##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 001-33887
 Orion Energy Systems, Inc.
 (Exact name of Registrant as specified in its charter)
 Wisconsin
    
    39-1847269(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification number)2001 Mirro Drive, Manitowoc, Wisconsin
    
    54220(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (920) 892-9340
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



Orion Energy Systems, Inc.
 Quarterly Report On Form 10-Q
 For The Quarter Ended December 31, 2008
 Table Of Contents
 Page(s)PART I FINANCIAL INFORMATION
    
    
    3ITEM 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2008 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months
Ended December 31, 2007 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended
December 31, 2007 and 2008
    
    
    5Notes to the Condensed Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27ITEM 4. Controls and Procedures
    
    
    27PART II OTHER INFORMATION
    
    
    27ITEM 1. Legal Proceedings
    
    
    27ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28ITEM 5. Other Information
    
    
    28ITEM 6. Exhibits
    
    
    29SIGNATURES
    
    
    30EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1: Financial Statements
 ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts)
(Unaudited)
 (Unaudited)March 31,
    
    
    December 31,2008
    
    
    2008AssetsCash and cash equivalents
    
    $
    78,312
    
    
    $
    24,175Short-term investments
    
    
    2,404
    
    
    
    24,692Accounts receivable, net of allowances of $79 and $111
    
    
    17,666
    
    
    
    19,144Inventories, net
    
    
    16,789
    
    
    
    18,592Deferred tax assets
    
    
    286
    
    
    
    472Prepaid expenses and other current assets
    
    
    1,439
    
    
    
    2,616Total current assets
    
    
    116,896
    
    
    
    89,691Property and equipment, net
    
    
    11,539
    
    
    
    20,949Patents and licenses, net
    
    
    388
    
    
    
    1,400Investment
    
    
    794
    
    
    
    Deferred tax assets
    
    
    1,000
    
    
    
    888Other long-term assets
    
    
    85
    
    
    
    360Total assets
    
    $
    130,702
    
    
    $
    113,288Liabilities and Shareholders EquityAccounts payable
    
    $
    7,521
    
    
    $
    8,963Accrued expenses
    
    
    4,242
    
    
    
    2,614Current maturities of long-term debt
    
    
    843
    
    
    
    868Total current liabilities
    
    
    12,606
    
    
    
    12,445Long-term debt, less current maturities
    
    
    4,473
    
    
    
    3,813Other long-term liabilities
    
    
    433
    
    
    
    429Total liabilities
    
    
    17,512
    
    
    
    16,687Commitments and contingencies (See Note F)Shareholders equity:Preferred stock, $0.01 par value: Shares authorized: 30,000,000 shares at March 31, 2008
and December 31, 2008Common stock, no par value: Shares authorized: 200,000,000 at March 31, 2008 and December
31, 2008; shares issued: 27,339,414 and 28,253,773 at March 31, 2008 and December 31,
2008; shares outstanding: 26,963,408 and 22,618,553 at March 31, 2008 and December 31,
2008
    
    
    
    
    
    
    Additional paid-in capital
    
    
    114,090
    
    
    
    118,282Treasury stock: 376,006 common shares at March 31, 2008 and 5,635,220 at December 31, 2008
    
    
    (1,739
    )
    
    
    (24,180
    )Accumulated other comprehensive (loss) income
    
    
    (6
    )
    
    
    13Retained earnings
    
    
    845
    
    
    
    2,486Total shareholders equity
    
    
    113,190
    
    
    
    96,601Total liabilities and shareholders equity
    
    $
    130,702
    
    
    $
    113,288
  3




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##### Table of Contents



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share amounts)
 (Unaudited)
 Three Months Ended December 31,
    
    
    Nine Months Ended December 31,2007
    
    
    2008
    
    
    2007
    
    
    2008Product revenue
    
    $
    18,934
    
    
    $
    20,671
    
    
    $
    47,686
    
    
    $
    50,840Service revenue
    
    
    4,377
    
    
    
    1,704
    
    
    
    10,751
    
    
    
    6,401Total revenue
    
    
    23,311
    
    
    
    22,375
    
    
    
    58,437
    
    
    
    57,241Cost of product revenue
    
    
    12,224
    
    
    
    13,644
    
    
    
