commissions as a result of Orion’s distribution model changes.33Cash used in operating activities for fiscal 2016 was $3.5 million and consisted of net cash provided by changes in operating assets and liabilities of$3.6 million and a net loss adjusted for non-cash expense items of $7.1 million. Cash provided by changes in operating assets and liabilities consisted of adecrease of $7.1 million in accounts receivable due to the increase in lighting revenue and collections from customers, an increase in accounts payable of$0.7 million due to the increase in inventory purchases to support our growth in lighting product revenue during fiscal 2016, an increase of $1.8 million inaccrued expenses due to a loss contingency reserve and accrued project installation costs, and a decrease in deferred contract costs of $0.1 million due to thecompletion of solar projects. Cash used by changes in operating assets and liabilities included an increase of $3.2 million in inventory due to the increase inpurchases to support our anticipated growth in lighting product revenue, an increase in prepaid and other assets of $2.6 million for project billings thatincreased unbilled revenue, and a decrease in deferred revenue of $0.3 million due to project completions.Cash Flows Related to Investing Activities. Cash used by investing activities was $0.6 million in fiscal 2018 which consisted of purchases of propertyand equipment of $0.5 million and investment in patents and licenses of $0.1 million.Cash provided by investing activities was $1.6 million in fiscal 2017 which consisted of spend of $0.7 million for capital expenditures and $0.3 millionof investment in patents, offset by $2.6 million of proceeds from the sale of the Manitowoc manufacturing facility.Cash used in investing activities was $0.4 million in fiscal 2016 that consisted of $0.4 million 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 Flows Related to Financing Activities. Cash used in financing activities was $2.9 million for fiscal 2018 and was due almost entirely to the netrepayment of our revolving credit facility.Cash provided by financing activities was $2.0 million for fiscal 2017. This included net proceeds from the revolving credit facility of $2.9 million,offset by $0.9 million 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 $0.6 million for fiscal 2016. This included $1.9 million cash used for the repayment of long-term debt, partiallyoffset by $1.2 million of net proceeds from our Credit Facility and $0.1 million received from stock option exercises.Working CapitalOur net working capital as of March 31, 2018 was $13.0 million, consisting of $29.4 million in current assets and $16.4 million in current liabilities.Our net working capital as of March 31, 2017 was $25.5 million, consisting of $43.9 million in current assets and $18.4 in current liabilities. Our currentaccounts receivable balance decreased by $0.4 million from the fiscal 2017 year-end due to the decline in sales and the timing of customer collections. Ourinventory decreased from the fiscal 2017 year-end by $5.8 million due to continued management of purchasing activities and inventory managementinitiatives. Our prepaid and other current assets decreased by $0.4 million due to a decrease in unbilled revenue as a result of the timing of customer billings.Our accounts payable remained relatively flat compared to fiscal 2017 year-end. Our accrued expenses decreased from our fiscal 2017 year-end by $1.8million due to the payment of commissions and a decrease in accrued bonuses in the current fiscal year.We generally attempt to maintain at least a three-month supply of on-hand inventory of purchased components and raw materials to meet anticipateddemand, as well as to reduce our risk of unexpected raw material or component shortages or supply interruptions. Our accounts receivables, inventory andpayables may increase to the extent our revenue and order levels increase.IndebtednessRevolving Credit AgreementWe have an amended credit agreement ("Credit Agreement") that provides for a revolving credit facility ("Credit Facility") subject to a borrowing baserequirement based on eligible receivables and inventory. As of March 31, 2018 our borrowing base was approximately $4.0 million. The Credit Facility has amaturity date of February 6, 2021 and includes a $2.0 million sublimit for the issuance of letters of credit. As of March 31, 2018, we had no outstandingletters of credit. Borrowings outstanding as of March 31, 2018, amounted to approximately $3.9 million and are included in non-current liabilities in theaccompanying consolidated balance sheet. We estimate that as of March 31, 2018, we were eligible to borrow an additional $0.1 million under the CreditFacility based upon current levels of eligible inventory and accounts receivable.Subject in each case to our applicable borrowing base limitations, the Credit Agreement otherwise provides for a $15.0 million Credit Facility. Thislimit may increase up to $20.0 million, subject to a borrowing base requirement, if we satisfy certain conditions. We did not meet the requirements to increasethe borrowing limit to $20.0 million as of July 31, 2017, the most recent measurement date.34From and after any increase in the Credit Facility limit from $15.0 million to $20.0 million, the Credit Agreement requires that we maintain, as of theend of each month, a minimum ratio for the trailing twelve-month period of (i) earnings before interest, taxes, depreciation and amortization, subject tocertain adjustments, to (ii) the sum of cash interest expense, certain principal payments on indebtedness and certain dividends, distributions and stockredemptions, equal to at least 1.10 to 1.00. The Credit Agreement contains additional customary covenants, including certain restrictions on our ability toincur additional indebtedness, consolidate or merge, enter into acquisitions, guarantee obligations of third parties, make loans or advances, declare or payany dividend or distribution on our stock, redeem or repurchase shares of our stock, or pledge or dispose of assets. We were in compliance with our covenantsin the Credit Agreement as of March 31, 2018.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 securityinterest in substantially all of our and each subsidiary’s personal property (excluding various assets relating to customer OTAs) and a mortgage on certain realproperty.Borrowings under the Credit Agreement bear interest at the daily three-month LIBOR plus 3.0% per annum, with a minimum interest charge for eachyear or portion of a year during the term of the Credit Agreement of $0.1 million, regardless of usage. As of March 31, 2018, the interest rate was 5.31%. Orionmust 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% perannum on the undrawn amount of letters of credit outstanding from time to time under the Credit Facility.Capital SpendingOver the past three fiscal years, we have made capital expenditures primarily for production equipment and tooling, for information technology systems,and for general corporate purposes for our corporate headquarters and technology center. Our capital expenditures totaled $0.5 million in fiscal 2018, $0.7million in fiscal 2017, and $0.4 million in fiscal 2016. We plan to incur approximately $0.6 million in capital expenditures in fiscal 2019. Our capitalspending plans predominantly consist of investments related to new product development tooling and investments in information technology systems. Weexpect to finance these capital expenditures primarily through our existing cash, equipment secured loans and leases, to the extent needed, long-term debtfinancing, or by using our available capacity under our Credit Facility.Contractual ObligationsInformation regarding our known contractual obligations of the types described below as of March 31, 2018 is set forth in the following table (dollarsin thousands): Payments Due By Period Total Less than1 Year 1-3 Years 3-5 Years More than5 Years (in thousands)Bank debt obligations$3,908 $— $3,908 $— $—Capital lease obligations184 79 105 — Cash interest payments on debt273 139 134 — —Operating lease obligations1,642 647 995 — —Purchase order and capital expenditure commitments(1)1,882 1,882 — — —Total$7,889 $2,747 $5,142 $— $— (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 ArrangementsWe have no off-balance sheet arrangements.InflationOur results from operations have not been, and we do not expect them to be, materially affected by inflation.Critical Accounting Policies and EstimatesThe discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requiresus to make certain estimates and judgments that affect our reported assets, liabilities, revenue and expenses, and our related disclosure of contingent assetsand liabilities. We re-evaluate our estimates35on an ongoing basis, including those related to revenue recognition, inventory valuation, collectability of receivables, stock-based compensation, warrantyreserves and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under thecircumstances. 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) deliveryhas occurred and title has passed to the customer; (iii) the sales price is fixed and determinable and no further obligation exists; and (iv) collectability isreasonably assured. Virtually all of our revenue is recognized when title and risk of loss transfers to the customer or when services are completed andacceptance provisions, if any, have been met. In certain of our contracts, we provide multiple deliverables. We record the revenue associated with eachelement of these arrangements by allocating the total contract revenue to each element based on their relative selling prices. In such circumstances, we use ahierarchy 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 isavailable. We determine the selling price for our lighting and energy management system products, installation and recycling services using management’sbest estimate of selling price as VSOE or TPE evidence does not exist. We consider external and internal factors including, but not limited to, pricingpractices, 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 generationof electricity for which we recognize revenue on a monthly basis over the life of the PPA contract, typically in excess of 10 years.Historically we have offered our customers long-term financing through our OTA sales-type financing program. Under this program we finance thecustomer’s purchase of our energy management systems. Our OTA contracts are sales-type capital leases under GAAP and we record revenue at the net presentvalue of the future payments at the time customer acceptance of the installed and operating system is complete. Our OTA contracts under this sales-typefinancing 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 durationand, 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 forcash; 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 ourOTA financing program is fixed and is based on the cost of the lighting fixtures and applicable profit margin. Our revenue from agreements entered intounder this program is not dependent upon our customers’ actual energy savings. Upon completion of the installation, we may choose to sell the future cashflows 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 net realizable value and include raw materials, work in process and finished goods. Items areremoved from inventory using the first-in, first-out method. Work in process inventories are comprised of raw materials that have been converted intocomponents for final assembly. Inventory amounts include the cost to manufacture the item, such as the cost of raw materials and related freight, labor andother applied overhead costs. We review our inventory for obsolescence. If the net realizable value, which is based upon the estimated selling price, lessestimated costs of completion, disposal, and transportation, falls below cost, then the inventory value is reduced to its net realizable value. Our inventoryobsolescence reserves at March 31, 2018 were $3.4 million, or 30.1% of gross inventory, and $3.5 million, or 20.4% of gross inventory, at March 31, 2017.Allowance for Doubtful Accounts. We perform ongoing evaluations of our customers and continuously monitor collections and payments and estimatean allowance for doubtful accounts based upon the aging of the underlying receivables, our historical experience with write-offs and specific customercollection issues that we have identified. While such credit losses have historically been within our expectations, and we believe appropriate reserves havebeen established, we may not adequately predict future credit losses. If the financial condition of our customers were to deteriorate and result in animpairment of their ability to make payments, additional allowances might be required which would result in additional general and administrative expensein the period such determination is made. Our allowance for doubtful accounts was $0.2 million, or 1.7% of gross receivables, at March 31, 2018 and $0.1million, or 1.5% of gross receivables, at March 31, 2017.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 carryingvalue of the assets recognized in our financial statements may not be recoverable. Factors that we consider include whether there has been a significantdecrease 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 strategyfor that asset, such as the loss of a customer in the case of customer relationships. Our assessment of the recoverability of long-lived assets involvessignificant judgment and estimation. These assessments reflect our assumptions, which, we believe, are consistent with the assumptions hypotheticalmarketplace participants use. Factors that we must estimate when performing recoverability and impairment tests include, among others, forecasted revenue,margin costs and the economic life of the asset. If impairment is indicated, we first36determine 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 ismeasured and recognized.As a result of lower than anticipated operating results for our non-solar business during fiscal 2018, we reviewed our definite lived assets for impairmentin accordance with the applicable accounting guidance. Under this guidance, assets are identified to asset groups that are then tested for recoverability bycomparing 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. Ifthe asset group fails the recoverability test, an impairment and reduction in the asset value is recorded if the carrying value of the assets exceeds the assetgroup's fair value. In conjunction with the fiscal 2018 review, we determined that our fixed and intangible assets represented two asset groups. The first assetgroup represents our solar power generating assets that are installed at a customer location and generate distinct and separately identifiable cash flows under along-term contract with this customer for the use of the power they generate. The operating results for the solar generating assets were consistent withforecasts, and therefore no impairment review was performed. The second asset group consists of all of our other fixed and intangible assets. Due to the centralnature of our operations, these assets support our full operations and are utilized by all three of our reportable segments and do not generate separatelyidentifiable cash flows below the total asset group level. The primary asset within the asset group is the machinery and equipment with a remaining useful lifeof five years. As such, in accordance with the accounting guidance, our review for recoverability of this asset group compared the carrying value of the assetgroup 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 theundiscounted cash flows for the other non-solar asset group exceeded their carrying values. As such the assets were deemed recoverable and no impairmentwas recorded.As a result of our reoccurring losses, during fiscal 2017 we reviewed our definite