ORION ENERGY SYSTEMS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes included in this Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 . See also "Forward-Looking Statements" and Item 1A "Risk Factors". Overview We provide state-of-the-art LED lighting, wireless Internet of Things ("IoT") enabled control solutions, and energy project management. We research, design, develop, manufacture, market, sell, install, and implement energy management systems consisting primarily of high-performance, energy-efficient commercial and industrial interior and exterior lighting systems and related services. Our products are targeted for applications in three primary market segments: commercial office and retail, area lighting, and industrial applications, although we do sell and install products into other markets. Virtually all of our sales occur withinNorth America . Our lighting products consist primarily of light emitting diode ("LED") lighting fixtures, many of which include IoT enabled control systems. Our principal customers include large national account end-users, Federal and State government facilities, large regional account end-users, electrical distributors, electrical contractors and energy service companies ("ESCOs"). Currently, substantially all of our products are manufactured at our leased production facility located inManitowoc, Wisconsin , although as the LED and related IoT market continues to evolve, we are increasingly sourcing products and components from third parties in order to provide versatility in our product development. We have experienced recent success offering our comprehensive project management services to national account customers to retrofit their multiple locations. Our comprehensive services include initial site surveys and audits, utility incentive and government subsidy management, engineering design, and project management from delivery through to installation and controls integration. We believe the market for LED lighting products and related controls continues to grow. Due to their size and flexibility in application, we also believe that LED lighting systems can address opportunities for retrofit applications that cannot be satisfied by other lighting technologies. Our LED lighting technologies have become the primary component of our revenue as we continue to strive to be a leader in the LED market. In fiscal 2020, we began to successfully capitalize on our capability of being a full service, turn-key provider of LED lighting and controls systems with design, build, installation and project management services, including being awarded a very large project for a major national account. As a result of this success, we have begun to evolve our business strategy to focus on further expanding the nature and scope of our products and services offered to our customers. This further expansion of our products and services includes pursuing projects to develop recurring revenue streams, including providing lighting and electrical maintenance services and utilizing control sensor technology to collect data and assisting customers in the digitization of this data, along with other potential services. We also plan to pursue the expansion of our IoT, "smart-building" and "connected ceiling" and other related technology, software and controls products and services that we offer to our customers. We currently plan on investing significant time, resources and capital into expanding our offerings in these areas with no expectation that they will result in us realizing material revenue in the near term and without any assurance they will succeed or be profitable. In fact, it is likely that these efforts will reduce our profitability, at least in the near term as we invest resources and incur expenses to develop these offerings. While we intend to pursue these expansion strategies organically, we also are actively exploring potential business acquisitions which would more quickly add these types of expanded and different capabilities to our product and services offerings. It is possible that one or more of such potential acquisitions, if successfully completed, could significantly change, and potentially transform, the nature and extent of our business. We generally do not have long-term contracts with our customers that provide us with recurring revenue from period to period and we typically generate substantially all of our revenue from sales of lighting and control systems and related services to governmental, commercial and industrial customers on a project-by-project basis. We also perform work under master services or product purchasing agreements with major customers with sales completed on a purchase order basis. In addition, in order to provide quality and timely service under our multi-location master retrofit agreements we are required to make substantial working capital expenditures and advance inventory purchases that we may not be able to recoup if the agreements or a substantial volume of purchase orders under the agreements are delayed or terminated. For example, while we received a master retrofit agreement inJanuary 2020 33 -------------------------------------------------------------------------------- for approximately$18-20 million in revenue from our largest customer, due to the closure of its facilities to external activities because of the COVID-19 pandemic, this customer deferred retrofit installations related to the project duringMarch 2020 , thereby resulting in the deferral of our realization of expected revenue during our fiscal 2020 fourth quarter. The loss of, or substantial reduction in sales to, any of our significant customers, or our current single largest customer, or the termination or delay of a significant volume of purchase orders by one or more key customers, could have a material adverse effect on our results of operations in any given future period. We typically sell our lighting systems in replacement of our customers' existing fixtures. We call this replacement process a "retrofit". We frequently engage our customer's existing electrical contractor to provide installation and project management services. We also sell our lighting systems on a wholesale basis, principally to electrical distributors and ESCOs to sell to their own customer bases.
The gross margins of our products can vary significantly depending upon the types of products we sell, with margins typically ranging from 10% to 50%. As a result, a change in the total mix of our sales among higher or lower margin products can cause our profitability to fluctuate from period to period.
Our fiscal year ends onMarch 31 . We refer to our just completed fiscal year, which ended onMarch 31, 2020 , as "fiscal 2020", and our prior fiscal years which ended onMarch 31, 2019 andMarch 31, 2018 as "fiscal 2019" and "fiscal 2018", respectively. Our fiscal first quarter of each fiscal year ends onJune 30 , our fiscal second quarter ends onSeptember 30 , our fiscal third quarter ends onDecember 31 and our fiscal fourth quarter ends onMarch 31 . Reportable segments are components of an entity that have separate financial data that the entity's chief operating decision maker ("CODM") regularly reviews when allocating resources and assessing performance. Our CODM is our chief executive officer. Orion has three reportable segments: Orion Engineered Systems Division ("OES"), andOrion Distribution Services Division ("ODS"), and OrionU.S. Markets Division ("USM").
Major Developments in Fiscal 2020
During fiscal 2020, we executed on a series of master contracts for a major national account customer with our state-of-the-art LED lighting systems and wireless IoT enabled control solutions at locations nationwide. This one national account customer represented 74.1% of our total revenue in fiscal 2020 and was the primary driver for our growth over the prior year period. DuringMarch 2020 , this customer suspended our installations at a significant number of locations that were scheduled for installation during our fiscal 2020 fourth quarter and our fiscal 2021 first quarter. Although circumstances may change, further installations at this customer's locations are currently not expected to recommence until calendar year 2021. We expect further revenue opportunity with this national account customer in fiscal 2021 and beyond; however, due to the COVID-19 pandemic, the timing, and volume of revenue, including our ability to realize these potential revenue opportunities is uncertain.