    31,044
    
    
    
    33,724Cost of service revenue
    
    
    2,833
    
    
    
    1,311
    
    
    
    7,214
    
    
    
    4,565Total cost of revenue
    
    
    15,057
    
    
    
    14,955
    
    
    
    38,258
    
    
    
    38,289Gross profit
    
    
    8,254
    
    
    
    7,420
    
    
    
    20,179
    
    
    
    18,952Operating expenses:General and administrative
    
    
    3,288
    
    
    
    2,438
    
    
    
    6,766
    
    
    
    7,946Sales and marketing
    
    
    2,260
    
    
    
    2,741
    
    
    
    6,309
    
    
    
    8,164Research and development
    
    
    454
    
    
    
    347
    
    
    
    1,334
    
    
    
    1,138Total operating expenses
    
    
    6,002
    
    
    
    5,526
    
    
    
    14,409
    
    
    
    17,248Income from operations
    
    
    2,252
    
    
    
    1,894
    
    
    
    5,770
    
    
    
    1,704Other income (expense):Interest expense
    
    
    (648
    )
    
    
    (33
    )
    
    
    (1,272
    )
    
    
    (141
    )Dividend and interest income
    
    
    286
    
    
    
    325
    
    
    
    480
    
    
    
    1,492Total other income (expense)
    
    
    (362
    )
    
    
    292
    
    
    
    (792
    )
    
    
    1,351Income before income tax
    
    
    1,890
    
    
    
    2,186
    
    
    
    4,978
    
    
    
    3,055Income tax expense
    
    
    737
    
    
    
    1,032
    
    
    
    2,023
    
    
    
    1,414Net income
    
    
    1,153
    
    
    
    1,154
    
    
    
    2,955
    
    
    
    1,641Accretion of redeemable preferred stock
and preferred stock dividends
    
    
    (75
    )
    
    
    
    
    
    
    (225
    )
    
    
    Participation rights of preferred stock
in undistributed earnings
    
    
    (264
    )
    
    
    
    
    
    
    (775
    )
    
    
    Net income attributable to common
shareholders
    
    $
    814
    
    
    $
    1,154
    
    
    $
    1,955
    
    
    $
    1,641Basic net income per share attributable
to common shareholders
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.17
    
    
    $
    0.06Weighted-average common shares outstanding
    
    
    13,889,162
    
    
    
    25,203,827
    
    
    
    11,774,702
    
    
    
    26,398,338Diluted net income per share attributable
to common shareholders
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.14
    
    
    $
    0.06Weighted-average common shares and share
equivalents outstanding
    
    
    22,858,230
    
    
    
    26,414,750
    
    
    
    20,752,432
    
    
    
    28,710,765
  4




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##### Table of Contents



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (Unaudited)
 Nine Months Ended December 31,2007
    
    
    2008Operating activitiesNet income
    
    $
    2,955
    
    
    $
    1,641Adjustments to reconcile net income to net cash used in
operating activities:Depreciation and amortization
    
    
    1,089
    
    
    
    1,337Stock-based compensation expense
    
    
    929
    
    
    
    1,204Deferred income tax benefit
    
    
    565
    
    
    
    1,340Other
    
    
    38
    
    
    
    78Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,130
    )
    
    
    (1,484
    )Inventories
    
    
    (7,822
    )
    
    
    (1,804
    )Prepaid expenses and other current assets
    
    
    (785
    )
    
    
    (2,473
    )Accounts payable
    
    
    2,032
    
    
    
    1,442Accrued expenses
    
    
    2,014
    
    
    
    (1,749
    )Net cash used in operating activities
    
    
    (2,115
    )
    
    
    (468
    )Investing activitiesPurchase of property and equipment
    
    
    (1,876
    )
    
    
    (10,630
    )Purchase of short-term investments
    
    
    
    
    
    
    (22,270
    )Additions to patents and licenses
    
    
    (132
    )
    
    
    (1,090
    )Proceeds from sales of long term assets
    
    
    
    
    
    
    860Gain on sale of long term investment
    
    
    
    
    
    
    (361
    )Net decrease in amount due from shareholder
    
    
    187
    
    
    
    Net cash used in investing activities
    
    
    (1,821
    )
    