lived assets for impairment in accordance with the applicableaccounting guidance. Under this guidance assets are identified to asset groups that are then tested for recoverability by comparing the asset group’s carryingvalue to the sum of undiscounted cash flows to be generated through the use and eventual disposition of the assets. If the asset group fails the recoverabilitytest, an impairment and reduction in the asset value is recorded if the carrying value of the assets exceeds the asset group's fair value. In conjunction with thefiscal 2017 review, we determined that our fixed and intangible assets represented two asset groups. The first asset group represents our solar powergenerating assets that are installed at a customer location and generate distinct and separately identifiable cash flows under a long-term contract with thiscustomer for the use of the power they generate. The second asset group consists of all of our other fixed and intangible assets. Due to the central nature of ouroperations, these assets support our full operations and are utilized by all three of our reportable segments and do not generate separately identifiable cashflows 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. Assuch, in accordance with the accounting guidance, our review for recoverability of this asset group compared the carrying value of the asset group to ourexpected undiscounted cash flows for the next five years plus estimated proceeds at the end of the five-year period. We concluded that the undiscounted cashflows for the other non-solar 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 $1.6 million related to the write-down of our Manitowoc manufacturing facility based upon thenet realizable value of the pending sale leaseback transaction which occurred during the first fiscal quarter of fiscal 2017.After an impairment loss is recognized, a new, lower cost basis for that long-lived asset is established. Subsequent changes in facts and circumstances donot 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, andindependent 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 torecognize 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 leastannually as of the first day of the fiscal fourth quarter, or when indications of potential impairment existed. In addition, we monitored for the existence ofpotential impairment indicators throughout the fiscal year. We conducted impairment testing for goodwill at the reporting unit level. Reporting units, asdefined by Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other, may be operating segments as a whole or an operation onelevel below an operating segment, referred to as a component. For fiscal 2016, our reporting units consisted of our segments: USM and OES. The ODSsegment 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 stockprice, 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, werecorded an impairment loss of $4.4 million related to all of our goodwill which was determined to be in excess of its implied fair value based upon thesecond 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 arenot required.37Indefinite 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 annualimpairment 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 isgreater than its fair value. If our qualitative assessment reveals that asset impairment is more likely than not, we perform a quantitative impairment test bycomparing the fair value of the indefinite lived intangible asset to its carrying value. Alternatively, we may bypass the qualitative test and initiateimpairment 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, estimatingfuture cash flows from product sales, perpetuation of employment agreements containing non-competition clauses, continuation of customer relationshipsand 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 hasoccurred. If the carrying value of the indefinite lived intangible asset exceeds its fair value, we recognize an impairment loss in an amount equal to theexcess, not to exceed the carrying value. Once an impairment loss is recognized, the adjusted carrying value becomes the new accounting basis of theindefinite lived intangible asset.We performed a qualitative assessment in conjunction with its annual impairment test of its indefinite lived intangible assets as of January 1, 2018. Thisqualitative assessment considered our operating results for the first nine months of fiscal 2018 in comparison to prior years as well as its anticipated fourthquarter 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 likelythan not and a quantitative analysis was not required.During the second quarter of fiscal 2018, as a result of lower than anticipated operating results in the first half of fiscal 2018, we revised our full yearfiscal 2018 forecast. As such, a triggering event occurred as of September 30, 2017, requiring us to evaluate our indefinite lived intangible assets forimpairment. We performed a quantitative impairment review of our indefinite lived intangible assets related to the Harris trade name applying the royaltyreplacement method to determine the asset’s fair value as of September 30, 2017. Under the royalty replacement method, the fair value of the Harristradename 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 quantitativeanalysis incorporated several assumptions including forecasted future revenues and cash flows, estimated royalty rate, based on similar licensing transactionsand market royalty rates, and discount rate, which incorporates assumptions such as weighted-average cost of capital and risk premium. As a result of thisimpairment test, the carrying value of the Harris trade name exceeded its estimated fair value and an impairment of $0.7 million was recorded to Impairmentof intangible assets during the quarter ended September 30, 2017 to reduce the asset’s carrying value to its calculated fair value. This fair value determinationwas categorized as Level 3 in the fair value hierarchy.During the fourth quarter of fiscal 2017, we achieved lower than anticipated operating results, made a strategic shift in our manufacturing strategy andapproach to the fluorescent and LED exterior lighting market, and revised our fiscal 2018 forecast. As a result, a triggering event occurred requiring us toassess our indefinite lived intangible assets for impairment. As such we performed a quantitative impairment review of our indefinite lived intangible assetrelated 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 replacementmethod, 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 touse 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 capitaland 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 $0.3million was recorded to Impairment of assets during the quarter ended March 31, 2017, 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 itsfair value exceeded its carrying value and was not impaired. This test was performed in conjunction with our annual impairment test of goodwill afterdetermining 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 ourresults of operations.Stock-Based Compensation. We currently issue restricted stock awards to our employees, executive officers and directors. Prior to fiscal 2015, we alsoissued stock options to these individuals. We apply the provisions of ASC 718, Compensation - Stock Compensation, to these restricted stock and stockoption 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 ofgrant. Compensation costs for equity incentives are recognized in earnings, 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 usingthe Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of38certain assumptions, including fair value, expected term, risk-free interest rate, expected volatility, expected dividends, and expected forfeiture rate tocalculate 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 aremaining 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 securitiesexchange on which we were listed on the date of grant to establish the exercise price of our stock options.As of March 31, 2018, $1.3 million of total stock-based compensation cost was expected to be recognized by us over a weighted average period of 1.9years. We expect to recognize $0.8 million of stock-based compensation expense in fiscal 2019 based on restricted stock awards outstanding as of March 31,2018. 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 taxesin each of the jurisdictions in which we operate. This process involves estimating our actual current tax expenses, together with assessing temporarydifferences resulting from recognition of items for income tax and accounting purposes. These differences result in deferred tax assets and liabilities, whichare included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxableincome and, to the extent we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowance or increasethis 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 recordedagainst our net deferred tax assets. We continue to monitor the realizability of our deferred tax assets and adjust the valuation allowance accordingly. Forfiscal 2018, 2017, and 2016 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 netoperating 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 aresult, our ability to use our net operating loss carry-forwards attributable to the period prior to such ownership change to offset taxable income will besubject to limitations in a particular year, which could potentially result in increased future tax liability for us.As of March 31, 2018, we had net operating loss carry-forwards of approximately $82.5 million for federal tax purposes and $66.4 million for state taxpurposes. As of the current fiscal year, this amount is representative of the entire loss carryforward on the filed returns.We also had federal tax credit carry-forwards of $1.3 million and state tax credit carry-forwards of $0.8 million, which are fully reserved for as part of ourvaluation allowance. Both the net operating losses and tax credit carry-forwards will begin to expire in varying amounts between 2020 and 2038.We recognize penalties and interest related to uncertain tax liabilities in income tax expense. Penalties and interest were immaterial as of the date ofadoption 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 toexamination 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 tointerpretation, differences of opinion can result in differing conclusions as to the amount of tax benefits to be recognized under Financial AccountingStandards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes. ASC 740 utilizes a two-step approach for evaluating taxpositions. Recognition (Step 1) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more likely than not to besustained upon examination. Measurement (Step 2) is only addressed if Step 1 has been satisfied. Under Step 2, the tax benefit is measured as the largestamount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. Consequently, the levelof evidence and documentation necessary to support a position prior to being given recognition and measurement within the financial statements is a matterof judgment that depends on all available evidence. As of March 31, 2018, the balance of gross unrecognized tax benefits was approximately $0.1 million,all of which would reduce our effective tax rate if recognized. We believe that our estimates and judgments discussed herein are reasonable, however, actualresults could differ, which could result in gains or losses that could be material.The Tax Cut and Jobs Act ("Act") was enacted on December 22, 2017. The Act significantly changes U.S. tax law by, among other things, reducing theU.S. federal corporate tax rate from 35% to 21%, imposing a one-time transition tax on earnings of39certain foreign subsidiaries that were previously tax deferred, and creating new taxes on certain foreign sourced earnings. On December 22, 2017, the SECstaff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address accounting for income tax effects of the Tax Reform Act. At March 31, 2018, Orion hasnot completed its accounting for the tax effects of enactment of the Act. Additional information on the impacts of the Act can be found in Note 13, IncomeTaxes to our accompanying audited consolidated financial statements.Recent Accounting PronouncementsSee Note 2 —Summary of Significant Accounting Policies to our accompanying audited consolidated financial statements for a full description ofrecent accounting pronouncements including the respective expected dates of adoption and expected effects on results of operations and financial condition.40Item 7A.Quantitative and Qualitative Disclosure About Market RiskMarket risk is the risk of loss related to changes in market prices, including interest rates, foreign exchange rates and commodity pricing that mayadversely 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 allreporting 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 inthe 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, foreigncurrency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. It is our policy not to enterinto interest rate derivative financial instruments. As a result, we do not currently have any significant interest rate exposure.As of March 31, 2018, $3.8 million of our $3.9 million of outstanding debt was at floating interest rates. An increase of 1.0% in the prime rate wouldresult in an increase in our interest expense of approximately thirty-eight thousand per year.Commodity Price Risk. We are exposed to certain commodity price risks associated with our purchases of raw materials, most significantly ouraluminum purchases. A hypothetical 20% fluctuation in aluminum prices would have an impact of $0.4 million on earnings in fiscal 2019.41ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageNumberReports of Independent Registered Public Accounting Firms43Consolidated Balance Sheets46Consolidated Statements of Operations and Comprehensive Income47Consolidated Statements of Shareholders’ Equity48Consolidated Statements of Cash Flows49Notes to Consolidated Financial Statements5042REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMShareholders and Board of DirectorsOrion Energy Systems, Inc.Manitowoc, WisconsinOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of Orion Energy Systems, Inc. (the “Company”) as of March 31, 2018 and 2017, the relatedconsolidated statements of operation and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended March31, 2018, and the related notes and Schedule II, Valuation and Qualifying Accounts for each of the three years in the period ended March 31, 2018(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all materialrespects, the financial position of the Company at March 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three yearsin the period ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company'sinternal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated June 13, 2018 expressed an adverse opinion thereon.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion./s/BDO USA, LLPWe have served as the Company's auditor since 2012Milwaukee, WisconsinJune 13, 201843REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMShareholders and Board of DirectorsOrion Energy Systems, Inc.Manitowoc, WisconsinOpinion on Internal Control over Financial ReportingWe have audited Orion Energy Systems, Inc.’s (the “Company’s”) internal control over financial reporting as of March 31, 2018, based on criteria establishedin Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSOcriteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2018,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 thedate of management’s assessment.