Impact of COVID-19 and Fiscal 2021 Outlook
The COVID-19 pandemic has disrupted business, trade, commerce, financial and credit markets, in theU.S. and globally. Our business has been adversely impacted by measures taken by government entities and others to control the spread of the virus beginning inMarch 2020 . As an essential business, we provide products and services to ensure energy and lighting infrastructure and we therefore continue to operate throughout the pandemic. Nonetheless, we did experience a curtailment of activity in the last few weeks of our 2020 fiscal year. As part of our recent response to the impacts of the COVID-19, we have taken a number of cost reduction and cash conservation measures, including reducing headcount. While restrictions have begun to lessen in certain jurisdictions during our fiscal 2021 first quarter, stay-at-home or lockdown orders remain in effect in others, with employees asked to work remotely if possible. Some customers and projects are in areas where travel restrictions have been imposed, certain customers have either closed or reduced on-site activities, and timelines for the completion of several projects have been delayed, extended or terminated. These modifications to our business practices, including any future actions we take, may cause us to experience reductions in productivity and disruptions to our business routines. In addition, we are required to make substantial working capital expenditures and advance inventory purchases that we may not be able to recoup if the agreements or a substantial volume of purchase orders under the agreements are delayed or terminated as a result of COVID-19. As of the date of this report, it is not possible to predict the overall impact the COVID-19 pandemic will have on the Company's business, liquidity, capital resources or financial results, although we expect that the economic 34
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and regulatory impacts of COVID-19 will significantly reduce our revenue and
profitability in at least the first half of fiscal 2021. If the COVID-19
pandemic becomes more pronounced in our markets or experiences a resurgence in
markets recovering from the spread of COVID-19, or if another significant
natural disaster or pandemic were to occur in the future, our operations in
areas impacted by such events could experience further adverse financial impacts
due to market changes and other resulting events and circumstances.
The impact of COVID-19 has caused significant uncertainty and volatility in the
credit markets. We rely on the credit markets to provide us with liquidity to
operate and grow our businesses beyond the liquidity that operating cash flows
provide. If our access to capital were to become significantly constrained or if
costs of capital increased significantly due the impact of COVID-19, including
volatility in the capital markets, a reduction in our credit ratings or other
factors, then our financial condition, results of operations and cash flows
could be adversely affected.
In addition to the managing the adverse financial impact of the COVID-19
pandemic, our ability to achieve our desired revenue growth and profitability
goals depends on our ability to effectively execute on the following key
strategic initiatives. We may identify strategic acquisition candidates that
would help support these initiatives.
Focus on executing and marketing our turnkey LED retrofit capabilities to large
national account customers. We believe one of our competitive advantages is our
ability to deliver full turnkey LED lighting project capabilities. These turnkey
services were the principal reason we achieved significant revenue growth in
fiscal 2020 as we executed on our commitment to retrofit multiple locations for
a major national account customer. Our success in the national account market
segment centers on our turnkey design, engineering, manufacturing and project
management capabilities, which represent a very clear competitive advantage for
us among large enterprises seeking to benefit from the illumination benefits and
energy savings of LED lighting across locations nationwide. Few LED lighting
providers are organized to serve every step of a custom retrofit project in a
comprehensive, non-disruptive and timely fashion, from custom fixture design and
initial site surveys to final installations. Incrementally, we are also able to
help customers deploy state-of-the-art control systems that provide even greater
long-term value from their lighting system investments.
Looking forward, we are focused on continuing to successfully execute on
existing national account opportunities while also actively pursuing new
national account opportunities that leverage our customized, comprehensive
turnkey project solutions, and expanding our addressable market with
high-quality, basic lighting systems to meet the needs of value-oriented
customer segments served by our other market channels. Given our unique value
proposition, capabilities and focus on customer service, we are optimistic about
our business prospects and working to build sales momentum with existing and new
customers.
Continued Product Innovation. We continue to innovate, developing lighting
fixtures and features that address specific customer requirements, while also
working to maintain a leadership position in energy efficiency, smart product
design and installation benefits. For interior building applications, we have
recently launched an antimicrobial troffer fixture which supports the
suppression of bacteria, mold, fungi, and mildew, and are currently developing
an air circulation troffer to support improved air circulation. We also continue
to deepen our capabilities in the integration of smart lighting controls. Our
goal is to provide state-of-the-art lighting products with modular plug-and-play
designs to enable lighting system customization from basic controls to advanced
IoT capabilities.
Leverage of Orion's Smart Lighting Systems to Support Internet of Things
Applications. We believe we are ideally positioned to help customers to
efficiently deploy new IoT controls and applications by leveraging the "Smart
Ceiling" capabilities of their Orion solid state lighting system. IoT
capabilities can include the management and tracking of facilities, personnel,
resources and customer behavior, driving both sales and lowering costs. As a
result, these added capabilities provide customers an even greater return on
investment from their lighting system and make us an even more attractive
partner. We plan to pursue the expansion of our IoT, "smart-building" and
"connected ceiling" and other related technology, software and controls products
and services that we offer to our customers. While we intend to pursue these
expansion strategies organically, we also are actively exploring potential
business acquisitions which would more quickly add these types of expanded and
different capabilities to our product and services offerings.
Develop Maintenance Service Offerings. We believe we can leverage our
construction management process expertise to develop a high-quality,
quick-response, multi-location maintenance service offering. Our experience with
large national customers and our large installed base of fixtures position us
well to extend a maintenance offering to historical customers, as well as to new
customers. Development of this recurring revenue stream is in the preliminary
stage, but we believe there is significant market opportunity.
Support success of our ESCO and agent-driven distribution sales channels. We
continue to focus on building our relationships and product and sales support
for our ESCO and agent driven distribution channels. These efforts include an
array of product and sales training efforts as well as the development of new
products to cater to the unique needs of these sales channels.
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--------------------------------------------------------------------------------Tariffs and Trade Policies
The United States government has been implementing various monetary, regulatory, and trade importation restraints, penalties, and tariffs. Certain sourced finished products and certain of the components used in our products have been impacted by imposed tariffs onChina imports. Our efforts to mitigate the impact of added costs resulting from these government actions include a variety of activities, such as sourcing from non-tariff impacted countries and raising prices. If we are unable to successfully mitigate the impacts of these tariffs and other trade policies, our results of operations may be adversely affected. We believe that these mitigation activities will assist to offset added costs, and we currently believe that such tariffs will have a limited adverse financial effect on our results of operations. Any future policy changes that may be implemented could have a positive or negative consequence on our financial performance depending on how the changes would influence many factors, including business and consumer sentiment.
