| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The condensed consolidated financial statements include the accounts of Orion Energy Systems, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Reclassifications Where appropriate, certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Orion have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results that may be expected for the year ending March 31, 2017 or other interim periods. The condensed consolidated balance sheet at March 31, 2016 has been derived from the audited and adjusted consolidated financial statements at that date but does not include all of the information required by GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Orion’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 filed with the Securities and Exchange Commission on June 23, 2016 . Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during that reporting period. Areas that require the use of significant management estimates include revenue recognition, inventory obsolescence and bad debt reserves, accruals for warranty expenses and loss contingencies, income taxes and certain equity transactions. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents Orion considers all highly liquid, short-term investments with original maturities of three months or less to be cash equivalents. Fair Value of Financial Instruments Orion’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses and other, revolving credit facility and long-term debt. The carrying amounts of Orion’s financial instruments approximate their respective fair values due to the relatively short-term nature of these instruments, or in the case of long-term debt and revolving credit facility, because of the interest rates currently available to Orion for similar obligations. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP describes a fair value hierarchy based on the following three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value: Level 1 — Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 — Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly. Level 3 — Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management's best estimate of what market participants would use in valuing the asset or liability at the measurement date. Accounts Receivable Orion’s accounts receivable are due from companies in the commercial, industrial and agricultural industries, as well as wholesalers. Credit is extended based on an evaluation of a customer’s financial condition. Generally, collateral is not required for end users; however, the payment of certain trade accounts receivable from wholesalers is secured by irrevocable standby letters of credit and/or guarantees. Accounts receivable are generally due within 30 - 60 days. Accounts receivable are stated at the amount Orion expects to collect from outstanding balances. Orion provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on its assessment of the current status of individual accounts. Balances that are still outstanding after Orion has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable. Orion's accounts receivable and allowance for doubtful accounts balances were as follows (dollars in thousands): June 30, 2016 March 31, 2016 Accounts receivable, gross $ 13,227 $ 11,394 Allowance for doubtful accounts (130 ) (505 ) Accounts receivable, net $ 13,097 $ 10,889 Financing Receivables Orion considers its lease balances included in consolidated current and long-term accounts receivable from its Orion Throughput Agreement, or OTA, sales-type leases to be financing receivables. Additional disclosures on the credit quality of Orion’s financing receivables are as follows: Aging Analysis as of June 30, 2016 (dollars in thousands): Not Past Due 1-90 days Greater than 90 Total past due Total sales-type Lease balances included in consolidated accounts receivable—current $ 190 $ 4 $ 3 $ 7 $ 197 Lease balances included in consolidated accounts receivable—long-term 75 — — — 75 Total gross sales-type leases 265 4 3 7 272 Allowance — — — — — Total net sales-type leases $ 265 $ 4 $ 3 $ 7 $ 272 Aging Analysis as of March 31, 2016 (dollars in thousands): Not Past Due 1-90 days Greater than 90 Total past due Total sales-type Lease balances included in consolidated accounts receivable—current $ 294 $ 4 $ 10 $ 14 $ 308 Lease balances included in consolidated accounts receivable—long-term 101 — — — 101 Total gross sales-type leases 395 4 10 14 409 Allowance — — (9 ) (9 ) (9 ) Total net sales-type leases $ 395 $ 4 $ 1 $ 5 $ 400 Inventories Inventories consist of raw materials and components, such as drivers, metal sheet and coil stock and molded parts; work in process inventories, such as frames and reflectors; and finished goods, including completed fixtures and systems, and accessories. All inventories are stated at the lower of cost or market value with cost determined using the first-in, first-out (FIFO) method. Orion reduces the carrying value of its inventories for differences between the cost and estimated net realizable value, taking into consideration usage in the preceding 9 to 24 months, expected demand, and other information indicating obsolescence. Orion records, as a charge to cost of product revenue, the amount required to reduce the carrying value of inventory to net realizable value. Orion's inventory balances were as follows (dollars in thousands): Cost Obsolescence Reserve Net As of June 30, 2016 Raw materials and components $ 9,715 $ (1,247 ) $ 8,468 Work in process 1,600 (129 ) 1,471 Finished goods 6,558 (1,007 ) 5,551 Total $ 17,873 $ (2,383 ) $ 15,490 As of March 31, 2016 Raw materials and components $ 10,556 $ (1,052 ) $ 9,504 Work in process 2,045 (119 ) 1,926 Finished goods 6,550 (956 ) 5,594 Total $ 19,151 $ (2,127 ) $ 17,024 Costs associated with the procurement and warehousing of inventories, such as inbound freight charges and purchasing and receiving costs, are also included in cost of product revenue. Deferred Contract Costs Deferred contract costs consist primarily of the costs of products delivered, and services performed, that are subject to additional performance obligations or customer acceptance. These deferred contract costs are expensed at the time the related revenue is recognized. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist primarily of prepaid insurance premiums, prepaid license fees, purchase deposits, advance payments to contractors, unbilled revenue, prepaid taxes and miscellaneous receivables. Prepaid expenses and other current assets include the following (dollars in thousands): June 30, 2016 March 31, 2016 Unbilled accounts receivable $ 2,140 $ 4,307 Other prepaid expenses 664 731 Total $ 2,804 $ 5,038 Property and Equipment Property and equipment are stated at cost. Expenditures for additions and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are expensed as incurred. Properties sold, or otherwise disposed of, are removed from the property accounts, with gains or losses on disposal credited or charged to income from operations. Orion periodically reviews the carrying values of property and equipment for impairment in accordance with ASC 360, Property, Plant and Equipment , if events or changes in circumstances indicate that the assets may be impaired. The estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition are compared to the assets' carrying amount to determine if a write down to market value is required. On June 30, 2016, Orion completed the sale of its Manitowoc manufacturing and distribution facility to Tramontina U.S. Cookware, Inc. ("Tramontina") for gross cash proceeds of $2,600,000 , which approximated the assets' net carrying values. In conjunction with the sale, Orion entered into an agreement with Tramontina to leaseback approximately 197,000 square feet of the building for not less than three years , subject to mutual options to reduce the amount of leased space. Property and equipment were comprised of the following (dollars in thousands): June 30, 2016 March 31, 2016 Land and land improvements $ 424 $ 421 Buildings and building improvements 9,245 11,849 Furniture, fixtures and office equipment 7,261 7,233 Leasehold improvements 148 148 Equipment leased to customers 4,997 4,997 Plant equipment 10,987 10,805 Construction in progress 143 128 33,205 35,581 Less: accumulated depreciation and amortization (18,963 ) (18,577 ) Property and equipment, net $ 14,242 $ 17,004 Equipment included above under capital leases was as follows (in thousands): June 30, 2016 March 31, 2016 Equipment $ 581 $ 408 Less: accumulated depreciation and amortization (95 ) (65 ) Net Equipment $ 486 $ 343 Depreciation is provided over the estimated useful lives of the respective assets, using the straight-line method. Orion recorded depreciation expense of $389,000 and $786,000 for the three months ended June 30, 2016 and 2015, respectively. Depreciable lives by asset category are as follows: Land improvements 10-15 years Buildings and building improvements 3-39 years Furniture, fixtures and office equipment 2-10 years Leasehold improvements Shorter of asset life or life of lease Equipment leased to customers under Power Purchase Agreements 20 years Plant equipment 3-10 years Other Intangible Assets The costs of specifically identifiable intangible assets that do not have an indefinite life are amortized over their estimated useful lives. Intangible assets with indefinite lives are not amortized and are reviewed for impairment annually, as of January 1, or more frequently if impairment indicators arise. Amortizable intangible assets are amortized over their estimated economic useful life to reflect the pattern of economic benefits consumed based upon the following lives and methods: Patents 10-17 years Straight-line Licenses 7-13 years Straight-line Customer relationships 5-8 years Accelerated based upon the pattern of economic benefits consumed Developed technology 8 years Accelerated based upon the pattern of economic benefits consumed Non-competition agreements 5 years Straight-line Indefinite lived intangible assets are evaluated for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable based primarily upon whether expected future undiscounted cash flows are sufficient to support the asset recovery. If the actual useful life of the asset is shorter than the estimated life estimated by us, the asset may be deemed to be impaired and accordingly a write-down of the value of the asset determined by a discounted cash flow analysis or shorter amortization period may be required. The components of, and changes in, the carrying amount of other intangible assets were as follows (dollars in thousands): June 30, 2016 March 31, 2016 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Patents $ 2,377 $ (1,096 ) $ 1,281 $ 2,377 $ (1,053 ) $ 1,324 Licenses 58 (58 ) — 58 (58 ) — Trade name and trademarks 1,956 — 1,956 1,956 — 1,956 Customer relationships 3,600 (2,667 ) 933 3,600 (2,512 ) 1,088 Developed technology 900 (305 ) 595 900 (265 ) 635 Non-competition agreements 100 (60 ) 40 100 (55 ) 45 Total $ 8,991 $ (4,186 ) $ 4,805 $ 8,991 $ (3,943 ) $ 5,048 Amortization expense on intangible assets was $243,000 and $351,000 for the three months ended June 30, 2016 and 2015, respectively. As of June 30, 2016 , the weighted average useful life of intangible assets was 6.07 years. The estimated amortization expense for each of the next five years is shown below (dollars in thousands): Fiscal 2017 $ 640 Fiscal 2018 602 Fiscal 2019 426 Fiscal 2020 341 Fiscal 2021 266 Fiscal 2022 170 Thereafter 404 Total $ 2,849 Other Long-Term Assets Other long-term assets include the following (dollars in thousands): June 30, 2016 March 31, 2016 Deferred