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, 2021 . See also "Forward-Looking Statements" and Item 1A "Risk Factors". Overview We provide state-of-the-art light emitting diode ("LED") lighting systems, wireless Internet of Things ("IoT") enabled control solutions, project engineering, design energy project management and maintenance services. We help our customers achieve energy savings with healthy, safe and sustainable solutions that enable them to reduce their carbon footprint and digitize their business. 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 LED 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 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, most 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 2021, we successfully capitalized 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, as we continued 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 35 -------------------------------------------------------------------------------- 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. 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, 2021 , as "fiscal 2021", and our prior fiscal years which ended onMarch 31, 2020 andMarch 31, 2019 as "fiscal 2020" and "fiscal 2019", 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").
Impact of COVID-19 and Fiscal 2022 Outlook
The COVID-19 pandemic has disrupted business, trade, commerce, financial and credit markets, in theU.S. and globally. Our business was adversely impacted by measures taken by government entities and others to control the spread of the virus beginning inMarch 2020 , the last few weeks of our prior fiscal year, and continuing most significantly into the second quarter of fiscal 2021. During the second half of fiscal 2021, we experienced a rebound in business. Project installations for our largest customer recommenced, as well installations for a new large specialty retail customer began, with no further significant COVID-19 impacts. However, some customers continue to refrain from awarding new projects and potential future risks remain due to the COVID-19 pandemic, including supply chain disruption for certain components. As a deemed essential business, we provide products and services to ensure energy and lighting infrastructure and we therefore have continued to operate throughout the pandemic. We have implemented a number of safety protocols, including limiting travel and restricting access to our facilities along with monitoring processes, physical distancing, physical barriers, enhanced cleaning procedures and requiring face coverings. As part of our response to the impacts of the COVID-19 pandemic, during the fourth quarter of fiscal 2020 we implemented a number of cost reduction and cash conservation measures, including reducing headcount. While certain restrictions began to initially lessen in certain jurisdictions during fiscal 2021, stay-at-home, face mask 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 our customer agreements or a substantial volume of purchase orders under our customer agreements are delayed or terminated as a result of COVID-19. At this time, it is not possible to predict the overall impact the COVID-19 pandemic will have on our business, liquidity, capital resources or financial results, although the economic and regulatory impacts of COVID-19 significantly reduced our revenue and profitability in 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, our operations in areas impacted by such events could experience further material adverse financial impacts due to market changes and other resulting events and circumstances. 36 -------------------------------------------------------------------------------- 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 recent revenue growth 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. We believe one of our competitive advantages is that we 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. 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 compelling 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 recently expanded our product line to include a family of ceiling air movement solutions, some of which incorporate LED lighting and others which utilize ultraviolet C light waves to kill viruses, bacteria and germs. 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 making progress and 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. 37 --------------------------------------------------------------------------------
Major Developments in Fiscal 2021
During fiscal years 2021 and 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 single national account customer represented 56.0% of our total revenue in fiscal 2021 and 74.1% of our total revenue in fiscal 2020. DuringMarch 2020 , due to the COVID-19 pandemic, this customer temporarily 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. These originally scheduled installations resumed during the second quarter of fiscal 2021 and continued through the second half of fiscal 2021. Additionally, we added a large specialty retail customer and are providing turnkey LED lighting retrofit solutions for a number of its stores. This project generated product and service revenue of$8.1 million during the second half fiscal 2021. We expect to retrofit additional stores for this customer in fiscal 2022. We also completed several initial retrofit projects at facilities for a major global logistics company. This customer is expected to be a significant source of revenue as we move forward, although these installations are likely to occur more slowly than we had originally anticipated. We expect to work with the customer on a project-by-project basis, versus larger-scale multi-site commitments, which limits visibility on the timing of future revenue contributions. We also have been selected to work with another major logistics company that is also expected to be a significant source of revenue in the future. Given our current earnings and potential future earnings, as ofMarch 31, 2021 , we recorded a net valuation allowance release of$20.9 million against our deferred tax assets. This resulted in substantially and disproportionately increasing our reported net income and our earnings per share compared to our operating results. Historical and future comparisons to these amounts are not, and will not be, indicative of actual profitability trends for our business.