    
    (33,491
    )Financing activitiesProceeds from issuance of long-term debt
    
    
    11,302
    
    
    
    Payment of long-term debt
    
    
    (531
    )
    
    
    (633
    )Repurchase of common stock into treasury
    
    
    
    
    
    
    (22,441
    )Proceeds from shareholder notes receivable, net
    
    
    750
    
    
    
    Net activity in revolving line of credit
    
    
    (6,064
    )
    
    
    Excess benefit for deferred taxes on stock-based compensation
    
    
    1,230
    
    
    
    1,453Deferred financing costs and offering costs
    
    
    (256
    )
    
    
    7Proceeds from initial public offering, net of issuance costs
    
    
    78,627
    
    
    
    Proceeds from exercise of stock options and warrants
    
    
    1,888
    
    
    
    1,436Net cash provided by (used in) financing activities
    
    
    86,946
    
    
    
    (20,178
    )Net increase (decrease) in cash and cash equivalents
    
    
    83,010
    
    
    
    (54,137
    )Cash and cash equivalents at beginning of period
    
    
    285
    
    
    
    78,312Cash and cash equivalents at end of period
    
    $
    83,295
    
    
    $
    24,175Supplemental cash flow information:Cash paid for interest
    
    $
    914
    
    
    $
    272Cash paid for income taxes
    
    
    379
    
    
    
    121Supplemental disclosure of non-cash investing and financing
activitiesLong term note receivable received on sale of investment
    
    $
    
    
    
    $
    298Shares surrendered for payment of stock note receivable
    
    
    1,378
    
    
    
    Conversion of debt to common stock
    
    
    10,762
    
    
    
    Conversion of redeemable preferred stock and accrued
dividends to
common stock
    
    
    10,714
    
    
    
    Preferred stock accretion
    
    
    225
    
    
    
    
  5




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##### Table of Contents



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A  DESCRIPTION OF BUSINESS
 Organization
  Initial Public Offering
  NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Basis of Presentation
    Use of Estimates
  6




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##### Table of Contents



Cash and cash equivalents
  Short-term investments available for sale
  December 31, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    
    
    
    
    Cash and Cash
    
    
    Short TermCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    Equivalents
    
    
    InvestmentsMoney market funds
    
    $
    17,318
    
    
    $
    
    
    
    $
    
    
    
    $
    17,318
    
    
    $
    17,318
    
    
    $
    Bank certificate of deposit
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    700
    
    
    
    6,300Commercial paper
    
    
    6,596
    
    
    
    83
    
    
    
    
    
    
    
    6,679
    
    
    
    3,000
    
    
    
    3,679Corporate obligations
    
    
    2,257
    
    
    
    
    
    
    
    (11
    )
    
    
    2,246
    
    
    
    
    
    
    
    2,246Government agency obligations
    
    
    14,501
    
    
    
    24
    
    
    
    
    
    
    
    14,525
    
    
    
    2,058
    
    
    
    12,467Total
    
    $
    47,672
    
    
    $
    107
    
    
    $
    (11
    )
    
    $
    47,768
    
    
    $
    23,076
    
    
    $
    24,692
 March 31, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    
    
    
    
    Cash and Cash
    
    
    Short TermCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    Equivalents
    
    
    InvestmentsMoney market funds
    
    $
    63,356
    
    
    $
    
    
    
    $
    
    
    
    $
    63,356
    
    
    $
    63,356
    
    
    $
    Commercial paper
    
    
    14,466
    
    
    
    7
    
    
    
    
    
    
    
    14,473
    
    
    
    14,473
    
    
    
    Government agency obligations
    
    
    2,410
    
    
    
    
    
    
    
    (6
    )
    
    
    2,404
    
    
    
    
    
    
    
    2,404Total
    
    $
    80,232
    
    
    $
    7
    
    
    $
    (6
    )
    
    $
    80,233
    
    
    $
    77,829
    
    
    $
    2,404
 Fair Value Measurements Effective Date of FASB Statement No. 157
     Fair value of financial instruments
  7




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##### Table of Contents



Accounts receivable
   2009
    
    $
    1402010
    
    
    33Total gross receivable
    
    
    173Less: amount representing interest
    
    
    (9
    )Net contracts receivable
    
    $
    164
 Inventories
    March 31,
    
    
    December 31,2008
    
    
    2008Raw materials and components
    
    $
    9,948
    
    
    $
    10,630Work in process
    
    
    680
    
    
    