financing costs $ 64 $ 92 Security deposits 116 87 Other 7 6 Total $ 187 $ 185 Deferred financing costs relate to Orion’s revolving credit agreement and are recognized to interest expense straight-line over the remaining term of the credit agreement. Accrued Expenses and Other Accrued expenses and other include the following (dollars in thousands): June 30, 2016 March 31, 2016 Compensation and benefits $ 1,596 $ 1,794 Sales tax 304 913 Contract costs 502 586 Legal and professional fees (1) 2,786 2,348 Warranty 728 554 Other accruals 420 391 Total $ 6,336 $ 6,586 (1) Includes a $1,400 loss contingency recorded in fiscal 2016. Orion generally offers a limited warranty of one year on its lighting products in addition to those standard warranties offered by major original equipment component manufacturers. The manufacturers’ warranties cover lamps and ballasts, which are significant components in the Orion's lighting products. Changes in the Orion’s warranty accrual (both current and long-term) were as follows (dollars in thousands): Three Months Ended June 30, 2016 2015 Beginning of period (1) $ 864 $ 1,015 Provision to product cost of revenue 175 29 Charges (1 ) 18 End of period (1) $ 1,038 $ 1,062 (1) Includes a $310 reserve related to solar operating system warranties. Revenue Recognition Revenue is recognized on the sales of our 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; and 4. collectability is reasonably assured. These four criteria are met for Orion’s product-only revenue upon delivery of the product and title passing to the customer. At that time, Orion provides for estimated costs that may be incurred for product warranties and sales returns. Revenues are presented net of sales tax and other sales related taxes. For sales of Orion’s lighting and energy management technologies under multiple element arrangements, consisting of a combination of product sales and services, Orion determines revenue by allocating the total contract revenue to each element based on their relative selling prices in accordance with ASC 605-25, Revenue Recognition - Multiple Element Arrangements . In such circumstances, Orion uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (1) vendor-specific objective evidence (VSOE) of fair value, if available, (2) third-party evidence (TPE) of selling price if VSOE is not available, and (3) best estimate of the selling price if neither VSOE nor TPE is available (a description as to how Orion determines estimated selling price is provided below). The nature of Orion’s multiple element arrangements for the sale of its lighting and energy management technologies is similar to a construction project, with materials being delivered and contracting and project management activities occurring according to an installation schedule. The significant deliverables include the shipment of products and related transfer of title and the installation. To determine the selling price in multiple-element arrangements, Orion establishes the selling price for its energy management system products using management's best estimate of the selling price, as VSOE or TPE does not exist. Product revenue is recognized when products are shipped. For product revenue, management's best estimate of selling price is determined using a cost plus gross profit margin method. In addition, Orion records in service revenue the selling price for its installation and recycling services using management’s best estimate of selling price, as VSOE or TPE does not exist. Service revenue is recognized when services are completed and customer acceptance has been received. Recycling services provided in connection with installation entail the disposal of the customer’s legacy lighting fixtures. Orion’s service revenues, other than for installation and recycling that are completed prior to delivery of the product, are included in product revenue using management’s best estimate of selling price, as VSOE or TPE does not exist. These services include comprehensive site assessment, site field verification, utility incentive and government subsidy management, engineering design, and project management. For these services, along with Orion's installation and recycling services, under a multiple-element arrangement, management’s best estimate of selling price is determined by considering economic conditions and trends, customer demand, pricing practices, margin objectives, competition, geographies in which Orion offers its products and services and internal costs. The determination of an estimated selling price is made through consultation with and approval by management, taking into account the preceding factors. Orion offers a financing program, called an Orion Throughput Agreement, or OTA, for a customer’s lease of Orion’s energy management systems. The OTA is structured as a sales-type lease and upon successful installation of the system and customer acknowledgment that the system is operating as specified, revenue is recognized at Orion’s net investment in the lease, which typically is the net present value of the future cash flows. Orion offers a financing program, called a power purchase agreement, or PPA, for Orion’s renewable energy product offerings. A PPA is a supply side agreement for the generation of electricity and subsequent sale to the end user. Upon the customer’s acknowledgment that the system is operating as specified, product revenue is recognized on a monthly basis over the life of the PPA contract, which is typically in excess of 10 years. Deferred revenue relates to advance customer billings, investment tax grants received related to PPAs and a separate obligation to provide maintenance on OTAs and is classified as a liability on the Condensed Consolidated Balance Sheet. The fair value of the maintenance is readily determinable based upon pricing from third-party