Results of Operations: Fiscal 2021 versus Fiscal 2020
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,
2021 2020 2021 2020
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 87,664 $ 113,352 (22.7 )% 75.0 % 75.1 %
Service revenue 29,176 37,489 (22.2 )% 25.0 % 24.9 %
Total revenue 116,840 150,841 (22.5 )% 100.0 % 100.0 %
Cost of product revenue 63,233 83,588 (24.4 )% 54.1 % 55.4 %
Cost of service revenue 23,483 30,130 (22.1 )% 20.1 % 20.0 %
Total cost of revenue 86,716 113,718 (23.7 )% 74.2 % 75.4 %
Gross profit 30,124 37,123 (18.9 )% 25.8 % 24.6 %
General and administrative expenses 11,262 11,184 0.7 % 9.6 % 7.4 %
Sales and marketing expenses 10,341 11,113 (6.9 )% 8.9 % 7.4 %
Research and development expenses 1,685 1,716 (1.8 )% 1.4 % 1.1 %
Income from operations 6,836 13,110 (47.9 )% 5.9 % 8.7 %
Other income 56 28 100.0 % 0.0 % 0.0 %
Interest expense (127 ) (279 ) 54.5 % (0.1 )% (0.2 )%
Amortization of debt issue costs (157 ) (243 ) 35.4 % (0.1 )% (0.2 )%
Loss on debt extinguishment (90 ) - NM (0.1 )% -
Interest income - 5 (100.0 )% - 0.0 %
Income before income tax 6,518 12,621 (48.4 )% 5.6 % 8.4 %
Income tax (benefit) expense (19,616 ) 159 NM -16.8 % 0.1 %
Net income $ 26,134 $ 12,462 109.7 % 22.4 % 8.3 %
* NM = Not Meaningful
38
-------------------------------------------------------------------------------- Revenue. Product revenue decreased by 22.7%, or$25.7 million , for fiscal 2021 versus fiscal 2020. Service revenue decreased by 22.2%, or$8.3 million , for fiscal 2021 versus fiscal 2020. The decrease in product and service revenue was primarily due to multiple projects put on hold during the first half of fiscal 2021 as a result of COVID-19, including the projects for one large national account customer which represented 56.0% of revenue in fiscal 2021, and 74.1% of revenue in fiscal 2020. The project installations for this large national account customer resumed during the second quarter of fiscal 2021. Total revenue decreased by 22.5%, or$34.0 million , due to the items discussed above. Cost of Revenue and Gross Margin. Cost of product revenue decreased by 24.4%, or$20.4 million , in fiscal 2021 versus the comparable period in fiscal 2020. Cost of service revenue decreased by 22.1%, or$6.6 million , in fiscal 2021 versus fiscal 2020. The decrease in product and service costs was primarily due to the decrease in revenue. Gross margin increased from 24.6% of revenue in fiscal 2020 to 25.8% in fiscal 2021, due primarily to cost management and a change in customer sales mix.
Operating Expenses
General and Administrative. General and administrative expenses increased 0.7%, or$0.1 million , in fiscal 2021 compared to fiscal 2020, primarily due to a decrease in travel as a result of COVID-19 restrictions, offset by an increase in services and insurance costs. Sales and Marketing. Our sales and marketing expenses decreased 6.9%, or$0.8 million , in fiscal 2021 compared to fiscal 2020. The decrease year over year was primarily due to a decrease in commission expense on lower sales and a decrease in travel, both a result of COVID-19 restrictions. Research and Development. Research and development expenses decreased by 1.8%, or$31 thousand in fiscal 2021 compared to fiscal 2020 primarily due to lower travel costs due to COVID-19 restrictions, partially offset by an increase in site testing. Interest Expense. Interest expense in fiscal 2021 decreased by 54.5%, or$0.2 million , from fiscal 2020. The decrease in interest expense was due to fewer sales of receivables. Loss on Debt Extinguishment. Loss on debt extinguishment in fiscal 2021 related to the write-off of fees incurred with respect to our prior credit facility, which was recognized upon execution of our new credit facility during the third quarter of fiscal 2021. Income Taxes. In fiscal 2021, we recognized a tax benefit of$19.6 million . The benefit was driven by the release of the valuation allowance on a significant portion of our deferred tax assets. This resulted in substantially and disproportionately increasing our reported net income and our earnings per share compared to our operating results. Historical and future comparisons to these amounts are not, and will not be, indicative of actual profitability trends for our business. 39
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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 % 2.1 %
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 8.4 % (10.1 )%
Income tax expense 159 14 1035.7 % 0.1 % 0.0 %
Net income (loss) $ 12,462 $ (6,674 ) NM 8.3 % (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.