Results of Operations: Fiscal 2020 versus Fiscal 2019
The following table sets forth the line items of our consolidated statements of
operations and as a relative percentage of our total revenue for each applicable
period, together with the relative percentage change in such line item between
applicable comparable periods (in thousands, except percentages):
Fiscal Year Ended March 31,
2020 2019 2020 2019
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 113,352 $ 56,261 101.5 % 75.1 % 85.6 %
Service revenue 37,489 9,493 294.9 % 24.9 % 14.4 %
Total revenue 150,841 65,754 129.4 % 100.0 % 100.0 %
Cost of product revenue 83,588 44,111 89.5 % 55.4 % 67.1 %
Cost of service revenue 30,130 7,091 324.9 % 20.0 % 10.8 %
Total cost of revenue 113,718 51,202 122.1 % 75.4 % 77.9 %
Gross profit 37,123 14,552 155.1 % 24.6 % 22.1 %
General and administrative expenses 11,184 10,231 9.3 % 7.4 % 15.6 %
Sales and marketing expenses 11,113 9,104 22.1 % 7.4 % 13.8 %
Research and development expenses 1,716 1,374 24.9 % 1.1 % 2.0 %
Income (loss) from operations 13,110 (6,157 ) NM 8.7 % (9.4 )%
Other income 28 80 (65.0 )% 0.0 % 0.1 %
Interest expense (279 ) (493 ) (43.4 )% (0.2 )% (0.7 )%
Amortization of debt issue costs (243 ) (101 ) 140.6 % (0.2 )% (0.2 )%
Interest income 5 11 (54.5 )% 0.0 % 0.0 %
Income (loss) before income tax 12,621 (6,660 ) NM 8.5 % (10.0 )%
Income tax expense (benefit) 159 14 NM 0.4 % 0.1 %
Net income (loss) and comprehensive
income (loss) $ 12,462 $ (6,674 ) NM 8.1 % (10.1 )%
* NM = Not Meaningful
Revenue. Product revenue increased by 101.5%, or $57.1 million , for fiscal 2020
versus fiscal 2019. This increase in product revenue was primarily a result of
higher sales volume through our national account channel, and almost exclusively
as a result of a major retrofit project for multiple locations for one of our
national account customers. Service revenue increased by 294.9%, or $28.0
million , due to higher sales volume through our national account channel for the
major retrofit project for one customer and the timing of those project
installations. In fiscal 2020, sales to this one national account customer
represented 74.1% of our total revenue. Total revenue increased by 129.4%, or
$85.1 million , due to the items discussed above.
Cost of Revenue and Gross Margin. Cost of product revenue increased by 89.5%, or
$39.5 million , in fiscal 2020 versus the comparable period in fiscal 2019
primarily due to the corresponding increase in sales. Cost of service revenue
increased by 324.9%, or $23.0 million , in fiscal 2020 versus fiscal 2019
primarily due to the corresponding increase in service revenue. Gross margin
increased from 22.1% of revenue in fiscal 2019 to 24.6% in fiscal 2020, due to
our higher sales levels covering fixed costs.
36
--------------------------------------------------------------------------------Operating Expenses
General and Administrative. General and administrative expenses increased 9.3%, or$1.0 million , in fiscal 2020 compared to fiscal 2019, primarily due to higher bonus and employment costs. Sales and Marketing. Our sales and marketing expenses increased 22.1%, or$2.0 million , in fiscal 2020 compared to fiscal 2019. The increase year over year was primarily due to an increase in commission expense on higher sales and higher employment costs. Research and Development. Research and development expenses increased by 24.9%, or$0.3 million in fiscal 2020 compared to fiscal 2019 primarily due to higher employment costs.
Other income. Other income in fiscal 2020 and fiscal 2019 represented product royalties received from licensing agreements for our patents.
Interest Expense. Interest expense in fiscal 2020 decreased by 43.4%, or$0.2 million , from fiscal 2019. The decrease in interest expense was due to fewer sales of receivables. Amortization of debt issue costs. Amortization of debt issue costs in fiscal 2020 increased 140.6%, or$0.1 million from fiscal 2019. The increase was due to the timing of the execution of our credit agreement.
Interest Income. Interest income in fiscal 2020 remained relatively flat compared to fiscal 2019. Interest income relates to interest earned on sweep bank accounts.
Income Taxes. Income tax expense in fiscal 2020 increased by 1,000.0%, or$0.1 million , from fiscal 2019. Both periods include income tax expense for state tax liabilities. The increase in expense was driven by fiscal 2020 book income. 37 --------------------------------------------------------------------------------
Results of Operations: Fiscal 2019 versus Fiscal 2018
The following table sets forth the line items of our consolidated statements of
operations and as a relative percentage of our total revenue for each applicable
period, together with the relative percentage change in such line item between
applicable comparable periods (in thousands, except percentages):
Fiscal Year Ended March 31,
2019 2018 2019 2018
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 56,261 $ 55,595 1.2 % 85.6 % 92.2 %
Service revenue 9,493 4,705 101.8 % 14.4 % 7.8 %
Total revenue 65,754 60,300 9.0 % 100.0 % 100.0 %
Cost of product revenue 44,111 41,415 6.5 % 67.1 % 68.7 %
Cost of service revenue 7,091 4,213 68.3 % 10.8 % 7.0 %
Total cost of revenue 51,202 45,628 12.2 % 77.9 % 75.7 %
Gross profit 14,552 14,672 (0.8 )% 22.1 % 24.3 %
General and administrative expenses 10,231 13,159 (22.3 )% 15.6 % 21.8 %
Impairment of assets - 710 NM 0.0 % 1.1 %
Sales and marketing expenses 9,104 11,879 (23.4 )% 13.8 % 19.7 %
Research and development expenses 1,374 1,905 (27.9 )% 2.0 % 3.2 %
Loss from operations (6,157 ) (12,981 ) 52.6 % (9.4 )% (21.5 )%
Other income 80 248 (67.7 )% 0.1 % 0.4 %
Interest expense (493 ) (333 ) 48.0 % (0.7 )% (0.6 )%
Amortization of debt issue costs (101 ) (92 ) 9.8 % (0.1 )% (0.1 )%
Interest income 11 15 (26.7 )% - % - %
Loss before income tax (6,660 ) (13,143 ) 49.3 % (10.1 )% (21.8 )%
Income tax benefit 14 (15 ) NM - % (0.0 )%
Net loss and comprehensive loss
(10.1 )% (21.8 )%
Revenue. Product revenue increased by 1.2%, or $0.7 million , for fiscal 2019
versus fiscal 2018. The increase in product revenue was primarily a result of
higher sales volume through our national account channel, and primarily the
result of a major retrofit project for multiple locations for one of our
national account customers. Service revenue increased by 101.8%, or $4.8
million , primarily due to higher sales volume through our national account
channel and the timing of project installations. Total revenue increased by
9.0%, or $5.5 million , due to the items discussed above. Excluding the impact of
the adoption of ASC 606, Product revenue increased by 5.1%, or $2.9 million ,
Service revenue increased by 56.2%, or $2.6 million , and Total revenue increased
by 9.1%, or $5.5 million , compared to fiscal year 2018.