    1,024Finished goods
    
    
    6,161
    
    
    
    6,938$
    16,789
    
    
    $
    18,592
 Property and Equipment
  March 31,
    
    
    December 31,2008
    
    
    2008Land and land improvements
    
    $
    703
    
    
    $
    822Buildings
    
    
    4,803
    
    
    
    5,390Furniture, fixtures and office equipment
    
    
    2,256
    
    
    
    2,591Plant equipment
    
    
    4,543
    
    
    
    6,568Construction in progress
    
    
    2,918
    
    
    
    10,10415,223
    
    
    
    25,475Less: accumulated depreciation and amortization
    
    
    (3,684
    )
    
    
    (4,526
    )Net property and equipment
    
    $
    11,539
    
    
    $
    20,949
 8




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##### Table of Contents



March 31,
    
    
    December 31,2008
    
    
    2008Equipment
    
    $
    1,206
    
    
    $
    1,154Less: accumulated amortization
    
    
    (433
    )
    
    
    (493
    )Net equipment
    
    $
    773
    
    
    $
    661
  Patents and Licenses
  Investment
  Other Long-Term Assets
  Accrued Expenses
    Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2008
    
    
    2007
    
    
    2008Beginning of period
    
    $
    187
    
    
    $
    46
    
    
    $
    45
    
    
    $
    69Provision to cost of revenue
    
    
    2
    
    
    
    10
    
    
    
    233
    
    
    
    35Charges
    
    
    (95
    )
    
    
    (1
    )
    
    
    (184
    )
    
    
    (49
    )End of period
    
    $
    94
    
    
    $
    55
    
    
    $
    94
    
    
    $
    55
 Revenue Recognition
 Revenue Recognition
 
    
    persuasive evidence of an arrangement exists;
    
    delivery has occurred and title has passed to the customer;
    
    the sales price is fixed and determinable and no further obligation exists; and
    
    collectability is reasonably assured
  Revenue Arrangements With Multiple Deliverables
  9




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##### Table of Contents



March 31,
    
    
    December 31,2008
    
    
    2008Deferred revenue  current liability
    
    $
    134
    
    
    $
    116Deferred revenue  long term liability
    
    
    41
    
    
    
    32Total deferred revenue
    
    $
    175
    
    
    $
    148
 Income Taxes
 Accounting for Income Taxes Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No.
109.
  Nine Months EndedDecember 31, 2008Unrecognized tax benefits upon adoption on March 31, 2008
    
    $
    392Decreases relating to settlements with tax authorities
    
    
    (5
    )Additions based on tax positions related to the current
period positions
    
    
    10Unrecognized tax benefits as of December 31, 2008
    
    $
    397
 10




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##### Table of Contents



Year Ended
    
    Nine Months EndedMarch 31, 2008
    
    December 31, 2008Statutory federal tax rate
    
    
    34.00
    %
    
    
    34.00
    %State taxes, net
    
    
    4.20
    %
    
    
    5.89
    %Incentive stock options
    
    
    2.70
    %
    
    
    6.05
    %Federal tax credit
    
    
    (1.50
    )%
    
    
    (0.77
    )%State tax credit
    
    
    (1.00
    )%
    
    
    0.00
    %Other, net
    
    
    (0.30
    )%
    
    
    1.13
    %Effective income tax rate
    
    
    38.10
    %
    
    
    46.30
    %
   Stock Option Plans
  Three months Ended December 31,
    
    Nine months Ended December 31,2007
    
    2008
    
    2007
    
    2008Weighted average expected term
    
    
    N/A
    
    
    5.2 years
    
    6.6 years
    
    5.6 yearsRisk-free interest rate
    
    
    N/A
    
    
    
    2.19
    %
    
    
    4.66
    %
    
    
    3.15
    %Expected volatility
    
    
    N/A
    
    
    
    60
    %
    
    
    60
    %
    
    
    60
    %Expected forfeiture rate
    
    
    N/A
    
    
    