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidatedbalance sheets of the Company as of March 31, 2018 and 2017, 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, 2018, and the related notes and schedule (collectively referred to as “thefinancial statements”)” and our report dated June 13, 2018 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicablerules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Ouraudit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibilitythat a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weaknessregarding management review controls over the accounting close process, contract costs and forecasts used in support of certain fair value estimates has beenidentified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit testsapplied in our audit of the 2018 financial statements, and this report does not affect our report dated June 13, 2018 on those financial statements.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.44Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/BDO USA, LLPMilwaukee, WisconsinJune 13, 201845ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share amounts) March 31, 2018 2017Assets Cash and cash equivalents$9,424 $17,307Accounts receivable, net8,736 9,171Inventories, net7,826 13,593Deferred contract costs1,000 935Prepaid expenses and other current assets2,467 2,877Total current assets29,453 43,883Property and equipment, net12,894 13,786Other intangible assets, net2,868 4,207Other long-term assets110 175Total assets$45,325 $62,051Liabilities and Shareholders’ Equity Accounts payable$11,675 $11,635Accrued expenses and other4,171 5,988Deferred revenue, current499 621Current maturities of long-term debt79 152Total current liabilities16,424 18,396Revolving credit facility3,908 6,629Long-term debt, less current maturities105 190Deferred revenue, long-term940 944Other long-term liabilities524 442Total liabilities21,901 26,601Commitments and contingencies (Note 14) Shareholders’ equity: Preferred stock, $0.01 par value: Shares authorized: 30,000,000 shares at March 31, 2018 and 2017; no sharesissued and outstanding at March 31, 2018 and 2017— —Common stock, no par value: Shares authorized: 200,000,000 at March 31, 2018 and 2017; shares issued:38,384,575 and 37,747,227 at March 31, 2018 and 2017; shares outstanding: 28,953,183 and 28,317,490 atMarch 31, 2018 and 2017— —Additional paid-in capital155,003 153,901Treasury stock: 9,431,392 and 9,429,737 common shares at March 31, 2018 and 2017(36,085) (36,081)Shareholder notes receivable— (4)Retained deficit(95,494) (82,366)Total shareholders’ equity23,424 35,450Total liabilities and shareholders’ equity$45,325 $62,05146ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(in thousands, except share and per share amounts) Fiscal Year Ended March 31, 2018 2017 2016Product revenue$55,595 $66,224 $64,897Service revenue4,705 3,987 2,745Total revenue60,300 70,211 67,642Cost of product revenue41,415 49,630 49,630Cost of service revenue4,213 3,244 2,015Total cost of revenue45,628 52,874 51,645Gross profit14,672 17,337 15,997Operating expenses: General and administrative13,159 14,777 16,884Impairment of assets710 250 6,023Sales and marketing11,879 12,833 11,343Research and development1,905 2,004 1,668Total operating expenses27,653 29,864 35,918Loss from operations(12,981) (12,527) (19,921)Other income (expense): Other income248 215 —Interest expense(425) (273) (297)Interest income15 36 128Total other expense(162) (22) (169)Loss before income tax(13,143) (12,549) (20,090)Income tax (benefit) expense(15) (261) 36Net loss and comprehensive loss$(13,128) $(12,288) $(20,126) Basic net loss per share attributable to common shareholders$(0.46) $(0.44) $(0.73)Weighted-average common shares outstanding28,783,830 28,156,382 27,627,693Diluted net loss per share$(0.46) $(0.44) $(0.73)Weighted-average common shares and share equivalents outstanding28,783,830 28,156,382 27,627,69347ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIESSTATEMENTS OF SHAREHOLDERS’ EQUITY(in thousands, except share amounts) Shareholders’ Equity Common Stock Shares AdditionalPaid-inCapital TreasuryStock ShareholderNotesReceivable RetainedEarnings(Deficit) TotalShareholders’EquityBalance, March 31, 201527,421,533 $150,516 $(36,049) $(4) $(49,952) $64,511Issuance of stock for services35,290 66 — — — 66Exercise of stock options and warrants for cash46,410 97 — — — 97Shares issued under Employee Stock Purchase Plan3,925 (1) 8 — — 7Stock-based compensation270,303 1,462 — — — 1,462Employee tax withholdings on stock-based compensation(10,323) — (34) — — (34)Net loss— — — — (20,126) (20,126)Balance, March 31, 201627,767,138 $152,140 $(36,075) $(4) $(70,078) $45,983Issuance of stock for services110,566 156 — — — 156Shares issued under Employee Stock Purchase Plan5,156 — 8 — — 8Stock-based compensation444,102 1,605 — — — 1,605Employee tax withholdings on stock-based compensation(9,472) — (14) — — (14)Net loss— — — — (12,288) (12,288)Balance, March 31, 201728,317,490 $153,901 $(36,081) $(4) $(82,366) $35,450Issuance of stock for services24,747 — — — — —Shares issued under Employee Stock Purchase Plan10,057 — 11 — — 11Stock-based compensation612,601 1,102 — — — 1,102Employee tax withholdings on stock-based compensation(10,482) — (11) — — (11)Collections on stockholder notes(1,230) — (4) 4 — —Net loss— — — — (13,128) (13,128)Balance, March 31, 201828,953,183 $155,003 $(36,085) $— $(95,494) $23,42448ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Fiscal Year Ended March 31, 2018 2017 2016Operating activities Net loss$(13,128) $(12,288) $(20,126)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation1,404 1,451 2,950Amortization607 881 1,215Stock-based compensation expense1,102 1,605 1,462Impairment of assets710 250 6,023Loss on sale of property and equipment— 1 40Provision for inventory reserves1,261 2,212 509Provision for bad debts22 132 575Other(94) 177 258Changes in operating assets and liabilities: Accounts receivable, current and long-term419 1,687 7,116Inventories, current4,706 1,220 (3,249)Deferred contract costs(65) (899) 137Prepaid expenses and other current assets483 2,084 (2,645)Accounts payable20 (81) 713Accrued expenses and other(1,736) (635) 1,803Deferred revenue, current and long-term(126) 300 (254)Net cash used in operating activities(4,415) (1,903) (3,473)Investing activities Purchase of property and equipment(512) (660) (401)Additions to patents and licenses(73) (291) (6)Proceeds from sales of property, plant and equipment— 2,600 35Net cash (used in) provided by investing activities(585) 1,649 (372)Financing activities Payment of long-term debt(158) (880) (1,901)Proceeds from revolving credit facility68,734 87,935 65,767Repayments of revolving credit facility(71,456) (85,025) (64,549)Proceeds from issuance of common stock, net of issuance costs— — (2)Payments to settle employee tax withholdings on stock-based compensation(9) (19) (34)Net proceeds from employee equity exercises6 8 104Net cash (used in) provided by financing activities(2,883) 2,019 (615)Net (decrease) increase in cash and cash equivalents(7,883) 1,765 (4,460)Cash and cash equivalents at beginning of period17,307 15,542 20,002Cash and cash equivalents at end of period$9,424 $17,307 $15,542Supplemental cash flow information: Cash paid for interest$147 $164 $191Cash (received) paid for income taxes$(17) $(153) $18Supplemental disclosure of non-cash investing and financing activities: Vendor financed capital lease addition$— $175 $39649ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 — DESCRIPTION OF BUSINESSOrganizationOrion includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated subsidiaries. Orion is a developer, manufacturer and seller oflighting 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. During fiscal 2018 and fiscal 2017 Orion hadleased warehouse space in Augusta, Georgia, but as of March 31, 2018, Orion had vacated this storage location.NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of ConsolidationThe consolidated financial statements include the accounts of Orion Energy Systems, Inc. and its wholly-owned subsidiaries. All significantintercompany transactions and balances have been eliminated in consolidation.ReclassificationsWhere appropriate, certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenuesand expenses during that reporting period. Areas that require the use of significant management estimates include revenue recognition, inventoryobsolescence and allowance for doubtful accounts, accruals for warranty and loss contingencies, income taxes, impairment analyses, and certain equitytransactions. Accordingly, actual results could differ from those estimates.Cash and Cash EquivalentsOrion considers all highly liquid, short-term investments with original maturities of three months or less to be cash equivalents.Fair Value of Financial InstrumentsOrion’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other, revolvingcredit 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 forsimilar obligations. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservableinputs. GAAP describes a fair value hierarchy based on the following three levels of inputs, of which the first two are considered observable and the lastunobservable, 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 forwhich 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 valuemeasurement. Inputs reflect management's best estimate of what market participants would use in valuing the asset or liability at the measurement date.50Allowance for Doubtful Accounts Orion performs ongoing evaluations of its customers and continuously monitors collections and payments. Orion estimates an allowance for doubtfulaccounts based upon the aging of the underlying receivables, historical experience with write-offs and specific customer collection issues that have beenidentified. See Note 3 - Accounts Receivable for further discussion of the allowance for doubtful accounts.Deferred Contract CostsDeferred contract costs consist primarily of the costs of products delivered, and services performed, that are subject to additional performanceobligations or customer acceptance. These deferred contract costs are expensed at the time the related revenue is recognized. Deferred costs amounted to $1.0million as of March 31, 2018 and $0.9 million as of March 31, 2017.Incentive CompensationOrion’s compensation committee approved an Executive Fiscal Year 2018 Annual Cash Incentive Program. The program provided for performance cashbonus payments ranging from 50-100% of the fiscal 2018 base salaries of Orion’s named executive officers and other key employees. The program providedfor bonuses to be paid out on the basis of achieving positive EBITDA in fiscal 2018. Based upon the results for the year ended March 31, 2018, Orion did notaccrue any expense related to this plan.Orion’s compensation committee approved an Executive Fiscal Year 2017 Annual Cash Incentive Program. The program provided for performance cashbonus payments ranging from 35-100% of the fiscal 2017 base salaries of Orion’s named executive officers and other key employees. The program providedfor bonuses to be paid out on the basis of the achievement in fiscal 2018 of at least (i) $0.5 million of profit before taxes and (ii) revenue growth of 10% morethan 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. The program provided for performance cashbonus payments ranging from 35-100% of the fiscal 2016 base salaries of Orion’s named executive officers and other key employees. The program providedfor bonuses to be paid out on the basis of the achievement in fiscal 2016 of at least (i) $0.1 million of profit before taxes and (ii) revenue growth of 10% morethan fiscal year 2015. Based upon the results for the year ended March 31, 2016, Orion did not accrue any expense related to this plan.Revenue RecognitionRevenue is recognized on the sales of Orion's lighting and related energy-efficiency systems and products when the following four criteria are met:1.persuasive evidence of an arrangement exists;2.delivery has occurred and title has passed to the customer;3.the sales price is fixed and determinable and no further obligation exists; and4.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 providesfor 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 salesand services, Orion determines revenue by allocating the total contract revenue to each element based on their relative selling prices in accordance with ASC605-25, Revenue Recognition - Multiple Element Arrangements. In such circumstances, Orion uses a hierarchy to determine the selling price to be used forallocating revenue to deliverables: (1) vendor-specific objective evidence ("VSOE") of fair value, if available, (2) third-party evidence ("TPE") of selling priceif 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 estimatedselling 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 constructionproject, with materials being delivered and contracting and project management activities occurring according to an installation schedule. The significantdeliverables 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 usingmanagement'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 productstransfers. For product revenue, management's best estimate of selling price is determined using a cost plus gross profit margin method.51In addition, Orion records in service revenue the selling price for its installation and recycling services using management’s best estimate of sellingprice, as VSOE and TPE do not exist. Service revenue is recognized when services are completed and customer acceptance has been received. Recyclingservices provided in connection with installation entail the disposal of the customer’s legacy lighting fixtures. Orion’s service revenues, other than forinstallation and recycling that are completed prior to delivery of the product, are included in product revenue using management’s best estimate of sellingprice, as VSOE and TPE do not exist. These services include comprehensive site assessment, site field verification, utility incentive and government subsidymanagement, 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 consideration given toother relevant economic conditions and trends, customer demand, pricing practices, and margin objectives. The determination of an estimated selling price ismade 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. TheOTA 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 thegeneration of electricity for which we recognize revenue on a monthly basis over the life of the PPA contract, typically in excess of 10 years.Deferred revenue relates to advance customer billings, investment tax grants received related to PPAs and long term maintenance contracts on OTAsand is classified as a liability on the 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 theoriginal OTA contract is executed.Shipping and Handling CostsOrion records costs incurred in connection with shipping and handling of products as cost of product revenue. Amounts billed to customers inconnection with these costs are included in product revenue.AdvertisingAdvertising costs of seventeen thousand, $0.1 million and four thousand for fiscal 2018, 2017 and 2016, respectively, were charged to operations asincurred.Research and DevelopmentOrion expenses research and development costs as incurred. Amounts are included in the Statement of Operations and Comprehensive Income on theline item Research and development.Income TaxesOrion recognizes deferred tax assets and liabilities for the future tax consequences of temporary differences between financial reporting and income taxbasis of assets and liabilities, measured using the enacted tax rates and laws expected to be in effect when the temporary differences reverse. Deferred incometaxes also arise from the future tax benefits of operating loss and tax credit carry-forwards. A valuation allowance is established when management determinesthat 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, 2018, Orion decreased its fullvaluation allowance by $6.8 million against its deferred tax assets due to the decrease in its deferred tax assets.ASC 740, Income Taxes, also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement oftax 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 sustainedupon examination. Orion has classified the amounts recorded for uncertain tax benefits in the balance sheet as other liabilities (non-current) to the extent thatpayment is not anticipated within one year. Orion recognizes penalties and interest related to uncertain tax liabilities in income tax expense. Penalties andinterest are immaterial and are included in the unrecognized tax benefits.The Tax Cut and Jobs Act ("ACT") was enacted December 22, 2017. Further information on the impacts of the Act can be found in Note 13, IncomeTaxes.Stock Based CompensationOrion’s share-based payments to employees are measured at fair value and are recognized in earnings, on a straight-line basis over the requisite serviceperiod.52Cash 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, 2018, 2017 and 2016.Orion uses the Black-Scholes option-pricing model for issued stock options. Orion calculated volatility based upon the historical market price of itscommon 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 theexpected 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 recognitionprovisions 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 overthe requisite service period. As more fully described in Note 16, Orion currently awards non-vested restricted stock to employees, executive officers anddirectors. Orion did not issue any stock options during fiscal 2018, fiscal 2017 or fiscal 2016.