Cost of Revenue and Gross Margin. Cost of product revenue increased by 6.5%, or
$2.7 million , in fiscal 2019 versus the fiscal 2018 primarily due to the
increase in sales. Cost of service revenue by increased 68.3%, or $2.9 million ,
in fiscal 2019 versus fiscal 2018 primarily due to the increase in service
revenue. Gross margin decreased from 24.3% of revenue in fiscal 2018 to 22.1% in
fiscal 2019, primarily due to our product mix on higher sales to one large
national account customer. Excluding the impact of the adoption of ASC 606,
gross margin for fiscal 2019 was 24.4%.
Operating Expenses
General and Administrative. General and Administrative. General and
administrative expenses decreased by 22.3%, or
Impairment of assets. No impairment charge was recorded in fiscal 2019. During fiscal 2018, we performed a review of our definite and indefinite-lived tangible and intangible assets for impairment. In conjunction with this review, we determined that the carrying value of our Harris trade name intangible asset exceeded its fair value. As a result, we recorded an impairment charge of$0.7 million in fiscal 2018. 38
-------------------------------------------------------------------------------- Sales and Marketing. Our sales and marketing expenses decreased by 23.4%, or$2.8 million , in fiscal 2019 compared to fiscal 2018. Excluding the impact of the adoption of ASC 606, Sales and marketing expenses decreased by 11.1%, or$1.3 million , in fiscal 2019 compared to fiscal 2018. The decrease year over year was primarily due to reduced employee costs due to the impact of our prior year cost reduction plan, and lower travel and entertainment and marketing expenses. Research and Development. Research and development expenses decreased by 27.9%, or$0.5 million in fiscal 2019 compared to fiscal 2018 primarily due to lower employee costs as a result of our prior year cost reduction plan, as well as a decrease in testing costs based on timing of new product rollouts and reduced consulting expenses.
Other income. Other income in fiscal 2019 and fiscal 2018 represented product royalties received from licensing agreements for our patents.
Interest Expense. Interest expense in fiscal 2019 increased by 48.0%, or$0.2 million , from fiscal 2018. The increase in interest expense was due to increased third party financing costs related to the sale of receivables. Amortization of debt issue costs. Amortization of debt issue costs in fiscal 2019 increased by 9.8%, or$9 thousand from fiscal 2018. The increase was due to the execution of our new revolving credit facility.
Interest Income. Interest income in fiscal 2019 remained relatively flat compared to fiscal 2018. Interest income relates to interest earned on sweep bank accounts.
Income Taxes. Income tax expense in fiscal 2019 increased immaterially from fiscal 2018. Both periods include income tax expense for minimum state tax liabilities. In fiscal 2018 we received refunds from previously filed tax returns. In both periods, the impact of the Tax Cuts and Jobs Act on tax expense was immaterial due to the valuation allowance.
Orion Engineered Systems Division
The OES segment develops and sells lighting products and provides construction and engineering services for our commercial lighting and energy management systems. OES provides turnkey solutions for large national accounts, governments, municipalities and schools.
The following table summarizes our OES segment operating results (dollars in
thousands):
Fiscal Year Ended March 31,
2020 2019 2018
Revenues $ 122,744 $ 30,925 $ 23,827
Operating income (loss) $ 16,164 $ (1,237 ) $ (3,792 )
Operating margin 13.2 % (4.0 )% (15.9 )%
Fiscal 2020 Compared to Fiscal 2019
OES revenue increased in fiscal 2020 by 296.9%, or$91.8 million , compared to fiscal 2019 almost exclusively as the result of a major retrofit project for multiple locations for one of our national account customers. OES operating income in fiscal 2020 was$16.2 million , which improved from a net loss position of$(1.2) million in fiscal 2019. The improvement in the segment's operating income was the result of increased sales covering fixed costs.
Fiscal 2019 Compared to Fiscal 2018
OES revenue increased in fiscal 2019 by 29.8%, or$7.1 million , compared to fiscal 2018 primarily as a result of the increase in volume of turnkey projects, specifically to one large national account customer, which continued in fiscal 2020. OES operating loss in fiscal 2019 was$1.2 million , an improvement of$2.6 million from fiscal 2018. The improvement in the segment's operating loss was the result of increased sales, the benefit of lower corporate allocated costs due to the impact of cost reduction initiatives, and a non-recurring asset impairment charge of$0.5 million in fiscal 2018. 39 --------------------------------------------------------------------------------
The ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of broadline North American distributors.
The following table summarizes our ODS segment operating results (dollars in
thousands):
Fiscal Year Ended March 31,
2020 2019 2018
Revenues $ 15,087 $ 24,173 $ 27,906
Operating loss $ (852 ) $ (1,742 ) $ (325 )
Operating margin (5.6 )% (7.2 )% (1.2 )%
Fiscal 2020 Compared to Fiscal 2019
ODS revenue decreased in fiscal 2020 by 37.6%, or
ODS operating loss in fiscal 2020 was$(0.9) million , an improvement of$0.9 million from fiscal 2019. The decrease in segment operating loss was primarily due to lower operating costs on lower employment expenses and commissions.
Fiscal 2019 Compared to Fiscal 2018
ODS revenue decreased in fiscal 2019 by 13.4%, or
ODS operating loss in fiscal 2019 was$(1.7) million , an increased loss of$1.4 million from fiscal 2018. The increase in segment operating loss was primarily due to decreased sale. OrionU.S. Markets Division The USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers are primarily comprised of ESCOs. The following table summarizes our USM segment operating results (dollars in thousands): Fiscal Year Ended March 31, 2020 2019 2018 Revenues$ 13,010 $ 10,656 $ 8,567 Operating income (loss)$ 2,447 $ 1,132 $ (3,123 ) Operating margin 18.8 % 10.6 % (36.5 )%
Fiscal 2020 Compared to Fiscal 2019
USM revenue increased in fiscal 2020 by 22.1%, or
USM operating income in fiscal 2020 was
Fiscal 2019 Compared to Fiscal 2018
USM revenue increased in fiscal 2019 by 24.3%, or
40
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USM operating income in fiscal 2019 was $1.1 million , an improvement of $4.3
million over the operating loss in fiscal 2018. The improvement was primarily
due to better operating leverage on lower allocated corporate costs, as well as
a non-recurring asset impairment charge of $0.2 million in fiscal 2018.