    2
    %
    
    
    6
    %
    
    
    2
    %Expected dividend yield
    
    
    N/A
    
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Net Income per Common Share
  Participating Securities and the Two-Class Method under FASB Statement No.
128
  11




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(in thousands except share amounts)
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Numerator:Net income
    
    $
    1,153
    
    
    $
    1,154
    
    
    $
    2,955
    
    
    $
    1,641Accretion of redeemable preferred stock and preferred stock dividends
    
    
    (75
    )
    
    
    
    
    
    
    (225
    )
    
    
    Participation rights of preferred stock in undistributed earnings
    
    
    (264
    )
    
    
    
    
    
    
    (775
    )
    
    
    Numerator for basic net income per common share
    
    
    814
    
    
    
    1,154
    
    
    
    1,955
    
    
    
    1,641Adjustment for interest, net of income tax effect
    
    
    89
    
    
    
    
    
    
    
    149
    
    
    
    Preferred stock dividends and participation rights of preferred stock
    
    
    334
    
    
    
    
    
    
    
    1,000
    
    
    
    Numerator for diluted net income per common share
    
    $
    1,237
    
    
    $
    1,154
    
    
    $
    3,104
    
    
    $
    1,641Denominator:Weighted-average common shares outstanding
    
    
    13,889,162
    
    
    
    25,203,827
    
    
    
    11,774,702
    
    
    
    26,398,338Weighted-average effect of preferred stock, restricted stock,
convertible notes and assumed conversion of stock options and
warrants
    
    
    8,969,068
    
    
    
    1,210,923
    
    
    
    8,977,730
    
    
    
    2,312,427Weighted-average common shares and common share equivalents
outstanding
    
    
    22,858,230
    
    
    
    26,414,750
    
    
    
    20,752,432
    
    
    
    28,710,765
 Concentration of Credit Risk and Other Risks and Uncertainties
     Segment Information
 Disclosures about Segments of an Enterprise and Related Information
  Recent Accounting Pronouncements
  12




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial Statements  An Amendment to ARB No. 51
 Determination of Useful
Life of Intangible Assets (FSP FAS 142-3),
 The Hierarchy of Generally Accepted Accounting
Principles. The Meaning of
Presented Fairly in Conformity with Generally Accepted Accounting Principles
 Disclosures by Public Entities (Enterprises) about Transfers of Financial
Assets and Interests in Variable Interest Entities.
 NOTE C  RELATED PARTY TRANSACTIONS
       13




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##### Table of Contents



NOTE D  LONG-TERM DEBT
  March 31,
    
    
    December 31,2008
    
    
    2008Term note
    
    $
    1,440
    
    
    $
    1,288First mortgage note payable
    
    
    1,045
    
    
    
    1,007Debenture payable
    
    
    922
    
    
    
    895Lease obligations
    
    
    536
    
    
    
    302Other long-term debt
    
    
    1,373
    
    
    
    1,189Total long-term debt
    
    
    5,316
    
    
    
    4,681Less current maturities
    
    
    (843
    )
    
    
    (868
    )Long-term debt, less current maturities
    
    $
    4,473
    
    
    $
    3,813
 Revolving Credit Agreement
     NOTE E  INCOME TAXES
  14




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NOTE F  COMMITMENTS AND CONTINGENCIES
 Operating Leases and Purchase Commitments
  Litigation
    NOTE G  SHAREHOLDERS EQUITY
 Share Repurchase Program
  15




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NOTE H  STOCK OPTIONS AND WARRANTS
    Three months ended December 31,
    
    
    Nine months ended December 31,2007
    
    
    2008
    
    
    2007
    
    
    2008Cost of product revenue
    
    $
    24
    
    
    $
    68
    
    
    $
    68
    
    
    $
    198General and administrative
    
    
    185
    
    
    
    121
    
    
    
    565
    
    
    
    546Sales and marketing
    
    
    157
    
    
    
    157
    
    
    
    267
    
    
    
    428Research and development
    
    
    13
    
    
    
    12
    
    
    
    29
    
    
    
    32Total
    
    $
    379
    
    
    $
    358
    
    
    $
    929
    
    
    $
    1,204
   Options OutstandingWeightedWeighted
    
    AverageShares
    
    
    
    
    