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 unvestedstock awards based on historical experience.Concentration of Credit Risk and Other Risks and UncertaintiesOrion’s cash is deposited with two financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on suchdeposits. Orion has not experienced any losses in such accounts and believes that it is not exposed to any significant financial institution viability risk onthese balances.Orion purchases components necessary for its lighting products, including ballasts, lamps and LED components, from multiple suppliers. For fiscal2018, 2017 and 2016, no supplier accounted for more than 10% of total cost of revenue.In fiscal 2018, two customers accounted for 11.7% and 10.8% of total revenue. In fiscal 2017 and fiscal 2016, no customer accounted for 10% ofrevenue.As of March 31, 2018, one customer accounted for 13.2% of accounts receivable and as of March 31, 2017, one customer accounted for 11.6% ofaccounts receivable.Recent Accounting PronouncementsIn August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, "Classification of CertainCash Receipts and Cash Payments," which provides clarification and additional guidance as to the presentation and classification of certain cash receipts andcash payments in the statement of cash flows. This ASU provides guidance as to the classification of a number of transactions including: contingentconsideration 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 offiscal 2019 and will be applied through retrospective adjustment to all periods presented. Orion does not expect the adoption of this guidance to have amaterial 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 liabilitieson the balance sheet for the rights and obligations created by long-term leases and disclose additional quantitative and qualitative information about leasingarrangements. 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 transferredthrough 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 isrequired for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certainpractical expedients available. Orion has not yet completed its review of the full provisions of this standard against its outstanding lease arrangements and isin 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 thestandard. In addition, management continues to assess the impact of adoption of this standard on its consolidated statements of operations, cash flows, andthe related footnote disclosures.In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." The pronouncement, and subsequent amendments, which isincluded in the Accounting Standards Codification as Topic 606 (“ASC 606”) and Sub-Topic 340-40 (“ASC 340-40”), supersedes the revenue recognitionrequirements in ASC 605 “Revenue Recognition” (ASC 605) and provides guidance on the accounting for other assets and deferred costs associated withcontracts with customers. ASC 60653requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the considerationto which the entity expects to be entitled to in exchange for those goods or services. ASC 340-40 limits the circumstances that an entity can recognize anasset from the costs incurred to obtain or fulfill a contract that are not subject to the guidance in other portions in the Accounting Standards Codification,such as those related to inventory. The provisions of ASC 606 and ASC 340-40 (the “new standards”) require entities to use more judgments and estimatesthan under previous guidance when allocating the total consideration in a contract to the individual promises to customers (which we refer to as“performance obligations”) and determining when a performance obligation has been satisfied and revenue can be recognized. Additional disclosuresregarding the nature, composition and timing of revenue and cash flow; and the significant judgments in measurement and recognition also are required.Orion evaluated the provisions of ASC 606 against a sample of its customer contracts to determine the impact, if any, on the timing, measurement andpresentation of revenue recognition and the cost of goods and services sold. The review considered among other matters, the evaluation and identification ofdistinct performance obligations, measurement of Orion's progress toward satisfying identified performance obligations, and the timing for recognizing costsassociated with satisfying performance obligations. The amount and timing of revenues and costs of sales associated with the contracts which include onlyperformance obligations for lighting fixtures will largely be unaffected by the new standards. While the impact of the new standards vary for each contractwhere Orion also installs products at the customer’s facilities based on the contract’s specific terms, the new standards result in Orion (a) delaying therecognition of some of its product revenues from the point of shipment until a later date during the installation period, (b) recording services revenueassociated with installing lighting fixtures as such fixtures are installed instead of recording all services revenue at the completion of the installation, and (c)recording costs associated with installing lighting fixtures as they are incurred instead of deferring such costs and recognizing them at the time servicerevenue was recorded.Under ASC 606, incremental contract costs, which for Orion includes sales commissions and costs paid to independent contractors for field audits, arerequired to be capitalized as contract assets and amortized over the period these costs are expected to be recovered. Although Orion incurs such costs, itscontracts are typically completed within one year. As such, Orion plans to elect the practical expedient provided in ASC 606 and expense incrementalcontract costs when incurred.Orion implemented ASC 606 at the start of the first quarter of the fiscal year ending March 31, 2019 using the modified retrospective transition methodunder which the new standards are being applied only to the most current period presented and the cumulative effect of applying the new standards to opencontracts as of April 1, 2018 is recognized at the date of initial application as a cumulative adjustment to retained earnings. Orion is finalizing the cumulativeadjustment to retained earnings, and will complete this adjustment prior to the filing its first quarter 10-Q for fiscal year end 2019. Based on the analysis todate, Orion does not expect a material impact from the adoption of the new standards.Orion implemented the appropriate changes to business processes and controls to support recognition and disclosure under the new standard, includingthe new qualitative and quantitative disclosures that will include information on the nature, amount, timing and significant judgments impacting revenuefrom contracts with customers.In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting” which provides guidanceabout which changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting. The provisions ofthis standard are effective for Orion beginning on April 1, 2018. The adoption of this standard is not expected to have a material impact on Orion’sconsolidated financial statements.Recently Adopted StandardsIn November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” to simplify thepresentation 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 had no impact onOrion’s consolidated financial statements. Orion adopted his ASU on a prospective basis; prior periods were not retrospectively adjusted.In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurementprinciple 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 ofcompletion, disposal and transportation. Orion adopted this standard as of April 1, 2017. The adoption of this standard had an immaterial impact on Orion'sconsolidated financial statements as the previous measurement and validation of the carrying value of its inventory incorporated market values consistentwith the net realizable value measurements of the standard.54In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting," which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for incometaxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. Orion adopted thisASU as of April 1, 2017. As a result of adopting the income tax accounting provisions of this standard, Orion realized an increase in both its deferred taxassets related to stock-based compensation awards and the related valuation allowance. As Orion carries a full valuation allowance against its deferred taxassets, there was no net impact to its consolidated balance sheets or statements of operations. In accordance with the provisions of this standard, Orion electedto prospectively adopt an accounting policy to recognize forfeitures as they occur in lieu of estimating forfeitures. The cashflow presentation provisions ofthe standard had no impact on Orion’s consolidated financial statements. Finally, due to Orion's net loss, the modifications to the calculation of dilutedearnings per share as a result of adopting this standard did not impact its diluted earnings per share.NOTE 3 — ACCOUNTS RECEIVABLEOrion’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 ofcertain trade accounts receivable from wholesalers is secured by irrevocable standby letters of credit and/or guarantees. Accounts receivable are generally duewithin 30-60 days. Accounts receivable are stated at the amount Orion expects to collect from outstanding balances. Orion provides for probableuncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on its assessment of the current status ofindividual accounts. Balances that are still outstanding after Orion has used reasonable collection efforts are written off through a charge to the allowance fordoubtful accounts and a credit to accounts receivable. Orion's accounts receivable and allowance for doubtful accounts balances were as follows (dollars inthousands): 2018 2017Accounts receivable, gross$8,886 $9,315Allowance for doubtful accounts(150) (144)Accounts receivable, net$8,736 $9,171NOTE 4 — INVENTORIESInventories consist of raw materials and components, such as drivers, metal sheet and coil stock and molded parts; work in process inventories, such asframes and reflectors; and finished goods, including completed fixtures and systems, and accessories. All inventories are stated at the lower of cost or netrealizable with cost determined using the first-in, first-out (FIFO) method. Orion reduces the carrying value of its inventories for differences between the costand estimated net realizable value, taking into consideration usage in the preceding 9 to 12 months, expected demand, and other information indicatingobsolescence. Orion records, as a charge to cost of product revenue, the amount required to reduce the carrying value of inventory to net realizable value. Asof March 31, 2018 and 2017, Orion's inventory balances were as follows (dollars in thousands): Cost Excess andObsolescenceReserve NetAs of March 31, 2018 Raw materials and components$6,073 $(1,363) $4,710Work in process1,190 (263) 927Finished goods3,934 (1,745) 2,189 Total$11,197 $(3,371) $7,826 As of March 31, 2017 Raw materials and components$8,104 $(1,807) $6,297Work in process1,918 (329) 1,589Finished goods7,044 (1,337) 5,707 Total$17,066 $(3,473) $13,593Costs associated with the procurement and warehousing of inventories, such as inbound freight charges and purchasing and receiving costs, are alsoincluded in cost of product revenue.55In fiscal 2018, Orion's decreased its obsolescence reserve by $0.1 million. The reserve decrease was due to $1.6 million of disposals during the year offully reserved inventory items along with other inventory related activities, offset by $1.5 million of increases to the reserve related to aging of fluorescentand LED exterior products.NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETSPrepaid expenses and other current assets consist primarily of prepaid insurance premiums, prepaid license fees, purchase deposits, advance paymentsto contractors, unbilled receivables, and prepaid taxes. Prepaid expenses and other current assets include the following (dollars in thousands): March 31, 2018 March 31, 2017Unbilled accounts receivable$1,910 $2,226Other prepaid expenses557 651 Total$2,467 $2,877NOTE 6 — PROPERTY AND EQUIPMENTProperty 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 and equipment sold, or otherwise disposed of, areremoved from the property and equipment 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 useof the assets and their eventual disposition are compared to the assets' carrying amount to determine if a write down to market value is required.During both the second quarter and fourth quarter of fiscal 2018, as a result of lower than anticipated operating results for Orion’s non-solar business, atriggering event occurred as of September 30, 2017, and March 31, 2018, requiring Orion to evaluate its long-lived assets (excluding solar assets) forimpairment. Due to the central nature of its operations, Orion’s tangible and intangible assets support its full operations, are utilized by all three of itsreportable segments, and do not generate separately identifiable cash flows. As such, these assets together represent a single asset group. Orion performed theStep 1 recoverability test for the asset group comparing its carrying value to the asset group’s expected future undiscounted cash flows. As of both the secondquarter and fourth quarter of fiscal 2018, Orion concluded that the undiscounted cash flows of the non-solar asset group exceeded its carrying value. As suchthe asset group was deemed recoverable and no impairment was recorded.In fiscal 2018 and 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 $2.6 million, whichapproximated the assets' net carrying values. In conjunction with the sale, Orion entered into an agreement with the buyer to leaseback approximately197,000 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 distributionfacility assets for impairment performing a probability weighted analysis of expected future cash flows. Based on that analysis, the Company concluded thatthe assets' carrying values were no longer supported. As such, Orion recorded an impairment charge of $1.6 million in fiscal 2016 to write the assets down totheir fair value, which approximated the expected selling price. The impairment charge was recorded to all three of Orion’s reportable segments as follows:Orion U.S. Markets $0.7 million, Orion Engineered Systems $0.8 million, and Orion Distribution Services $0.1 million.56Property and equipment were comprised of the following (dollars in thousands): March 31, 2018 March 31, 2017Land and land improvements$424 $424Buildings and building improvements9,245 9,245Furniture, fixtures and office equipment7,096 7,056Leasehold improvements324 324Equipment leased to customers under Power Purchase Agreements4,997 4,997Plant equipment12,106 11,627Construction in progress— 61 34,192 33,734Less: accumulated depreciation and amortization(21,298) (19,948)Net property and equipment$12,894 $13,786Equipment included above under capital leases was as follows (dollars in thousands): March 31, 2018 March 31, 2017Equipment$581 581Less: accumulated depreciation and amortization(344) (202)Net equipment$237 $379Depreciation is recognized over the estimated useful lives of the respective assets, using the straight-line method. Orion recorded depreciation expenseof $1.4 million, $1.5 million and $3.0 million for the years ended March 31, 2018, 2017 and 2016, respectively.Depreciable lives by asset category are as follows:Land improvements10-15 yearsBuildings and building improvements10-39 yearsFurniture, fixtures and office equipment2-10 yearsLeasehold improvementsShorter of asset life or life of leaseEquipment leased to customers under Power Purchase Agreements20 yearsPlant equipment3-10 yearsNo interest was capitalized for construction in progress during fiscal 2018 or fiscal 2017.NOTE 7 — OTHER INTANGIBLE ASSETSThe costs of specifically identifiable intangible assets that do not have an indefinite life are amortized over their estimated useful lives. Intangibleassets with indefinite lives are not amortized.As of January 1, 2016, Orion's USM segment recorded a goodwill impairment charge of $2.4 million and Orion’s OES segment recorded a goodwillimpairment charge of $2.0 million. Therefore, as of March 31, 2018 and March 31, 2017, Orion had no goodwill on its Consolidated Balance Sheets.Amortizable intangible assets are amortized over their estimated economic useful life to reflect the pattern of economic benefits consumed based uponthe following lives and methods:Patents10-17 yearsStraight-lineLicenses7-13 yearsStraight-lineCustomer relationships5-8 yearsAccelerated based upon the pattern of economic benefits consumedDeveloped technology8 yearsAccelerated based upon the pattern of economic benefits consumedNon-competition agreements5 yearsStraight-line57Intangible assets that have a definite life are evaluated for potential impairment whenever events or circumstances indicate that the carrying valuemay not be recoverable based primarily upon whether expected future undiscounted cash flows are sufficient to support the asset recovery. If the actual usefullife 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 determinedby 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 ofpotential impairment exist. This annual impairment review may begin with a qualitative test to determine whether it is more likely than not that an indefinitelived intangible asset's carrying value is greater than its fair value. If the qualitative assessment reveals that asset impairment is more likely than not, aquantitative impairment test is performed comparing the fair value of the indefinite lived intangible asset to its carrying value. Alternatively, the qualitativetest may be bypassed and the quantitative impairment test may be immediately performed. If the fair value of the indefinite lived intangible asset exceeds itscarrying value, the indefinite lived intangible asset is not impaired and no further review is performed. If the carrying value of the indefinite lived intangibleasset exceeds its fair value, an impairment loss would be recognized in an amount equal to such excess. Once an impairment loss is recognized, the adjustedcarrying 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, 2018.This qualitative assessment considered Orion’s operating results for the first nine months of fiscal 2018 in comparison to prior years as well as its anticipatedfourth 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 morelikely than not and a quantitative analysis was not required.During the second quarter of fiscal 2018, as a result of lower than anticipated operating results in the first half of fiscal 2018, Orion revised its full yearfiscal 2018 forecast. As such, a triggering event occurred as of September 30, 2017, requiring Orion to evaluate its long-lived assets for impairment. Orionperformed a quantitative impairment review of its indefinite lived intangible assets related to the Harris trade name applying the royalty replacement methodto determine the asset’s fair value as of September 30, 2017. Under the royalty replacement method, the fair value of the Harris tradename was determinedbased on a market participant’s view of the royalty that would be paid to license the right to use the tradename. This quantitative analysis incorporatedseveral assumptions including forecasted future revenues and cash flows, estimated royalty rate, based on similar licensing transactions and market royaltyrates, and discount rate, which incorporates assumptions such as weighted-average cost of capital and risk premium. As a result of this impairment test, thecarrying value of the Harris trade name exceeded its estimated fair value and an impairment of $0.7 million was recorded to Impairment of intangible assetsduring the quarter ended September 30, 2017 to reduce the asset’s carrying value to its calculated fair value. This fair value determination was categorized asLevel 3 in the fair value hierarchy.During the fourth quarter of fiscal 2017, Orion achieved lower than anticipated operating results, made a strategic shift in its manufacturing strategyand approach to the fluorescent and LED exterior lighting market, and revised its fiscal 2018 forecast. As a result, a triggering event occurred requiring theCompany to reassess its indefinite lived intangible assets for impairment. As such Orion performed a quantitative impairment review of its indefinite livedintangible 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 theroyalty 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 tolicense 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 andan impairment of $0.3 million was recorded to Impairment of assets during the fourth quarter of fiscal 2017 to reduce the asset’s carrying value to itscalculated fair value. This fair value determination was categorized as Level 3 in the fair value hierarchy (see “Fair Value of Financial Instruments” for thedefinition of Level 3 inputs).58The components of, and changes in, the carrying amount of other intangible assets were as follows (dollars in thousands): March 31, 2018 March 31, 2017 Gross CarryingAmount AccumulatedAmortization Net Gross CarryingAmount AccumulatedAmortization NetPatents$2,636 $(1,370) $1,266 $2,658 $(1,211) $1,447Licenses58 (58) — 58 (58) —Trade name and trademarks1,005 — 1,005 1,715 — 1,715Customer relationships3,600 (3,326) 274 3,600 (3,054) 546Developed technology900 (582) 318 900 (426) 474Non-competition agreements100 (95) 5 100 (75) 25Total$8,299 $(5,431) $2,868 $9,031 $(4,824) $4,207 As of March 31, 2018, the weighted average useful life of intangible assets was 5.6 years. The estimated amortization expense for each of the next fiveyears is shown below (dollars in thousands): Fiscal 2019$445Fiscal 2020360Fiscal 2021285Fiscal 2022188Fiscal 2023171Thereafter414 $1,863Amortization expense is set forth in the following table (dollars in thousands): Fiscal Year Ended March 31, 2018 2017 2016Amortization included in cost of sales: Patents$159 $158 $139Total$159 $158 $139 Amortization included in operating expenses: Customer relationships$272 $542 $891Developed technology156 161 156Non-competition agreements20 20 20Patents— — 9Total448 723 1,076Total amortization$607 $881 $1,215Orion’s management periodically reviews the carrying value of patent applications and related costs. When a patent application is probable of beingunsuccessful or a patent is no longer in use, Orion writes off the remaining carrying value as a charge to general and administrative expense within itsConsolidated Statement of Operations. Such write-offs recorded in fiscal 2018, 2017 and 2016 were $0, $0 and $0.1 million, respectively.Included in other income in fiscal 2018 and fiscal 2017 are product royalties received from licensing agreements for our patents.59NOTE 8 — OTHER LONG-TERM ASSETSOther long-term assets include the following (dollars in thousands): March 31, 2018 March 31, 2017Security deposits41 117Prepaid Insurance51 53Other$18 $5Total$110 $175Deferred 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 31,2018, 2017 and 2016, the expense was $0.1 million, $0.1 million and $0.1 million respectively.NOTE 9 — ACCRUED EXPENSES AND OTHERAccrued expenses and other include the following (dollars in thousands): March 31, 2018 March 31, 2017Compensation and benefits$1,786 $2,431Sales tax237 213Contract costs985 223Legal and professional fees (1)400 2,262Warranty (2)402 449Other accruals361 410Total$4,171 $5,988(1) March 31, 2017 includes a $1.4 million loss contingency reserve.(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 including the pass through of standard warranties offered by majororiginal equipment component manufacturers. The manufacturers’ warranties cover lamps, ballasts, LED modules, LED chips, LED drivers, control devices,and other fixture related items, which are significant components in Orion's lighting products.Changes in Orion’s warranty accrual (both current and long-term) were as follows (dollars in thousands): March 31, 2018 2017Beginning of year$759 $864Provision to product cost of revenue(82) (102)Charges(4) (3)End of year$673 $759NOTE 10 — NET LOSS PER COMMON SHAREBasic net loss per common share is computed by dividing net loss attributable to common shareholders by the weighted-average number of commonshares outstanding for the period and does not consider common stock equivalents.Diluted net loss per common share reflects the dilution that would occur if warrants and stock options were exercised and restricted shares vested. In thecomputation of diluted net loss per common share, Orion uses the treasury stock method for outstanding options, warrants and restricted shares. Diluted netloss per common share is the same as basic net loss per common share for the years ended March 31, 2018, March 31, 2017 and March 31, 2016 because theeffects of potentially dilutive securities would be anti-dilutive. The effect of net loss per common share is calculated based upon the following shares: 60 Fiscal Year Ended March 31, 2018 2017 2016Numerator: Net loss (dollars in thousands)$(13,128) $(12,288) $(20,126)Denominator: Weighted-average common shares outstanding28,783,830 28,156,382 27,627,693Weighted-average common shares and share equivalents outstanding28,783,830 28,156,382 27,627,693Net loss per common share: Basic$(0.46) $(0.44) $(0.73)Diluted$(0.46) $(0.44) $(0.73)The following table indicates the number of potentially dilutive securities as of the end of each period: March 31, 2018 2017 2016Common stock options629,667 1,520,953 2,017,046Restricted shares1,485,799 1,704,543 1,053,389Total2,115,466 3,225,496 3,070,435NOTE 11 — RELATED PARTY TRANSACTIONSDuring fiscal 2018, Orion incurred a de minimis expense for consulting services provided by a member of its Board of Directors. During 2017 and 2016,Orion purchased goods and services from an entity in the amount of $41,000, and $21,000, respectively, for which a director of Orion is a minority owner,serves as president and serves as chairman of the board of directors. In fiscal 2017, Orion purchased services in the amount of $43,000 from an immediatefamily member of a named executive officer who is now currently employed by Orion.NOTE 12 — LONG-TERM DEBTLong-term debt as of March 31, 2018 and 2017 consisted of the following (dollars in thousands): March 31, 2018 2017Revolving credit facility$3,908 $6,629Equipment lease obligations184 321Customer equipment finance notes payable— 7Other long-term debt— 14Total long-term debt4,092 6,971Less current maturities(79) (152)Long-term debt, less current maturities$4,013 $6,819Revolving Credit AgreementOrion has an amended credit agreement ("Credit Agreement") that provides for a revolving credit facility ("Credit Facility") subject to a borrowing baserequirement based on eligible receivables and inventory. As of March 31, 2018, Orion's borrowing base was approximately $4.0 million. The Credit Facilityhas a maturity date of February 6, 2021, and includes a $2.0 million sublimit for the issuance of letters of credit. As of March 31, 2018, Orion had nooutstanding letters of credit. Borrowings outstanding as of March 31, 2018, amounted to approximately $3.9 million and are included in non-currentliabilities in the accompanying consolidated balance sheet. Orion estimates that as of March 31, 2018, it was eligible to borrow an additional $0.1 millionunder 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 $15.0 million Credit Facility. Thislimit may increase up to $20.0 million, subject to a borrowing base requirement, if Orion satisfies certain conditions. Orion did not meet the requirements toincrease the borrowing limit to $20.0 million as of July 31, 2017, the most recent measurement date.61From and after any increase in the Credit Facility limit from $15.0 million to $20.0 million, the Credit Agreement requires that Orion maintain, as of theend of each month, a minimum ratio for the trailing twelve-month period of (i) earnings before interest, taxes, depreciation and amortization, subject tocertain adjustments, to (ii) the sum of cash interest expense, certain principal payments on indebtedness and certain dividends, distributions and stockredemptions, equal to at least 1.10 to 1.00. The Credit Agreement contains additional customary covenants, including certain restrictions on Orion’s abilityto incur additional indebtedness, consolidate or merge, enter into acquisitions, guarantee obligations of third parties, make loans or advances, declare or payany 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 itscovenants in the Credit Agreement as of March 31, 2018.