Liquidity and Capital Resources
Overview
We had$28.8 million in cash and cash equivalents as ofMarch 31, 2020 , compared to$8.7 million atMarch 31, 2019 . Our cash position increased primarily as a result of our increased net income and the timing of working capital changes. OnOctober 26, 2018 , we entered into a secured revolving Business Financing Agreement withWestern Alliance Bank , as lender (the "Credit Agreement"). The Credit Agreement, as amended, provides for a revolving credit facility (the "Credit Facility") that matures onOctober 26, 2021 . Borrowings under the Credit Facility are limited to$20.15 million subject to a borrowing base requirement based on eligible receivables and inventory. The Credit Agreement includes a$2.0 million sublimit for the issuance of letters of credit. As ofMarch 31, 2020 , our borrowing base was$11.2 million , and we had$10.0 million in borrowings outstanding which were included in non-current liabilities in the accompanying Consolidated Balance Sheets. As ofMarch 31, 2020 , we had no outstanding letters of credit leaving total additional borrowing availability of$1.2 million .
Additional information on our New Credit Agreement can be found in the "Indebtedness" section located below.
InMarch 2020 , we filed a universal shelf registration statement with theSecurities and Exchange Commission . Under our shelf registration statement, we currently have the flexibility to publicly offer and sell from time to time up to$100.0 million of debt and/or equity securities. The filing of the shelf registration statement may help facilitate our ability to raise public equity or debt capital to expand existing businesses, fund potential acquisitions, invest in other growth opportunities, repay existing debt, or for other general corporate purposes. The COVID-19 pandemic has had a negative near-term impact on the capital markets and may impact the Company's ability to access this capital. We also are exploring various alternative sources of liquidity, including the sale or mortgage of our tech center office building, to help ensure that we will have the best allocation of investing capital to satisfy our working capital needs. Our future liquidity needs and forecasted cash flows are dependent upon many factors, including our relative revenue, gross margins, cash management practices, cost containment, working capital management, capital expenditures. Further, as discussed in the "Risk Factors," we expect our forecasted cash flows, particularly during the first half of fiscal 2021, to be materially adversely impacted by the COVID-19 pandemic, the magnitude and period of impact of which is uncertain. While we believe that we will likely have adequate available cash and equivalents and credit availability under our Credit Agreement to satisfy our currently anticipated working capital and liquidity requirements during the next 12 months based on our current cash flow forecast, there can be no assurance to that effect. If we experience significant liquidity constraints, we may be required to issue equity or debt securities, reduce our sales efforts, implement additional cost savings initiatives or undertake other efforts to conserve our cash.
Cash Flows
The following table summarizes our cash flows for our fiscal 2020, fiscal 2019
and fiscal 2018:
Fiscal Year Ended March 31,
2020 2019 2018
(in thousands)
Operating activities $ 20,343 $ (5,058 ) $ (4,415 )
Investing activities (936 ) (449 ) (585 )
Financing activities 615 4,812 (2,883 )
Increase (decrease) in cash and cash equivalents
41
-------------------------------------------------------------------------------- Cash Flows Related to Operating Activities. Cash used in operating activities primarily consisted of a net income adjusted for certain non-cash items including depreciation and amortization, stock-based compensation expenses, provisions for reserves, and the effect of changes in working capital and other activities. Cash provided by operating activities for fiscal 2020 was$20.3 million and consisted of a net income adjusted for non-cash expense items of$15.2 million and net cash provided by changes in operating assets and liabilities of$5.2 million . Cash used by changes in operating assets and liabilities consisted primarily of an increase in Inventory of$1.3 million due to delayed shipments at the end of the fiscal year as a result of COVID-19. Cash provided by changes in operating assets and liabilities included a decrease in Accounts receivable of$3.6 million due to the timing of billing and customer collections, a decrease in Revenue earned but not billed of$3.2 million due to timing on revenue recognition compared to invoicing. Cash used in operating activities for fiscal 2019 was$5.1 million and consisted of a net loss adjusted for non-cash expense items of$4.1 million and net cash used in changes in operating assets and liabilities of$1.0 million . Cash used by changes in operating assets and liabilities consisted of an increase of$5.8 million in Accounts receivable due to the timing of billing and customer collections on comparatively higher fourth quarter sales, an increase in Inventory of$4.7 million due to higher backlog for anticipated first quarter fiscal 2020 sales, and an increase of$1.4 million in Revenue earned but not billed due to timing on revenue recognition compared to invoicing. Cash provided by changes in operating assets and liabilities included an increase of$8.9 million in Accounts payable based on timing of payments and an increase of$2.0 million in Accrued expenses and other primarily due to increased accrued project costs on higher installation volume. 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$8.0 million and net cash provided by changes in operating assets and liabilities of$3.6 million . Cash used by changes in operating assets and liabilities consisted of a decrease of$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, a decrease of$0.1 million in Deferred revenue, current and long term due to the timing of project completion and a decrease of$0.1 million in Deferred contract costs due to the timing of project completions. Cash provided by changes in operating assets and liabilities included a decrease of$0.4 million in Accounts receivable due to the 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 in consideration of the lower sales volume, a decrease of$0.5 million in Prepaid and other current assets primarily due to the timing of project billings, and a negligible decrease in accounts payable. Cash Flows Related to Investing Activities. Cash used in investing activities in fiscal 2020 was$0.9 million and consisted primarily of purchases of property and equipment of$0.8 million .
Cash used in investing activities in fiscal 2019 was
Cash used in investing activities in fiscal 2018 was$0.6 million and consisted of purchases of property and equipment of$0.5 million and investment in patents and licenses of$0.1 million . Cash Flows Related to Financing Activities. Cash provided by financing activities in fiscal 2020 was$0.6 million . This cash provided consisted primarily of net proceeds of$0.8 million from our Credit Facility, offset by$0.1 million in debt issue costs due to the Credit Facility and$0.1 million of payment of long-term debt. Cash provided by financing activities in fiscal 2019 was$4.8 million . This cash provided consisted primarily of net proceeds of$5.3 million from our Credit Facility, offset by$0.4 million in debt issue costs due to the Credit Facility and$0.1 million of payment of long-term debt.