vendors. Deferred revenue related to maintenance services is recognized when the services are delivered, which occurs in excess of a year after the original OTA contract is executed. Net Loss per Common Share Basic net loss per common share is computed by dividing net loss attributable to common shareholders by the weighted-average number of common shares outstanding for the period and does not consider common stock equivalents. For the three months ended June 30, 2016 and 2015, Orion was in a net loss position; therefore, the basic and diluted weighted average shares outstanding are equal because any increase to the basic shares would be anti-dilutive. The effect of net loss per common share is calculated based upon the following: Three Months Ended June 30, 2016 2015 Numerator: Net loss (in thousands) $ (2,940 ) $ (3,652 ) Denominator: Weighted-average common shares outstanding 27,885,588 27,481,624 Weighted-average effect of assumed conversion of stock options and restricted shares (excluded because shares would be anti-dilutive) — — Weighted-average common shares and common share equivalents outstanding 27,885,588 27,481,624 Net loss per common share: Basic $ (0.11 ) $ (0.13 ) Diluted $ (0.11 ) $ (0.13 ) The following table indicates the number of potentially dilutive securities excluded from the calculation of dilution because their inclusion would have been anit-dilutive. Amounts are as of the end of each period: June 30, 2016 June 30, 2015 Common stock options 1,949,846 2,337,636 Restricted shares 1,482,208 1,052,674 Total 3,432,054 3,390,310 Concentration of Credit Risk and Other Risks and Uncertainties Orion's cash is deposited with three financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. Orion has not experienced any losses in such accounts and believes that it is not exposed to any significant risk on these balances. Orion purchases components necessary for its lighting products, including ballasts, lamps and LED components, from multiple suppliers. For the three months ended June 30, 2016 and 2015, no supplier accounted for more than 10% of total cost of revenue. For the three months ended June 30, 2016 and 2015, no customer accounted for more than 10% of revenue. As of June 30, 2016 , no customer accounted for more than 10% of accounts receivable. As of March 31, 2016, one customer accounted for more than 10% of accounts receivable. Recent Accounting Pronouncements Recently Adopted Standards During the quarter ended June 30, 2016, Orion adopted the provisions of ASU 2015-03 “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” and the related ASU 2015-15 “Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements- Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update).” This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a reduction of the carrying amount of that debt liability, consistent with debt discounts, with the exception of debt issuance costs associated with line of credit agreements which may remain classified as an asset and amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. As Orion’s only deferred debt issuance costs relate to its revolving line of credit, upon adoption of these standards a reclassification of the deferred financing costs was not required and there was no impact on Orion’s condensed consolidated financial statements. Issued: Not Yet Adopted In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. The ASU is effective for Orion in the first quarter of Orion's fiscal 2018. Management is currently assessing the impact of adoption on its consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842)." This ASU requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and disclose additional quantitative and qualitative information about leasing arrangements. This ASU also provides clarifications surrounding 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. Management is currently assessing the impact of adoption on its consolidated financial statements. In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” to simplify the presentation of deferred taxes. The amendments in this update require that deferred tax assets and liabilities be classified as non-current on the balance sheet. This ASU is effective for Orion's annual reporting period, and interim periods therein, beginning on April 1, 2017 with earlier adoption permitted. The guidance may be adopted either prospectively or retrospectively. Management is currently assessing the impact of this standard on its consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value for entities that measure inventory using first-in, first-out (FIFO) or average cost. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for Orion on April 1, 2017. Orion is currently assessing the impact of this standard on its consolidated financial statements. In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Presentation of Financial Statements - Going Concern" ("ASU 2014-15"). ASU 2014-15 requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern and if those conditions exist, the required disclosures. The standard is effective for annual periods ending after December 15, 2016, and interim periods therein. Orion does not expect adoption of this standard will have a significant impact on its consolidated financial statements. In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Since the issuance of this ASU the FASB has issued further ASU’s to provide additional guidance and clarification as to the application of ASU 2014-09 and delaying its original effective date. These ASU’s are effective for Orion beginning on April 1, 2018 (as amended by ASU 2015-14) and early adoption is not permitted. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU. Orion is currently evaluating the impact and method of adoption of ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12. |