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 securityinterest in substantially all of Orion’s and each subsidiary’s 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 eachyear or portion of a year during the term of the Credit Agreement of $0.1 million, regardless of usage. As of March 31, 2018, the interest rate was 5.31%. Orionmust 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% perannum on the undrawn amount of letters of credit outstanding from time to time under the Credit Facility.Equipment Lease ObligationIn March 2016 and June 2015, Orion entered into lease agreements with a financing company in the principal amount of $19,000 and $0.4 million,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 inFebruary 2018 and June 2020. Both leases contain a one dollar buyout option.Customer Equipment Finance Notes PayableIn December 2014, Orion entered into a secured borrowing agreement with a financing company in the principal amount of $0.4 million to fundcompleted customer contracts under its OTA finance program that were previously funded under a differentOTA credit agreement. The loan amount is secured by the OTA-related equipment and the expected future monthly paymentsunder the supporting 25 individual OTA customer contracts. The borrowing agreement bears interest at a rate of 8.36% and matures in April 2018.Other Long-Term DebtIn September 2010, Orion entered into a note agreement with the Wisconsin Department of Commerce that provided Orion with $0.3 million to fundOrion’s rooftop solar project at its Manitowoc manufacturing facility. This note is included in the table above as other long-term debt. The note iscollateralized 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 matured in June 2017 and was paid in full upon maturity. The noteagreement requires Orion to maintain a certain number of jobs at its Manitowoc facilities during the note’s duration.Aggregate MaturitiesAs of March 31, 2018, aggregate maturities of long-term debt were as follows (dollars in thousands): Fiscal 2019$79Fiscal 202083Fiscal 20213,930 $4,09262NOTE 13 — INCOME TAXESThe total provision (benefit) for income taxes consists of the following for the fiscal years ending (dollars in thousands): Fiscal Year Ended March 31, 2018 2017 2016Current$4 $(261) $36Deferred(19) — —Total$(15) $(261) $36 2018 2017 2016Federal$(28) $(283) $15State13 22 21Total$(15) $(261) $36A reconciliation of the statutory federal income tax rate and effective income tax rate is as follows: Fiscal Year Ended March 31, 2018 2017 2016Statutory federal tax rate30.8 % 34.0 % 34.0 %State taxes, net2.2 % 3.5 % 2.8 %Federal tax credit(0.3)% — % — %Change in valuation reserve51.4 % (37.6)% (29.1)%Permanent items(1.4)% (0.5)% (7.5)%Change in tax contingency reserve(0.1)% 1.0 % (0.1)%Federal refunds0.3 % 1.4 % — %U.S. tax reform, corporate rate reduction(75.2)% — % — %Equity compensation cancellations(15.7)% — % — %Federal loss, ASU 2016-097.7 % — % — %Other, net0.4 % 0.3 % (0.3)%Effective income tax rate0.1 % 2.1 % (0.2)%63The net deferred tax assets and liabilities reported in the accompanying consolidated financial statements include the following components (dollars inthousands): March 31, 2018 2017Inventory, accruals and reserves$— $4,016Other— 54Deferred revenue— (141)Valuation allowance— (3,929)Total net current deferred tax assets and liabilities$— $—Inventory, accruals and reserves1,316 —Federal and state operating loss carry-forwards21,333 23,927Tax credit carry-forwards1,939 1,881Equity compensation402 3,265Deferred revenue(81) (51)Fixed assets(878) (1,360)Intangible assets(363) (1,034)Other154 —Valuation allowance(23,803) (26,628)Total net long-term deferred tax assets and liabilities$19 $—Total net deferred tax assets$19 $—The Tax Cut and Jobs Act ("Act") was enacted December 22, 2017. The Act significantly changes U.S tax law by, among other things, reducing the U.S.federal corporate tax rate from 35% to 21%, imposing a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred,and creating new taxes on certain foreign sourced earnings.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address accounting for income tax effects of the TaxReform Act. At March 31, 2018, Orion has not completed its accounting for the tax effects of enactment of the Act; however, as described below, Orion hasmade a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax.Orion remeasured its deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the 21% federalcorporate tax rate. The provisional amount recorded related to the remeasurement of its deferred tax balance decreased deferred tax assets by $9.9 million.Substantially all of this decrease to deferred tax assets was offset by a corresponding decrease to the valuation allowance. There is no impact on the currentyear income tax expense for the federal corporate tax rate change due to Orion's current year taxable loss.The Act also requires companies to pay a one-time transition tax on Orion's total post-1986 earnings and profits ("E&P") of its foreign subsidiary thatwere previously tax deferred from US income taxes. Since Orion's foreign subsidiary has negative E&P, the company estimates there is no transition tax to bereported in income tax expense.As of March 31, 2018, Orion has federal net operating loss carryforwards of approximately $82.5 million, and state net operating loss carry-forwards ofapproximately $66.4 million. Upon adoption of ASU 2016-09 in the current fiscal year, the federal and state loss carryforwards associated with historicexercises of NQSOs have been recorded as deferred tax assets. Orion also has federal tax credit carry-forwards of approximately $1.3 million and state taxcredits of $0.8 million. Orion's net operating loss and tax credit carry-forwards will begin to expire in varying amounts between 2020 and 2038. For the fiscalyear ended March 31, 2018, Orion has recorded a valuation allowance of $23.8 million, equaling the net deferred tax asset due to the uncertainty of itsrealization value in the future. For the fiscal year ended March 31, 2018, the valuation allowance against Orion's net federal and net state deferred tax assetsdecreased $6.8 million, primarily because of the reduction in the corporate tax rate. For the fiscal year ended March 31, 2017, the valuation allowanceincreased approximately $4.6 million. Orion considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the needfor 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 assetwould 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 federalincome 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 taxable64income can be subject to limitations in a particular year, which could potentially result in increased future tax liability for Orion. There was no limitation ofnet operating loss carry-forwards that occurred for fiscal 2018, fiscal 2017, or fiscal 2016.Orion records its tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where Orion believes that atax 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 isrecorded based upon the expected most likely outcome taking into consideration the technical merits of the position based on specific tax regulations andfacts of each matter. These liabilities may be affected by changing interpretations of laws, rulings by tax authorities, or the expiration of the statute oflimitations.Orion files income tax returns in the United States federal jurisdiction and in several state jurisdictions. The Company's federal tax returns for tax yearsbeginning April 1, 2014 or later are open. For states in which Orion files state income tax returns, the statute of limitations is generally open for tax yearsended March 31, 2014 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 anyfederal 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 nostate income tax return positions in the process of examination, administrative appeals or litigation.Uncertain tax positionsAs of March 31, 2018, the balance of gross unrecognized tax benefits was approximately $0.1 million, all of which would affect Orion’s effective taxrate 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 isnot anticipated within one year. Orion recognizes penalties and interest related to uncertain tax liabilities in income tax expense. Penalties and interest areincluded in the unrecognized tax benefits. Orion had the following unrecognized tax benefit activity (dollars in thousands): Fiscal Year Ended March 31, 2018 2017 2016Unrecognized tax benefits as of beginning of fiscal year$113 $227 $212Additions based on tax positions related to the current period positions2 2 15Reduction for tax positions of prior years$14 $(116) $—Unrecognized tax benefits as of end of fiscal year$129 $113 $227NOTE 14 — COMMITMENTS AND CONTINGENCIESOperating LeasesOrion leases office space and equipment under operating leases expiring at various dates through 2020. Rent expense under operating leases was $0.9,$0.9 and $0.5 for fiscal 2018, 2017 and 2016, respectively. Total annual commitments under non-cancelable operating leases with terms in excess of one yearat March 31, 2018 are as follows (dollars in thousand):Fiscal 2019$647Fiscal 2020615Fiscal 2021380 $1,642On March 22, 2018, Orion renewed the lease for its manufacturing and distribution facility for an additional eighteen months with an annual rent expense ofapproximately $0.5 million.On April 28, 2017, Orion renewed the lease for its Jacksonville, Florida office space for an additional three-year term with annual rent expense ofapproximately $0.1 million.On March 31, 2016, Orion entered into a purchase and sale agreement with a third party to sell and leaseback Orion's manufacturing and distributionfacility for gross cash proceeds of $2.6 million. The transaction closed on June 30, 2016.On March 1, 2016, Orion entered into a lease agreement as a lessor for excess office space at its corporate headquarters in Manitowoc, Wisconsin. Theinitial term of the lease was 24 months and the tenant has the option to extend the term for up to three additional twelve month periods. The tenant exercisedits first twelve month extension. The monthly rental payment Orion receives is $21,000 and is included in general and administrative expenses.65On March 31, 2016, Orion entered into a purchase and sale agreement ("Agreement") with third party to sell and leaseback Orion's manufacturing anddistribution facility for gross cash proceeds of $2.6 million. The transaction closed on June 30, 2016. Pursuant to the Agreement, a lease was entered into onJune 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 perannum. Orion's monthly payment under this lease is approximately $38,000. The lease contains options by either party to reduce the amount of leased spaceafter March 1, 2017. On March 22, 2018, both parties agreed to extend the lease until December 31, 2020.Purchase CommitmentsOrion enters into non-cancellable purchase commitments for certain inventory items in order to secure better pricing and ensure materials on hand andcapital expenditures. As of March 31, 2018, Orion had entered into $1.9 million of purchase commitments related to fiscal 2019 for inventory purchases.Retirement Savings PlanOrion sponsors a tax deferred retirement savings plan that permits eligible employees to contribute varying percentages of their compensation up to thelimit allowed by the Internal Revenue Service. This plan also provides for discretionary contributions by Orion. In fiscal 2018, 2017 and 2016, Orion madematching contributions of approximately $9,000, $9,000 and $10,000, respectively.LitigationOrion 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 tocurrently 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 left the companyin 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. Thecomplaint sought, among other relief, unspecified pecuniary and compensatory damages, fees and such other relief as the court may deem just and proper.On January 11, 2018, a three judge panel of the United States Court of Appeals Seventh Circuit unanimously affirmed the dismissal of all of theplaintiff’s claims against Orion. With the conclusion of this case during the fourth quarter of fiscal 2018, Orion released a loss contingency accrual of $1.4million dollars, the impact of which is included in its general and administrative expenses on the face of the consolidated statement of operations.On November 10, 2017, a purported shareholder, Stephen Narten, filed a civil lawsuit in the Circuit Court for Manitowoc County against thoseindividuals who served on Orion's Board of Directors during fiscal years 2015, 2016, and 2017 and certain current and former officers during the same period.The plaintiff, who purports to bring the suit derivatively on behalf of Orion, alleges that the director defendants breached their fiduciary duties in connectionwith granting certain stock-based incentive awards under Orion's 2004 Stock and Incentive Awards Plan and that the directors and current and former officersbreached their fiduciary duties by accepting those awards. On January 22, 2018, Orion moved to dismiss the lawsuit on the grounds that the complaint failedto state a claim upon which relief may be granted. Subsequent to the end of fiscal 2018, the parties reached a settlement of the claims, filed a stipulation fordismissal of the case and the judge is expected to approve the settlement. The settlement did not, and will not, have a material impact on Orion's results ofoperations or financial condition.State Tax AssessmentIn June 2016, Orion negotiated a settlement with the Wisconsin Department of Revenue with respect to an assessment regarding the properclassification of its products for tax purposes under Wisconsin law for $0.5 million.During fiscal year 2018, was notified of a pending sales and use tax audit by the Wisconsin Department of Revenue for the period covering April 1,2013 through March 31, 2017. Although the final resolution of the Company’s sales and use tax audit is uncertain, based on current information, in theopinion of the Company’s management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidatedbalance sheet, statements of operations, or liquidity.NOTE 15 — SHAREHOLDERS’ EQUITYShare Repurchase Program and Treasury StockIn 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 programauthorizing Orion to repurchase in aggregate up to a maximum of $2,500,00066of Orion’s outstanding common stock. In April 2012, Orion's Board approved another increase to the share repurchase program authorizing Orion torepurchase in aggregate up to a maximum of $7,500,000 of Orion's outstanding common stock. As of March 31, 2018, Orion had repurchased 3,022,349shares of common stock at a cost of $6.8 million under the program. Orion did not repurchase any shares in fiscal 2018, fiscal 2017 or fiscal 2016 and doesnot intend to repurchase any additional common stock under this program in the near-term.In prior years, Orion issued loans to non-executive employees to purchase shares of its stock. The loan program has been discontinued and new loansare no longer issued. As of March 31, 2017, four thousand dollars of such loans remained outstanding and were reflected on Orion’s balance sheet as a contra-equity account. During the quarter ended June 30, 2017, Orion entered into agreements with the counterparties to these loans. In exchange for the forgivenessof their outstanding loan balance, the employees returned their shares to Orion. As a result of this transaction, 1,230 shares were recorded within treasurystock and the loan balances have been eliminated.Shareholder Rights PlanOn January 7, 2009, Orion’s Board of Directors adopted a shareholder rights plan and declared a dividend distribution of one common share purchaseright (Right) for each outstanding share of Orion’s common stock. The issuance date for the distribution of the Rights was February 15, 2009 to shareholdersof 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 pershare, 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 areearlier redeemed or expire). A Distribution Date generally will occur on the earlier of a public announcement that a person or group of affiliated or associatedpersons (Acquiring Person) has acquired beneficial ownership of 20% or more of Orion’s outstanding common stock (Shares Acquisition Date) or 10 businessdays 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 groupof 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 receivethat 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 anAcquiring 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 otherbusiness 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 aRight (except as otherwise provided in the shareholder rights plan) will thereafter have the right to receive that number of shares of the acquiring company’scommon 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 anAcquiring 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 orearlier redeemed or exchanged, the Rights will expire on January 7, 2019.Employee Stock Purchase PlanIn August 2010, Orion’s Board of Directors approved a non-compensatory employee stock purchase plan, or ESPP. The ESPP authorizes 2,500,000shares 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 begranted 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 priceequal 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. In prior years,Orion issued loans to non-executive employees to purchase shares of its stock. The loan program has been discontinued and new loans are no longer issued.Orion had the following shares issued from treasury during fiscal 2018 and fiscal 2017: 67 As of March 31, 2018 