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. 40
-------------------------------------------------------------------------------- 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.
Orion Engineered Systems Division
Our OES segment develops and sells lighting products and provides construction
and engineering services for our commercial lighting and energy management
systems. OES provides engineering, design, lighting products and in many cases
turnkey solutions for large national accounts, governments, municipalities,
schools and other customers.
The following table summarizes our OES segment operating results (dollars in
thousands):
Fiscal Year Ended March 31,
2021 2020 2019
Revenues $ 84,243 $ 122,744 $ 30,925
Operating income (loss) $ 7,472 $ 16,164 $ (1,237 )
Operating margin 8.9 % 13.2 % (4.0 )%
Fiscal 2021 Compared to Fiscal 2020
OES segment revenue decreased in fiscal 2021 by 31.4%, or$38.5 million , compared to fiscal 2020, due to multiple projects put on hold as a result of COVID-19, including the projects to one large national account customer that represented 56.0% in fiscal 2021 and 74.1% of total revenue in fiscal 2020. The project installations for this customer resumed during the second quarter of fiscal 2021. This sales decrease led to a corresponding decrease in operating income in this segment.
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. This sales increase led to a corresponding increase in operating income in this segment from a net loss position in fiscal 2019.
Our ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of North American broadline and electrical distributors and contractors.
The following table summarizes our ODS segment operating results (dollars in
thousands):
Fiscal Year Ended March 31,
2021 2020 2019
Revenues $ 21,122 $ 15,087 $ 24,173
Operating income (loss) $ 2,430 $ (852 ) $ (1,742 )
Operating margin 11.5 % (5.6 )% (7.2 )%
Fiscal 2021 Compared to Fiscal 2020
ODS segment revenue in fiscal 2021 increased 40.0%, or$6.0 million , compared to fiscal 2020, primarily due to sales to one customer who represented 5.9% of fiscal 2021 total consolidated revenue. This sales increase led to a corresponding increase in operating income in this segment based on operating leverage.
Fiscal 2020 Compared to Fiscal 2019
ODS revenue decreased in fiscal 2020 by 37.6%, or
41
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Orion
Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and contractors.
The following table summarizes our USM segment operating results (dollars in
thousands):
Fiscal Year Ended March 31,
2021 2020 2019
Revenues $ 11,476 $ 13,010 $ 10,656
Operating income $ 1,683 $ 2,447 $ 1,132
Operating margin 14.7 % 18.8 % 10.6 %
Fiscal 2021 Compared to Fiscal 2020
USM segment revenue in fiscal 2021 decreased 11.8%, or$1.5 million , from fiscal 2020, primarily due to the impact of COVID-19, and resulted in a corresponding decrease in operating income in this segment based on operating leverage.
Fiscal 2020 Compared to Fiscal 2019
USM revenue increased in fiscal 2020 by 22.1%, or$2.4 million , compared to fiscal 2019, primarily due to an increase in sales volume as a result of our reengagement in the sales channel. This sales increase led to a corresponding increase in operating income in this segment based on operating leverage.