Cash used in financing activities in fiscal 2018 was
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--------------------------------------------------------------------------------Working Capital
Our net working capital as ofMarch 31, 2020 was$27.8 million , consisting of$55.0 million in current assets and$27.2 million in current liabilities. Our net working capital as ofMarch 31, 2019 was$14.0 million , consisting of$41.4 million in current assets and$27.3 million in current liabilities. Our Cash and cash equivalents, net balance increased by$20.0 million from the fiscal 2019 year-end due primarily to increased net income and working capital changes. Our current Accounts receivable, net balance decreased by$4.4 million from the fiscal 2019 year-end due to the timing of billing and customer collections. Our Revenue earned but not billed balance decreased by$3.1 million from the fiscal 2019 year-end due to the timing of billing. Our Inventories, net increased$1.1 million from the fiscal 2019 year-end due to higher backlog as ofMarch 31, 2020 as a result of delayed shipments as impacted by COVID-19. We generally attempt to maintain at least a three-month supply of on-hand inventory of purchased components and raw materials to meet anticipated demand, as well as to reduce our risk of unexpected raw material or component shortages or supply interruptions. Our accounts receivables, inventory and payables may increase to the extent our revenue and order levels increase. In addition, in order to provide quality and timely service under our multi-location master retrofit agreements we are required to make substantial working capital expenditures and advance inventory purchases, including purchases to support the provision of products and services to our largest customer. As a result of our largest customer deferring retrofit installations inMarch 2020 , we are working with the customer to come to an equitable accommodation with respect to our advance purchases. In late fiscal 2020 and early fiscal 2021, we also made increased pre-purchases of components for our products to help mitigate the impact of the COVID-19 pandemic on our supply chain.
Indebtedness
Revolving Credit Agreement
OnOctober 26, 2018 , we entered into the Credit Agreement. OnJune 3, 2019 , we and certain of our subsidiaries entered into an amendment (the "First Amendment") to the Credit Agreement, which increased the maximum borrowing base credit available for certain of the customer receivables included in our borrowing base and provided for a borrowing base credit of up to$3.0 million based on inventory, in each case, subject to certain conditions. OnAugust 2, 2019 , we and certain of our subsidiaries entered into a second amendment (the "Second Amendment") to the Credit Agreement, which established a rent reserve in an amount equal to three months' rent payable at any leased location where we maintain inventory included in our borrowing base and provided for a reduction of the borrowing base credit that we may receive for inventory if we default under the lease for any such location. As of the date of the Second Amendment, this rent reserve equaled$0.1 million . OnNovember 21, 2019 , we entered into a third amendment (the "Third Amendment") to the Credit Agreement, which extended the maturity date fromOctober 26, 2020 toOctober 26, 2021 ; increased the sublimit under the Credit Agreement for advances under business credit cards from$1.5 million to$3 million ; created a new$2 million sublimit permitting entry into foreign currency forward contracts with the lender; expanded our ability to make capital expenditures and incur other debt from time to time; and permitted the lender to amend the financial covenant included in the Credit Agreement (which requires the maintenance of a certain amount of unrestricted cash on deposit with the lender at the end of each month) upon receipt of the our annual projections. The Credit Agreement, as amended, provides for a Credit Facility that matures onOctober 26, 2021 . Borrowings under the Credit Facility are currently limited to$20.15 million , subject to a borrowing base requirement based on eligible receivables and inventory. The Credit Agreement includes a$2.0 million sublimit for the issuance of letters of credit. As ofMarch 31, 2020 , our borrowing base was$11.2 million , and we had$10.0 million in borrowings outstanding which were included in non-current liabilities in the accompanying Consolidated Balance Sheets. We had no outstanding letters of credit leaving total borrowing availability of$1.2 million .
The Credit Agreement is secured by a security interest in substantially all of our and our subsidiaries' personal property.
Borrowings under the Credit Agreement generally bear interest at floating rates
based upon the prime rate (but not less than 5.00% per year) plus an applicable
margin determined by reference to our quick ratio (defined as the aggregate
amount of unrestricted cash, unrestricted marketable securities and, with
certain adjustments, receivables convertible into cash divided by the total
current
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liabilities, including the obligations under the Credit Agreement). As of March
31, 2020 , the applicable interest rate was 5.25%. Among other fees, we are
required to pay an annual facility fee equal to 0.45% of the credit limit under
the Credit Agreement, which was paid at commencement (October 26, 2018 ) and is
due on each anniversary thereof.
The Credit Agreement requires us to maintain nine months' of "RML" as of the end
of each month. For purposes of the Credit Agreement, RML is defined as, as of
the applicable determination date, unrestricted cash on deposit with the lender
plus availability under the Credit Agreement divided by an amount equal to, for
the applicable trailing three-month period, consolidated net profit before tax,
plus depreciation expense, amortization expense and stock-based compensation,
minus capital lease principal payments, tested as of the end of each month. As
of March 31, 2020 , we were in compliance with this RML requirement.
The Credit Agreement also contains customary events of default and other
covenants, including certain restrictions on our ability to incur additional
indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or
distribution on our stock, redeem, retire or purchase shares of our stock, make
investments or pledge or transfer assets. If an event of default under the
Credit Agreement occurs and is continuing, then the lender may cease making
advances under the Credit Agreement and declare any outstanding obligations
under the Credit Agreement to be immediately due and payable. In addition, if we
become the subject of voluntary or involuntary proceedings under any bankruptcy
or similar law, then any outstanding obligations under the Credit Agreement will
automatically become immediately due and payable.
Capital Spending
Our capital expenditures are primarily for general corporate purposes for our corporate headquarters and technology center, production equipment and tooling and for information technology systems. Our capital expenditures totaled$0.8 million in fiscal 2020,$0.5 million in fiscal 2019, and$0.5 million in fiscal 2018. Given the uncertain impact on financial results due to the COVID-19 pandemic, our estimate of forecasted capital expenditures in fiscal 2021 is uncertain. Our capital spending plans predominantly consist of investments related to new product development tooling and equipment and information technology systems. We expect to finance these capital expenditures primarily through our existing cash, equipment secured loans and leases, to the extent needed, long-term debt financing, or by using our Credit Facility.