Shares IssuedUnder ESPPPlan Closing MarketPrice Shares IssuedUnder LoanProgram Dollar Value ofLoans Issued Settlement ofLoansQuarter Ended March 31, 20181,780 $0.85 — $— $—Quarter Ended December 31, 20173,446 $0.88 — — —Quarter Ended September 30, 20172,681 $1.12 — — —Quarter Ended June 30, 20172,150 $1.28 — — 4,000Total10,057 $0.85 - 1.28 — $— $4,000 As of March 31, 2017 Shares IssuedUnder ESPPPlan Closing MarketPrice Shares IssuedUnder LoanProgram Dollar Value ofLoans Issued Settlement ofLoansQuarter Ended March 31, 20171,034 $1.98 — $— $—Quarter Ended December 31, 2016840 $2.17 — — —Quarter Ended September 30, 20161,511 $1.33 — — —Quarter Ended June 30, 20161,771 $1.16 — — —Total5,156 $1.16 - 2.17 — $— $—As of March 31, 2017, four thousand dollars of such loans remained outstanding and were reflected on Orion’s balance sheet as a contra-equityaccount. During fiscal 2018, Orion entered into agreements with the counterparties to these loans. In exchange for the forgiveness of their outstanding loanbalance, the employees returned their shares to Orion. As a result of these transactions, 1,230 shares were recorded within treasury stock and the loan balanceswere eliminated.NOTE 16 — STOCK OPTIONS, RESTRICTED SHARES AND WARRANTSAt Orion's 2016 Annual Meeting of Shareholders held on August 3, 2016, Orion's shareholders approved the Orion Energy Systems, Inc. 2016Omnibus Incentive Plan (the "Plan"). The Plan authorizes grants of equity-based and incentive cash awards to eligible participants designated by the Plan'sadministrator. Awards under the Plan may consist of stock options, stock appreciation rights, performance shares, performance units, shares of Orion'scommon stock ("Common Stock"), restricted stock, restricted stock units, incentive awards or dividend equivalent units. An aggregate of 1,750,000 shares ofCommon 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 thegrant of cash and equity awards to employees (the “Former Plan”). No new awards will be granted under the Former Plan, however, all awards granted underthe Former Plan that were outstanding as of August 3, 2016 will continue to be governed by the Former Plan. Forfeited awards originally issued under theFormer 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 aswell 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 insteadhas issued restricted stock.Orion accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation. Under the fair value recognitionprovisions 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 overthe requisite service period.In fiscal 2018, an aggregate of 730,410 restricted shares were granted valued at a price per share between $0.88 and $1.95, which was the closingmarket price as of each grant date. 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 pershare between $1.34 and $2.62, which was the closing market price as of each grant date.In fiscal 2018, Orion granted an aggregate of 24,747 shares from the 2016 Omnibus Incentive Plan to certain non-employee directors who elected toreceive stock awards in lieu of cash compensation. The shares were valued ranging from $0.80 to $1.28 per share, the closing market price as of the issuancedates. In fiscal 2017, Orion granted 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 awards68in 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 ofcash compensation. The shares were valued ranging from $1.20 to $2.62 per share, the closing market price as of the issuance dates. Additionally, duringfiscal 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 closingmarket price as of the issuance date.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 63,381shares 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 theshares 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 commonstock 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 expense for restricted shares and options were recorded (dollars in thousands): Fiscal Year Ended March 31, 2018 2017 2016Cost of product revenue$12 $30 $36General and administrative929 1,337 1,148Sales and marketing155 139 235Research and development6 99 43 $1,102 $1,605 $1,46269The number of shares available for grant under the plans were as follows:Available at March 31, 20151,078,600Granted stock options—Granted shares(64,960)Restricted Shares(795,805)Forfeited restricted shares206,471Forfeited stock options363,380Available at March 31, 2016787,686Shares reserved under new plan1,750,000Shares canceled from old plan(168,289)Granted stock options—Granted shares(58,484)Restricted shares(1,132,392)Forfeited restricted shares52,500Forfeited stock options67,200Available at March 31, 20171,298,221Granted shares(24,747)Restricted shares(730,410)Forfeited restricted shares58,000Available at March 31, 2018601,064The following table summarizes information with respect to outstanding stock options: Number ofShares WeightedAverage ExercisePrice WeightedAverage FairValue ofOptionsGranted Aggregate IntrinsicValueOutstanding at March 31, 20152,426,836 $3.50 1.32 Granted— $— Exercised(46,410) $2.09 Forfeited(363,380) $4.68 Outstanding at March 31, 20162,017,046 $3.32 — Granted— $— Exercised(80,000) $2.20 Forfeited(416,093) $3.41 Outstanding at March 31, 20171,520,953 $3.36 — Granted— $— Exercised— $— Forfeited(891,286) $3.51 Outstanding at March 31, 2018629,667 $3.14 — $—Exercisable at March 31, 2018623,267 $—The aggregate intrinsic value represents the total pre-tax intrinsic value, which is calculated as the difference between the exercise price of theunderlying stock options and the fair value of Orion’s closing common stock price of $0.85 as of March 31, 2018.70The following table summarizes the range of exercise prices on outstanding stock options at March 31, 2018: March 31, 2018 Outstanding Weighted AverageRemainingContractual Life(Years) Weighted AverageExercise Price Vested WeightedAverageExercise Price$1.62 - 2.20195,292 4.44 $1.92 195,292 $1.92$2.41 - 2.75100,936 4.91 2.48 100,536 2.48$2.86 - 4.28267,687 2.17 3.63 261,687 3.63$4.49 - 4.7611,000 1.30 4.73 11,000 4.73$5.35 - 5.4449,752 1.22 5.40 49,752 5.40$10.14 - 11.615,000 0.13 11.61 5,000 11.61 629,667 3.21 $3.14 623,267 $3.14During fiscal 2018, Orion recognized $14,360 of stock-based compensation income related to stock options due to forfeitures in the period.During fiscal 2018, Orion granted restricted shares as follows (which are included in the above stock plan activity tables):Balance at March 31, 20171,704,543 Shares issued730,410 Shares vested(612,601) Shares forfeited(336,553) Shares outstanding at March 31, 20181,485,799 Per share price on grant date$0.88-6.80 During fiscal 2018, Orion recognized $1.1 million of stock-based compensation expense related to restricted shares.As of March 31, 2018, the weighted average grant-date fair value of restricted shares granted was $1.35.Unrecognized compensation cost related to non-vested common stock-based compensation as of March 31, 2018 is as follows (dollars in thousands): Fiscal 2019$754Fiscal 2020405Fiscal 2021104Fiscal 202212Fiscal 2023—Thereafter— $1,275Remaining weighted average expected term1.9 yearsOrion previously issued warrants in connection with various stock offerings and services rendered. The warrants granted the holder the option topurchase common stock at specified prices for a specified period of time. No warrants were issued in fiscal 2018, 2017 or 2016.71NOTE 17 — SEGMENT DATAOrion has the following business segments: Orion U.S. Markets Division ("USM"), Orion Engineered Services Division ("OES") and Orion DistributionServices Division ("ODS"). The accounting policies are the same for each business segment as they are on a consolidated basis.Orion U.S. Markets Division ("USM")The USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers includeESCOs and electrical contractors. During fiscal 2017 and fiscal 2018, a significant portion of the historic sales of this division have migrated to distributionchannel sales as a result of the implementation of Orion’s agent distribution strategy. The migrated sales are included in Orion's ODS Division.Orion Engineered Systems Division ("OES")The OES segment develops and sells lighting products and provides construction and engineering services for Orion's commercial lighting and energymanagement systems. OES provides turnkey solutions for large national accounts, governments, municipalities and schools.Orion Distribution Services Division ("ODS")The ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of broadline North Americandistributors. This segment has expanded in fiscal 2017 and fiscal 2018 as a result of increased sales through distributors as Orion continues to develop itsagent distribution strategy. This expansion includes the migration of customers from direct sales previously included in the USM division.Corporate and OtherCorporate and Other is comprised of operating expenses not directly allocated to Orion’s segments and adjustments to reconcile to consolidated results(dollars in thousands). Revenues Operating (Loss) Profit(dollars in thousands)For the year ended March 31, For the year ended March 31, 2018 2017 2016 2018 2017 2016Segments: U.S. Markets$8,567 $17,852 $38,841 $(3,123) $(1,357) $(4,958)Engineered Systems23,827 29,501 26,325 (3,792) (3,647) (6,982)Distribution Services27,906 22,858 2,476 (325) (927) (632)Corporate and Other— — — (5,741) (6,596) (7,349) $60,300 $70,211 $67,642 $(12,981) $(12,527) $(19,921) Depreciation and Amortization Capital Expenditures For the year ended March 31, For the year ended March 31, 2018 2017 2016 2018 2017 2016Segments: U.S. Markets$267 $359 $1,168 $73 $150 $72Engineered Systems988 1,249 1,987 151 224 43Distribution Services275 148 71 217 184 10Corporate and Other481 576 939 71 102 276 $2,011 $2,332 $4,165 $512 $660 $40172 Total Assets Deferred Revenue March 31, 2018 March 31, 2017 March 31, 2018 March 31, 2017Segments: U.S. Markets$3,354 $6,698 $153 $141Engineered Systems13,570 18,111 1,247 1,424Distribution Services9,315 9,702 39 —Corporate and Other19,086 27,540 — — $45,325 $62,051 $1,439 $1,565Orion’s revenue outside the United States is insignificant and Orion has no long-lived assets outside the United States.NOTE 18 - RESTRUCTURING EXPENSEDuring fiscal 2018, we executed on a cost reduction plan by entering into separation agreements with multiple employees and recognized $2.1 millionof expense in fiscal 2018 in employee separation related costs. Our restructuring expense for the twelve months ended March 31, 2018 is reflected within ourconsolidated statements of operations as follows (dollars in thousands): Year Ended March 31, 2018Cost of product revenue$34General and administrative1,822Sales and marketing211Research and development79Total$2,146Total restructuring expense by segment was recorded as follows (dollars in thousands): Year Ended March 31, 2018Orion Distribution Systems$117Corporate and Other2,029Total$2,146We recorded no restructuring expense to the Orion U.S. Markets or Orion Engineered Systems segments.Cash payments for employee separation costs in connection with the reorganization of business plans were $1.8 million for fiscal 2018. The remainingrestructuring cost accruals as of March 31, 2018 were $0.3 million, of which $0.2 million relates to employee separation costs that are expected to be paidwithin one year. The remaining accrual of $0.1 million represents post-retirement medical benefits for one former employee which will be paid over severalyears.NOTE 19 — SUBSEQUENT EVENTSSubsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognizedsubsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including theestimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions thatdid not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statementswere issued and there were no subsequent events requiring disclosure.73NOTE 20 — QUARTERLY FINANCIAL DATA (UNAUDITED)Summary quarterly results for the years ended March 31, 2018 and March 31, 2017 are as follows: Three Months Ended Mar 31,2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Total (in thousands, except per share amounts)Total revenue$15,057 $17,263 $15,422 $12,558 $60,300Gross profit$3,225 $5,116 $3,620 $2,711 $14,672Net loss (1)$(1,462) $(1,433) $(3,669) $(6,564) $(13,128)Basic net loss per share$(0.05) $(0.05) $(0.13) $(0.23) $(0.46)Shares used in basic per share calculation28,935 28,910 28,835 28,455 28,784Diluted net loss per share$(0.05) $(0.05) $(0.13) $(0.23) $(0.46)Shares used in diluted per share calculation28,935 28,910 28,835 28,455 28,784 Three Months Ended Mar 31,2017 Dec 31, 2016 Sep 30, 2016 Jun 30, 2016 Total (in thousands, except per share amounts)Total revenue$15,290 $20,617 $18,670 $15,634 $70,211Gross profit$912 $6,155 $6,244 $4,026 $17,337Net loss (2)$(7,292) $(1,086) $(970) $(2,940) $(12,288)Basic net loss per share$(0.26) $(0.04) $(0.03) $(0.11) $(0.44)Shares used in basic per share calculation28,310 28,259 28,172 27,886 28,156Diluted net loss per share$(0.26) $(0.04) $(0.03) $(0.11) $(0.44)Shares used in diluted per share calculation28,310 28,259 28,172 27,886 28,156(1)Includes a $2.1 million restructuring charge, a $1.4 million loss contingency reversal, and an intangible impairment of $710.(2)Includes intangible impairment of $250 and $2,209 related to inventory reserve and other inventory adjustments.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 outstandingduring the quarters and the year.ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. 74ITEM 9A.CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur 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 reportsthat we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principalfinancial 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 disclosurecontrols and procedures and our internal control over financial reporting as of March 31, 2018, pursuant to Exchange Act Rule 13a-15(b) and 15d-15. Basedon that evaluation, our Chief Executive Officer and our Chief Financial Officer have identified a material weakness in internal controls over financialreporting described below in Management’s Report on Internal Control and have, therefore, concluded that our disclosure controls and procedures were noteffective as of March 31, 2018.Notwithstanding the identified material weakness, management, including our Chief Executive Officer and Chief Financial Officer, believes theconsolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results ofoperations and cash flows at and for the periods presented in accordance with U.S. GAAP.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officerand Chief Financial Officer, or persons performing similar functions, and effected by the board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withGAAP and includes those policies and procedures that:i.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, andthat our receipts and expenditures are being made only in accordance with authorizations of our management and directors; andiii.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliancewith 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, ourmanagement has assessed the effectiveness of our internal control over financial reporting based on the criteria set forth in the Internal Control - IntegratedFramework (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 ofMarch 31, 2018. 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, 2018, management identified the following materialweaknesses that existed as of March 31, 2018:•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 andevolution of a project to ensure timely and accurate recognition of project75costs. In addition, we did not have sufficient communication and resolution of matters identified through management’s review impacting theaccounting close as noted in the Control Activities discussion below.