Liquidity and Capital Resources
Overview
We had$19.4 million in cash and cash equivalents as ofMarch 31, 2021 , compared to$28.8 million atMarch 31, 2020 . Our cash position decreased primarily as a result of the paydown of our line of credit. OnDecember 29, 2020 , we entered into a new Loan and Security Agreement (the "Credit Agreement") withBank of America, N.A ., as lender (the "Lender"). The Credit Agreement replaced our existing$20.15 million secured revolving credit and security agreement dated as ofOctober 26, 2018 , as amended, with WesternAlliance Bank, National Association , as lender (the "Prior Credit Agreement"). The replacement of the existing credit agreement with the Credit Agreement provides us with increased financing capacity and liquidity to fund our operations and implement our strategic plans. As ofMarch 31, 2021 , the borrowing base supported the full availability of the Credit Facility. As ofMarch 31, 2021 , no amounts were borrowed under the Credit Facility.
Additional information on our 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 our ability to access this capital. InMarch 2021 , we entered into an At Market Issuance Sales Agreement to undertake an "at the market" (ATM) public equity capital raising program pursuant to which we may offer and sell shares of our common stock, having an aggregate offering price of up to$50 million from time to time through or to the Agent, acting as sales agent or principal. No share sales were effected pursuant to the ATM program throughMarch 31, 2021 . 42 --------------------------------------------------------------------------------
We also are exploring various alternative sources of liquidity 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 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 2021, fiscal 2020
and fiscal 2019:
Fiscal Year Ended March 31,
2021 2020 2019
(in thousands)
Operating activities $ 1,729 $ 20,343 $ (5,058 )
Investing activities (946 ) (936 ) (449 )
Financing activities (10,141 ) 615 4,812
(Decrease) increase in cash and cash equivalents
$ (695 ) Cash Flows Related to Operating Activities. Cash provided by (used in) operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation, amortization of intangible assets, stock-based compensation, amortization of debt issue costs, provisions for reserves, and the effect of changes in working capital and other activities. Cash provided by operating activities for fiscal 2021 was$1.7 million and consisted of a net income adjusted for non-cash expense items of$9.1 million and net cash used by changes in operating assets and liabilities of$7.4 million . Cash used by changes in operating assets and liabilities consisted primarily of an increase in inventory of$5.3 million due to the release of new product lines and pre-ordering due to supply chain delays as a result of COVID-19, a decrease in accounts payable of$2.6 million due to the timing of payments, an increase in accounts receivable of$2.4 million due to the timing of billing and customer collections, and an increase in Revenue earned but not billed of$2.4 million due to timing on revenue recognition compared to invoicing. Cash provided by changes in operating assets and liabilities included an increase in accrued expenses of$5.8 million due to the timing of project completions and the receipt of invoices. 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. 43 -------------------------------------------------------------------------------- Cash Flows Related to Investing Activities. Cash used in investing activities in fiscal 2021 was$0.9 million and consisted primarily of purchases of property and equipment.
Cash used in investing activities in fiscal 2020 was
Cash used in investing activities in fiscal 2019 was
Cash Flows Related to Financing Activities. Cash used in financing activities in
fiscal 2021 was
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.
Working Capital
Our net working capital as ofMarch 31, 2021 was$26.2 million , consisting of$56.5 million in current assets and$30.4 million in current liabilities. 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 Cash and cash equivalents, net balance decreased by$9.4 million from the fiscal 2020 year-end due primarily to the paydown of our line of credit. Our current Accounts receivable, net balance increased by$3.1 million from the fiscal 2020 year-end due to the timing of billing and customer collections. Our Revenue earned but not billed balance increased by$2.4 million from the fiscal 2020 year-end due to the timing of billing. Our Inventories, net increased$5.0 million from the fiscal 2020 year-end due to the release of new product lines and pre-purchases of components for our products to help mitigate the impact of the COVID-19 pandemic on our supply chain. 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. Because of recent supply chain challenges, we have been making additional incremental inventory purchases. 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. Indebtedness Revolving Credit Agreement The Credit Agreement provides for a five-year$25.0 million revolving credit facility (the "Credit Facility") that matures onDecember 29, 2025 . Borrowings under the Credit Facility are subject to a borrowing base requirement based on eligible receivables, inventory and cash. As ofMarch 31, 2021 , the borrowing base supports the full availability of the Credit Facility. As ofMarch 31, 2021 , no amounts were borrowed under the Credit Facility.