Contractual Obligations
Information regarding our known contractual obligations of the types described below as ofMarch 31, 2020 is set forth in the following table (dollars in thousands): Payments Due By Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years (in
thousands)
Bank debt obligations$ 10,013 $ -$ 10,013 $ - $ - Other debt obligations 85 35 30 20 - Cash interest payments on debt 6 3 3 - - Lease obligations (1) 4,137 692 1,368 1,449 628 Purchase order and capital expenditure commitments (2) 7,740 7,740 - - - Total$ 21,981 $ 8,470 $ 11,414 $ 1,469 $ 628 (1) Does not reflect the contract modification signed in the first quarter of fiscal 2021 extending the Jacksonville lease another three years. (2) Reflects non-cancellable purchase commitments primarily for certain
inventory items entered into in order to secure better pricing and ensure
materials on hand.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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--------------------------------------------------------------------------------Inflation
Our results from operations have not been, and we do not expect them to be, materially affected by inflation.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of our consolidated financial statements requires us to make certain estimates and judgments that affect our reported assets, liabilities, revenue and expenses, and our related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an ongoing basis, including those related to revenue recognition, inventory valuation, collectability of receivables, stock-based compensation, warranty reserves and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. A summary of our critical accounting policies is set forth below. Revenue Recognition. We generate revenue primarily by selling commercial lighting fixtures and components and by installing these fixtures in our customer's facilities. We recognize revenue in accordance with the guidance in "Revenue from Contracts with Customers" (Topic 606) ("ASC 606") when control of the goods or services being provided (which we refer to as a performance obligation) is transferred to a customer at an amount that reflects the consideration we expect to receive in exchange for those goods or services. Prices are generally fixed at the time of order confirmation. The amount of expected consideration includes estimated deductions and early payment discounts calculated based on historical experience, customer rebates based on agreed upon terms applied to actual and projected sales levels over the rebate period, and any amounts paid to customers in conjunction with fulfilling a performance obligation. If there are multiple performance obligations in a single contract, the contract's total sales price is allocated to each individual performance obligation based on their relative standalone selling price. A performance obligation's standalone selling price is the price at which we would sell such promised good or service separately to a customer. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus margin approach when one is not available. The cost-plus margin approach is used to determine the stand-alone selling price for the installation performance obligation and is based on average historical installation margin. Revenue derived from customer contracts which include only performance obligation(s) for the sale of lighting fixtures and components is classified as Product revenue in the Consolidated Statements of Operations. The revenue for these transactions is recorded at the point in time when management believes that the customer obtains control of the products, generally either upon shipment or upon delivery to the customer's facility. This point in time is determined separately for each contract and requires judgment by management of the contract terms and the specific facts and circumstances concerning the transaction. Revenue from a customer contract which includes both the sale of fixtures and the installation of such fixtures (which we refer to as a turnkey project) is allocated between each lighting fixture and the installation performance obligation based on relative standalone selling prices. Revenue from turnkey projects that is allocated to the sale of the lighting fixtures is recorded at the point in time when management believes the customer obtains control of the product(s) and is reflected in Product revenue. This point in time is determined separately for each customer contract based upon the terms of the contract and the nature and extent of our control of the light fixtures during the installation. Product revenue associated with turnkey projects can be recorded (a) upon shipment or delivery, (b) subsequent to shipment or delivery and upon customer payments for the light fixtures, (c) when an individual light fixture is installed and working correctly, or (d) when the customer acknowledges that the entire installation project is substantially complete. Determining the point in time when a customer obtains control of the lighting fixtures in a turnkey project can be a complex judgment and is applied separately for each individual light fixture included in a contract. In making this judgment, management considers the timing of various factors, including, but not limited to, those detailed below: • when there is a legal transfer of ownership; • when the customer obtains physical possession of the products; 45
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• when the customer starts to receive the benefit of the products;
• the amount and duration of physical control that we maintain on the
products after they are shipped to, and received at, the customer's
facility;
• whether we are required to maintain insurance on the lighting fixtures when
they are in transit and after they are delivered to the customer's
facility;
• when each light fixture is physically installed and working correctly;
• when the customer formally accepts the product; and
• when we receive payment from the customer for the light fixtures.
Revenue from turnkey projects that is allocated to the single installation
performance obligation is reflected in Service revenue. Service revenue is
recorded over-time as we fulfill our obligation to install the light fixtures.
We measure our performance toward fulfilling our performance obligations for
installations using an output method that calculates the number of light
fixtures completely removed and installed as of the measurement date in
comparison to the total number of light fixtures to be removed and installed
under the contract.
Most products are manufactured in accordance with our standard specifications.
However, some products are manufactured to a customer's specific requirements
with no alternative use to us. In such cases, and when we have an enforceable
right to payment, Product revenue is recorded on an over-time basis measured
using an input methodology that calculates the costs incurred to date as
compared to total expected costs. There was no over-time revenue related to
custom products recognized in fiscal year 2020 or 2019.
We offer a financing program, called an Orion Throughput Agreement, or OTA, for
a customer's lease of our 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 our net investment in the lease, which typically is the net present value of
the future cash flows.
We also record revenue in conjunction with several limited power purchase
agreements ("PPAs") still outstanding. Those PPAs are supply-side agreements for
the generation of electricity. Our last PPA expires in 2031. Revenue associated
with the sale of energy generated by the solar facilities under these PPAs is
within the scope of ASC 606. Revenues are recognized over-time and are equal to
the amount billed to the customer, which is calculated by applying the fixed
rate designated in the PPAs to the variable amount of electricity generated each
month. This approach is in accordance with the "right to invoice" practical
expedient provided for in ASC 606. We also recognize revenue upon the sale to
third parties of tax credits received from operating the solar facilities and
from amortizing a grant received from the federal government during the period
starting when the power generating facilities were constructed until the
expiration of the PPAs; these revenues are not derived from contracts with
customers and therefore not under the scope of ASC 606.
Inventories. Inventories are stated at the lower of cost or net realizable value
and include raw materials, work in process and finished goods. Items are removed
from inventory using the first-in, first-out method. Work in process inventories
are comprised of raw materials that have been converted into components for
final assembly. Inventory amounts include the cost to manufacture the item, such
as the cost of raw materials and related freight, labor and other applied
overhead costs. We review our inventory for obsolescence. If the net realizable
value, which is based upon the estimated selling price, less estimated costs of
completion, disposal, and transportation, falls below cost, then the inventory
value is reduced to its net realizable value. Our inventory obsolescence
reserves at March 31, 2020 were $2.4 million , or 14.3% of gross inventory, and
$2.8 million , or 17.4% of gross inventory, at March 31, 2019 .