    Average
    
    Remaining
    
    AggregateAvailable for
    
    Number
    
    Exercise
    
    Contractual
    
    Intrinsic(In thousands, except per share amounts)
    
    Grant
    
    of Shares
    
    Price
    
    Term (in years)
    
    valueBalance at March 31, 2008
    
    
    1,482
    
    
    
    4,716
    
    
    $
    2.30Granted
    
    
    (634
    )
    
    
    634
    
    
    $
    8.04Cancelled or expired
    
    
    290
    
    
    
    (290
    )
    
    $
    6.17Exercised
    
    
    
    
    
    
    (827
    )
    
    $
    1.53Balance at December 31, 2008
    
    
    1,138
    
    
    
    4,233
    
    
    $
    3.05
    
    
    
    6.4
    
    
    $
    12,141Exercisable at December 31, 2008
    
    
    
    
    
    
    2,093
    
    
    $
    1.74
    
    
    
    4.6
    
    
    $
    7,688
   Non-vested at March 31, 2008
    
    
    2,307Granted
    
    
    634Vested
    
    
    (528
    )Forfeited
    
    
    (273
    )Non-vested at December 31, 2008
    
    
    2,140
 16




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##### Table of Contents



WeightedAverageNumber of
    
    ExerciseShares
    
    PriceBalance at March 31, 2008
    
    
    578,788
    
    
    $
    2.31Issued
    
    
    
    
    
    
    Exercised
    
    
    (73,580
    )
    
    
    2.33Cancelled
    
    
    
    
    
    
    Balance at December 31, 2008
    
    
    505,208
    
    
    $
    2.31
  Number ofExercise Price
    
    Warrants
    
    Expiration$2.25
    
    
    38,980
    
    
    Fiscal 2014$2.30
    
    
    428,968
    
    
    Fiscal 2010$2.50
    
    
    37,260
    
    
    Fiscal 2011Total
    
    
    505,208
 NOTE I  SUBSEQUENT EVENTS
 Shareholder Rights Plan
     17




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Wisconsin Department of Commerce loan and grant agreement
  
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations should
be read together with our unaudited condensed consolidated financial statements and related notes
included elsewhere in the Form 10-Q . It should also be read in conjunction with our audited
consolidated financial statements and related notes included in our Annual Report on Form 10-K for
the year ended March 31, 2008.
 Cautionary Note Regarding Forward-Looking Statements
  Overview
     18




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Revenue and Expense Components
 Revenue.
     19




---



##### Table of Contents



Backlog.
 Cost of Revenue.
 Gross Margin.
 Operating Expenses.
     20




---



##### Table of Contents



Share-Based Payment
 Interest Expense.
 Dividend and Interest Income.
 Income Taxes.
  21




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##### Table of Contents



Results of Operations
  Three Months Ended December 31,
    
    
    Nine Months Ended December 31,2007
    
    
    2008
    
    
    
    
    
    
    2007
    
    
    2008% of
    
    
    
    
    
    
    % of
    
    
    %
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    %Amount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Change
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    ChangeProduct revenue
    
    $
    18,934
    
    
    
    81.2
    %
    
    $
    20,671
    
    
    
    92.4
    %
    
    
    9.2
    %
    
    $
    47,686
    
    
    
    81.6
    %
    
    $
    50,840
    
    
    
    88.8
    %
    
    
    6.6
    %Service revenue
    
    
    4,377
    
    
    
    18.8
    %
    
    
    1,704
    
    
    
    7.6
    %
    
    
    (61.1
    )%
    
    
    10,751
    
    
    
    18.4
    %
    
    
    6,401
    
    
    
    11.2
    %
    
    
    (40.5
    )%Total revenue
    
    
    23,311
    
    
    
    100.0
    %
    
    
    22,375
    
    
    
    100.0
    %
    
    
    (4.0
    )%
    
    
    58,437
    
    
    
    100.0
    %
    
    
    57,241
    
    
    
    100.0
    %
    
    
    (2.0
    )%Cost of product revenue
    
    
    12,224
    
    
    
    52.4
    %
    
    
    13,644
    
    
    
    61.0
    %
    
    
    11.6
    %
    
    
    31,044
    
    
    
    53.1
    %
    
    
    33,724
    
    
    