The Credit Agreement is secured by a first lien security interest in substantially all of our assets.
Borrowings under the Credit Agreement are permitted in the form of LIBOR or
prime rate-based loans and generally bear interest at floating rates plus an
applicable margin determined by reference to our availability under the Credit
Agreement. Among
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other fees, we are required to pay an annual facility fee of
The Credit Agreement includes a springing minimum fixed cost coverage ratio of 1.0 to 1.0 when excess availability under the Credit Facility falls below the greater of$3.0 million or 15% of the committed facility. Currently, the required springing minimum fixed cost coverage ratio is not required. 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. We did not incur any early termination fees in connection with the termination of the Prior Credit Agreement, but did recognize a loss on debt extinguishment of$0.1 million on the write-off of unamortized debt issue costs related to the Prior Credit Agreement. The Prior Credit Agreement was scheduled to mature onOctober 26, 2021 . 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$0.9 million in fiscal 2021,$0.8 million in fiscal 2020, and$0.5 million in fiscal 2019. Our capital spending plans predominantly consist of investments related to new product development tooling and equipment and information technology systems, exclusive of any capital spending for potential acquisitions. 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, 2021 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 $ - $ - $ - $ - $ - Other debt obligations 49 14 31 4 - Cash interest payments on debt 9 3 5 1 - Lease obligations 3,739 810 1,566 1,363 - Purchase order and capital expenditure commitments (1) 13,117 13,117 - - - Total$ 16,914 $ 13,944 $ 1,602 $ 1,368 $ - (1) 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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Our results from operations have not been materially affected by inflation. We are monitoring input costs and cannot currently predict the future impact to our operations 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 transaction price per GAAP 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 an expected cost-plus margin per GAAP approach when one is not available. The expected cost-plus margin per GAAP 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. 46 -------------------------------------------------------------------------------- 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; • 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.
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, 2021 were $1.9 million , or 8.9% of gross inventory, and
$2.4 million , or 14.3% of gross inventory, at March 31, 2020 .
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Allowance for Doubtful Accounts. We perform ongoing evaluations of our customers
and continuously monitor collections and payments and estimate an allowance for
doubtful accounts based upon the aging of the underlying receivables, our
historical experience with write-offs and specific customer collection issues
that we have identified. While such credit losses have historically been within
our expectations, and we believe appropriate reserves have been established, we
may not adequately predict future credit losses. If the financial condition of
our customers were to deteriorate and result in an impairment of their ability
to make payments, additional allowances might be required which would result in
additional general and administrative expense in the period such determination
is made. Our allowance for doubtful accounts was eleven thousand dollars , or
0.1% of gross receivables, at March 31, 2021 and twenty-eight thousand dollars ,
or 0.3% of gross receivables, at March 31, 2020 .
Recoverability of Long-Lived Assets. We evaluate long-lived assets such as
property, equipment and definite lived intangible assets, such as patents, 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 of March 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.
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 of January 1, 2021 . This
qualitative assessment considered our operating results for the first nine
months of fiscal 2021 in comparison to prior years as well as its anticipated
fourth quarter results and fiscal 2022 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 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.
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-------------------------------------------------------------------------------- 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 and 2019 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. During fiscal 2021, we reduced our valuation allowance on the basis of our reassessment of the amount of our deferred tax assets that are more likely than not to be realized. 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, 2021 , we had net operating loss carryforwards of approximately$69.4 million for federal tax purposes,$61.8 million for state tax purposes, and$0.8 million for foreign 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 partially reserved for as part of our valuation allowance. Of these tax attributes,$8.4 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$123.6 million net operating loss and tax credit carryforwards will begin to expire in varying amounts between 2022 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, 2021 , the balance of gross unrecognized tax benefits was approximately$0.3 million , all of which would reduce our effective tax rate if recognized. We believe that our estimates and judgments discussed herein are reasonable, however, actual results could differ, which could result in gains or losses that could be material.
Recent Accounting Pronouncements
See Note 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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