•Control Activities - Accounting Close. The operating effectiveness of our controls were inadequate related to management review controls over theaccounting close process and forecasts used to support certain fair value estimates. Specifically, we did not have an accurate forecast that impactedour assessment of triggering events and potential impairment. In addition, matters identified through management review controls were not broughtto 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 materialmisstatement 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 reportingas of March 31, 2018, based on the criteria in Internal Control - Integrated Framework (2013) issued by COSO.Plans for Remediation of March 31, 2018 Material WeaknessesOur Board, the Audit & Finance Committee and management have identified additional resources to assist in the remediation effort and are developingand implementing new processes, procedures and internal controls to remediate the material weakness that existed in our internal control over financialreporting as it related to project cost accounting, the accounting close and forecasting processes, and our disclosure controls and procedures, as of March 31,2018.We have developed a remediation plan (the “Remediation Plan”) to address the material weakness for the affected areas presented above. TheRemediation Plan ensures that each area affected by a material control weakness is put through a comprehensive remediation process. The Remediation Planentails a thorough analysis which includes the following phases:•Ensure a thorough understanding of the current state, process owners, and procedural or technological gaps causing the deficiency;•Design a remediation action for the forecasting process, to ensure supportable and accurate forecast data are gathered, analyzed and reviewed on atimely basis;•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 thecontrols, 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:•Designed improved procedures and controls for project cost accounting, including enhanced communication and tracking of project costs .•Developed new and revised procedures and controls throughout the accounting close process.•Implemented controls related to inventory valuation, accounting close, tax, revenue and project cost accounting, but they require further testing toconfirm operating effectiveness.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 describedabove and employ any additional tools and resources deemed necessary to ensure that our financial statements are fairly stated in all material respects.76Remediation Actions and March 31, 2017 Material Weakness StatusAs previously disclosed under "Item 9A. Controls and Procedures" in our Annual Report on Form 10-K for our fiscal year ended March 31, 2017, weidentified a material weakness that existed as of March 31, 2017 related to the identification and recording of project costs in a timely manner and thetimeliness of the completion of select accounting close management review controls. For the year ended March 31, 2017 and subsequent interim periods, weenhanced our closing procedures to ensure that, in all material respects, our financial statements were presented in conformity with GAAP and free of materialmisstatement as of and for all periods presented.During fiscal 2018, we took several actions to strengthen our controls and organizational structure in order to remediate the material weaknessidentified as of March 31, 2017. These actions as well as the revised and newly implemented controls are described in more detail below within “Changes inInternal Control Over Financial Reporting.” We completed the majority of our remediation plans during the quarter ended December 31, 2017. However,select accounting close controls continued to be formalized during the quarter ended December 31, 2017, including controls over our forecasting processes.We tested the design and operating effectiveness of the newly implemented and enhanced controls related to the March 31, 2017 material weaknessremediation actions concluding that the controls implemented are designed, but operating effectiveness of such controls have not been confirmed. Therefore,the material weakness identified as of March 31, 2017 continues to be unremediated as of March 31, 2018.Changes in Internal Control over Financial ReportingSubsequent to our March 31, 2017 fiscal year end, we took several actions to strengthen existing controls and implement new controls in an effort toremediate the March 31, 2017 material weaknesses described above. Those actions included revising existing controls throughout the accounting closeprocess and implementing new controls as necessary, evaluating and re-structuring the accounting organization, assessing the monthly close process andimplementing improved procedures, including enhancements to the execution of account reconciliations. In addition, policies, procedures and controldocumentation was updated to reflect the improved procedures and controls, as well as training for process and control owners. Finally, project costaccounting improvements were implemented to address project status tracking and communication throughout the organization.There were no changes in our internal control over financial reporting during the quarter ended March 31, 2018, that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting, other than with respect to the implementation of our Remediation Plans, asdescribed above.ITEM 9B.OTHER INFORMATIONNone.PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item with respect to directors, executive officers and corporate governance is incorporated by reference to Orion'sProxy Statement for its 2018 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2018.Code of ConductWe have adopted a Code of Conduct that applies to all of our directors, employees and officers, including our principal executive officer, our principalfinancial officer, our controller and persons performing similar functions. Our Code of Conduct is available on our web site at www.orionlighting.com. Futurematerial amendments or waivers relating to the Code of Conduct will be disclosed on our web site referenced in this paragraph within four business daysfollowing the date of such amendment or waiver.ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference to our Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed withthe SEC within 120 days after the end of the fiscal year ended March 31, 2018.77ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDERMATTERSSee Item 5, Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchaser of Securities, under the heading “EquityCompensation Plan Information” for information regarding our securities authorized for issuance under equity compensation plans. The additionalinformation required by this item is incorporated by reference to Orion's Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed with theSEC within 120 days after the end of the fiscal year ended March 31, 2018.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference to our Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed withthe SEC within 120 days after the end of the fiscal year ended March 31, 2018.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated by reference to our Proxy Statement for its 2018 Annual Meeting of Shareholders to be filed withthe SEC within 120 days after the end of the fiscal year ended March 31, 2018.PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a)Financial StatementsOur financial statements are set forth in Item 8 of this Form 10-K.(b)Financial Statement Schedule SCHEDULE IIVALUATION and QUALIFYING ACCOUNTS Balance atbeginning ofperiod Provisionscharged toexpense Write offsand other Balance atend ofperiodMarch 31, (in Thousands)2018Allowance for Doubtful Accounts$144 $22 $16 $1502017Allowance for Doubtful Accounts$505 $132 $493 $1442016Allowance for Doubtful Accounts$458 $575 $528 $505 2018Inventory Obsolescence Reserve$3,473 $1,514 $1,616 $3,3712017Inventory Obsolescence Reserve$2,127 $2,212 $866 $3,4732016Inventory Obsolescence Reserve$1,619 $509 $1 $2,12778EXHIBIT INDEX Number Exhibit Title 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, ishereby 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 Athereto the Form of Right Certificate and as Exhibit B thereto the Summary of Common Share Purchase Rights, filed as Exhibit 4.1 to theRegistrant’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 andguarantors, and Wells Fargo Bank, National Association, as lender, filed as Exhibit 10.1 to Registrant’s Form 10-Q filed on February 9, 2015, ishereby incorporated by reference. 10.2 First Amendment to Credit and Security Agreement, dated as of December 27, 2016, by and among Orion Energy Systems, Inc., the subsidiaryBorrowers party thereto, the subsidiary Guarantors party thereto and Wells Fargo Bank, National Association, filed as Exhibit 10.1 toRegistrant’s Form 8-K filed on December 29, 2016, is hereby incorporated by reference. 10.3 Second Amendment to Credit and Security Agreement, dated as of November 21, 2017, by and among Orion Energy Systems, Inc., thesubsidiary Borrowers party thereto, the subsidiary Guarantors party thereto and Wells Fargo Bank, National Association. + 10.4 Third Amendment to Credit and Security Agreement, dated as of March 30, 2018, by and among Orion Energy Systems, Inc., the subsidiaryBorrowers party thereto, the subsidiary Guarantors party thereto and Wells Fargo Bank, National Association, filed as Exhibit 10.1 toRegistrant’s Form 8-K filed on April 5, 2018, is hereby incorporated by reference. 10.5 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, ishereby incorporated by reference.* 10.6 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.* 10.7 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, ishereby incorporated by reference.* 10.7(a) Amendment to Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan, filed September 9, 2011 as Appendix A to the Registrant’sdefinitive proxy statement is hereby incorporated by reference.* 10.8 Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2004 Equity Incentive Plan, filed as Exhibit 10.10 to the Registrant’sForm S-1 filed August 20, 2007, is hereby incorporated by reference.* 10.9 Form of Stock Option Agreement as of May 14, 2013 under the Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan, filed asExhibit 10.7 to the Registrant’s Form 10-K filed on June 13, 2014, is hereby incorporated by reference.* 10.10 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 13, 2014, is hereby incorporated by reference.* 10.11 Orion Energy Systems, Inc. 2016 Omnibus Incentive Plan, filed as Annex A to the Registrant’s Form 8-K filed July 8, 2016, is herebyincorporated by reference.* 10.12 Form of Non-Employee Director Tandem Restricted Stock and Cash Award Agreement under the Orion Energy Systems, Inc. 2016 OmnibusIncentive Plan, filed as Exhibit 4.5 to the Registrant’s Form S-8 filed August 10, 2016, is hereby incorporated by reference.* 10.13 Form of Non-Employee Director Restricted Stock Award Agreement under the Orion Energy Systems, Inc. 2016 Omnibus Incentive Plan, filed asExhibit 4.6 to the Registrant’s Form S-8 filed August 10, 2016, is hereby incorporated by reference.* 10.14 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.* 7910.15 Form of Executive Restricted Stock Award Agreement under the Orion Energy Systems, Inc. 2016 Omnibus Incentive Plan, filed as Exhibit 4.8to the Registrant’s Form S-8 filed August 10, 2016, is hereby incorporated by reference.*10.16 Orion Energy Systems, Inc. Non-Employee Director Compensation Plan, updated and effective as of June 6, 2017, filed as Exhibit 10.14 to theRegistrant's Form 10-K filed June 13, 2017, is hereby incorporated by reference.* 10.17 Executive Employment and Severance Agreement, dated as of June 8, 2017, by and between Orion Energy Systems, Inc. and Michael W.Altschaefl, filed as Exhibit 10.16 to the Registrant's Form 10-K filed June 13, 2017, is hereby incorporated by reference. * 10.18 Executive Employment and Severance Agreement by and between Orion Energy Systems, Inc. and William T. Hull, filed as Exhibit 10.1 to theRegistrant’s Form 8-K filed on October 5, 2015, is hereby incorporated by reference.* 10.19 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.* 10.20 Letter Agreement effective June 13, 2017 between Orion and William T. Hull, filed as Exhibit 10.19 to the Registrant's Form 10-K filed June 13,2017, is hereby incorporated by reference. * 10.21 Executive Employment and Severance Agreement, dated as of January 1, 2014, by and between Orion Energy Systems, Inc. and Marc Meadefiled as Exhibit 10.1 to the Registrant’s Form 8-K filed on January 6, 2014, is hereby incorporated by reference.* 10.22 Form of Executive Restricted Stock Award Agreement as of May 26, 2015 under the Orion Energy Systems, Inc. 2004 Stock and IncentiveAwards 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.* 10.23 Form of Executive Tandem Restricted Stock and Cash Award Agreement as of May 26, 2015 under the Orion Energy Systems, Inc. 2004 Stockand 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 byreference.* 10.24 Form of Non-Employee Director Restricted Stock Award Agreement as of May 26, 2015 under the Orion Energy Systems, Inc. 2004 Stock andIncentive Awards Plan, filed as Exhibit 10.20 to the Registrant’s Form 10-K for the year ended March 31, 2015, is hereby incorporated byreference.* 10.25 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 herebyincorporated by reference.* 10.26 Mutual Termination and Severance Agreement and Complete and Permanent Release of All Claims, dated June 8, 2017, by and between OrionEnergy Systems, Inc. and John H. Scribante, filed as Exhibit 10.27 to the Registrant's Form 10-K filed June 13, 2017, is hereby incorporated byreference .* 10.27 Mutual Retirement and Severance Agreement, dated as of June 30, 2017, by and between Orion Energy Systems, Inc. and Michael J. Potts, filedas Exhibit 10.1 to the Registrant's Form 8-K filed on June 30, 2017, is hereby incorporated by reference. * 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 theSecurities 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 theSecurities 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) promulgatedunder the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct 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 document80Documents 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 herewith81ITEM 16.FORM 10-K SUMMARYNone.82SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report onForm 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on June 13, 2018. ORION ENERGY SYSTEMS, INC.By: /s/ MICHAEL W. ALTSCHAEFL Michael W. AltschaeflChief Executive Officer and Board ChairPursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons onbehalf of the Registrant in the capacities indicated on June 13, 2018. Signature Title /s/ Michael W. Altschaefl Chief Executive Officer and Board Chair (PrincipalMichael W. Altschaefl Executive Officer) /s/ William T. Hull Chief Financial Officer, Chief Accounting Officer andWilliam T. Hull Treasurer (Principal Financial Officer) /s/ Anthony L. Otten Lead Independent DirectorAnthony L. Otten /s/ Michael J. Potts DirectorMichael J. Potts /s/ Ellen B. Richstone DirectorEllen B. Richstone /s/ Mark C. Williamson DirectorMark C. Williamson /s/ Kenneth M. Young DirectorKenneth M. Young 83Executive 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 Anthony L. Otten (1), (2), (3), (5) Retired Chief Executive Officer, Versar, Inc., Managing Member, Stillwater LLC Michael J. Potts Retired Executive Vice President and Chief Risk Officer Orion Energy Systems, Inc. Ellen B. Richstone (1a), (3) 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 Mark C. Williamson (1), (2a) Partner, Putnam Roby Williamson Communications of Madison, Wis. Kenneth M. Young (2), (3a) Chief Executive Officer B. Riley Principal Investments (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 2210 Woodland Drive, Manitowoc, WI 54220

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