Allowance for Doubtful Accounts. We perform ongoing evaluations of our customers
and continuously monitor collections and payments and estimate an allowance for
doubtful accounts based upon the aging of the underlying receivables, our
historical experience with write-offs and specific customer collection issues
that we have identified. While such credit losses have historically been within
our expectations, and we believe appropriate reserves have been established, we
may not adequately predict future credit losses. If the financial condition of
our customers were to deteriorate and result in an impairment of their ability
to make payments, additional allowances might be required which would result in
additional general and administrative expense in the period such
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determination is made. Our allowance for doubtful accounts was
Recoverability of Long-Lived Assets. We evaluate long-lived assets such as property, equipment and definite lived intangible assets, such as patents, customer relationships, developed technology, and non-competition agreements, for impairment whenever events or circumstances indicate that the carrying value of the assets recognized in our financial statements may not be recoverable. Factors that we consider include whether there has been a significant decrease in the market value of an asset, a significant change in the way an asset is being utilized, or a significant change, delay or departure in our strategy for that asset, or a significant change in the macroeconomic environment, such as the impact of the COVID-19 pandemic. Our assessment of the recoverability of long-lived assets involves significant judgment and estimation. These assessments reflect our assumptions, which, we believe, are consistent with the assumptions hypothetical marketplace participants use. Factors that we must estimate when performing recoverability and impairment tests include, among others, forecasted revenue, margin costs and the economic life of the asset. If impairment is indicated, we first determine if the total estimated future cash flows on an undiscounted basis are less than the carrying amounts of the asset or assets. If so, an impairment loss is measured and recognized. As ofMarch 31, 2020 , due to the forecasted change in the macroeconomic conditions due to the COVID-19 pandemic, a triggering event occurred requiring us to evaluate our long-lived assets for impairment. Due to the central nature of our operations, our tangible and intangible definite-lived assets support our full operations, are utilized by all three of our reportable segments, and do not generate separately identifiable cash flows. As such, these assets together represent a single asset group. We performed the recoverability test for the asset group by comparing the carrying value to the group's expected future undiscounted cash flows. We concluded that the undiscounted cash flows of the definite lived asset group exceeded the carrying value. As such the asset group was deemed recoverable and no impairment was recorded. During the second quarter of fiscal 2019, we listed our corporate office building inManitowoc, Wisconsin for sale or lease to increase liquidity through the divestiture of a non-core asset. Because of the uncertainty of a sale of our building, management concluded that the sale is not probable within the next twelve months, therefore the building continues to be classified as held for use as ofMarch 31, 2020 . The building is included in our long-lived asset group, which was evaluated for impairment during the second quarter of fiscal 2020; the asset group was deemed recoverable and no impairment was recorded. However, as the building is currently listed for below its net book value, the sale of our building could result in a non-cash impairment charge in future reporting periods. Our impairment loss calculations require that we apply judgment in identifying asset groups, estimating future cash flows, determining asset fair values, and estimating asset's useful lives. To make these judgments, we may use internal discounted cash flow estimates, quoted market prices, when available, and independent appraisals, as appropriate, to determine fair value. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be required to recognize future impairment losses which could be material to our results of operations. Indefinite Lived Intangible Assets. We test indefinite lived intangible assets for impairment at least annually on the first day of our fiscal fourth quarter, or when indications of potential impairment exist. We monitor for the existence of potential impairment indicators throughout the fiscal year. Our annual impairment test may begin with a qualitative test to determine whether it is more likely than not that an indefinite lived intangible asset's carrying value is greater than its fair value. If our qualitative assessment reveals that asset impairment is more likely than not, we perform a quantitative impairment test by comparing the fair value of the indefinite lived intangible asset to its carrying value. Alternatively, we may bypass the qualitative test and initiate impairment testing with the quantitative impairment test. We performed a qualitative assessment in conjunction with our annual impairment test of our indefinite lived intangible assets as ofJanuary 1, 2020 . This qualitative assessment considered our operating results for the first nine months of fiscal 2019 in comparison to prior years as well as its anticipated fourth quarter results and fiscal 2020 plan. As a result of the conditions that existed as of the assessment date, an asset impairment was not deemed to be more likely than not and a quantitative analysis was not required. Stock-Based Compensation. We currently issue restricted stock awards to our employees, executive officers and directors. Prior to fiscal 2015, we also issued stock options to these individuals. We apply the provisions of ASC 718, Compensation - Stock Compensation, to these restricted stock and stock option awards which requires us to expense the estimated fair value of the awards 47 -------------------------------------------------------------------------------- based on the fair value of the award on the date of grant. Compensation costs for equity incentives are recognized in earnings, on a straight-line basis over the requisite service period. Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to determine our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expenses, together with assessing temporary differences resulting from recognition of items for income tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this increase as an expense within the tax provision in our statements of operations. Our judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We continue to monitor the realizability of our deferred tax assets and adjust the valuation allowance accordingly. For fiscal 2020, 2019, and 2018 we have recorded a full valuation allowance against our net federal and net state deferred tax assets due to our cumulative three-year taxable losses. In making these determinations, we considered all available positive and negative evidence, including projected future taxable income, tax planning strategies, recent financial performance and ownership changes. We believe that past issuances and transfers of our stock caused an ownership change in fiscal 2007 that affected the timing of the use of our net operating loss carry-forwards, but we do not believe the ownership change affects the use of the full amount of the net operating loss carry-forwards. As a result, our ability to use our net operating loss carry-forwards attributable to the period prior to such ownership change to offset taxable income will be subject to limitations in a particular year, which could potentially result in increased future tax liability for us. As ofMarch 31, 2020 , we had net operating loss carryforwards of approximately$75.3 million for federal tax purposes and$61.7 million for state tax purposes. As of the prior fiscal year, this amount is inclusive of the entire loss carryforward on the filed returns. We also had federal tax credit carryforwards of$1.3 million and state tax credit carryforwards of$0.8 million , which are fully reserved for as part of our valuation allowance. Of these tax attributes,$8.5 million of the federal and state net operating loss carryforwards are not subject to time restrictions on use but may only be used to offset 80% of future adjusted taxable income. The$128.5 federal and state net operating loss and tax credit carryforwards will begin to expire in varying amounts between 2024 and 2040.
We recognize penalties and interest related to uncertain tax liabilities in income tax expense. Penalties and interest were immaterial as of the date of adoption and are included in unrecognized tax benefits.
By their nature, tax laws are often subject to interpretation. Further complicating matters is that in those cases where a tax position is open to interpretation, differences of opinion can result in differing conclusions as to the amount of tax benefits to be recognized underFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes. ASC 740 utilizes a two-step approach for evaluating tax positions. Recognition (Step 1) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step 2) is only addressed if Step 1 has been satisfied. Under Step 2, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. Consequently, the level of evidence and documentation necessary to support a position prior to being given recognition and measurement within the financial statements is a matter of judgment that depends on all available evidence. As ofMarch 31, 2020 , the balance of gross unrecognized tax benefits was approximately$0.3 million , of which$0.2 million would reduce our effective tax rate if recognized. We believe that our estimates and judgments discussed herein are reasonable, however, actual results could differ, which could result in gains or losses that could be material. 48
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Recent Accounting Pronouncements
See Note 3 - Summary of Significant Accounting Policies to our accompanying audited consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on results of operations and financial condition.
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