    58.9
    %
    
    
    8.6
    %Cost of service revenue
    
    
    2,833
    
    
    
    12.2
    %
    
    
    1,311
    
    
    
    5.9
    %
    
    
    (53.7
    )%
    
    
    7,214
    
    
    
    12.3
    %
    
    
    4,565
    
    
    
    8.0
    %
    
    
    (36.7
    )%Total cost of revenue
    
    
    15,057
    
    
    
    64.6
    %
    
    
    14,955
    
    
    
    66.8
    %
    
    
    (0.7
    )%
    
    
    38,258
    
    
    
    65.5
    %
    
    
    38,289
    
    
    
    66.9
    %
    
    
    0.1
    %Gross profit
    
    
    8,254
    
    
    
    35.4
    %
    
    
    7,420
    
    
    
    33.2
    %
    
    
    (10.1
    )%
    
    
    20,179
    
    
    
    34.5
    %
    
    
    18,952
    
    
    
    33.1
    %
    
    
    (6.1
    )%General and administrative expenses
    
    
    3,288
    
    
    
    14.1
    %
    
    
    2,438
    
    
    
    10.9
    %
    
    
    (25.9
    )%
    
    
    6,766
    
    
    
    11.6
    %
    
    
    7,946
    
    
    
    13.9
    %
    
    
    17.4
    %Sales and marketing expenses
    
    
    2,260
    
    
    
    9.7
    %
    
    
    2,741
    
    
    
    12.3
    %
    
    
    21.3
    %
    
    
    6,309
    
    
    
    10.8
    %
    
    
    8,164
    
    
    
    14.3
    %
    
    
    29.4
    %Research and development expenses
    
    
    454
    
    
    
    1.9
    %
    
    
    347
    
    
    
    1.6
    %
    
    
    (23.6
    )%
    
    
    1,334
    
    
    
    2.3
    %
    
    
    1,138
    
    
    
    2.0
    %
    
    
    (14.7
    )%Income from operations
    
    
    2,252
    
    
    
    9.7
    %
    
    
    1,894
    
    
    
    8.4
    %
    
    
    (15.9
    )%
    
    
    5,770
    
    
    
    9.8
    %
    
    
    1,704
    
    
    
    2.9
    %
    
    
    (70.5
    )%Interest expense
    
    
    648
    
    
    
    2.8
    %
    
    
    33
    
    
    
    0.1
    %
    
    
    (94.9
    )%
    
    
    1,272
    
    
    
    2.2
    %
    
    
    141
    
    
    
    0.2
    %
    
    
    (88.9
    )%Dividend and interest income
    
    
    286
    
    
    
    1.2
    %
    
    
    325
    
    
    
    1.5
    %
    
    
    13.6
    %
    
    
    480
    
    
    
    .8
    %
    
    
    1,492
    
    
    
    2.6
    %
    
    
    210.8
    %Income before income tax
    
    
    1,890
    
    
    
    8.1
    %
    
    
    2,186
    
    
    
    9.8
    %
    
    
    15.7
    %
    
    
    4,978
    
    
    
    8.4
    %
    
    
    3,055
    
    
    
    5.3
    %
    
    
    (38.6
    )%Income tax expense
    
    
    737
    
    
    
    3.2
    %
    
    
    1,032
    
    
    
    4.6
    %
    
    
    40.0
    %
    
    
    2,023
    
    
    
    3.5
    %
    
    
    1,414
    
    
    
    2.5
    %
    
    
    (30.1
    )%Net income
    
    
    1,153
    
    
    
    4.9
    %
    
    
    1,154
    
    
    
    5.2
    %
    
    
    0.1
    %
    
    
    2,955
    
    
    
    4.9
    %
    
    
    1,641
    
    
    
    2.8
    %
    
    
    (44.4
    )%Accretion of redeemable preferred stock and
preferred stock dividends
    
    
    (75
    )
    
    
    (.3
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    100.0
    %
    
    
    (225
    )
    
    
    (.4
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    100.0
    %Participation rights of preferred stock in
undistributed earnings
    
    
    (264
    )
    
    
    (1.1
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    100.0
    %
    
    
    (775
    )
    
    
    (1.3
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    100.0
    %Net income attributable to common shareholders
    
    $
    814
    
    
    
    3.5
    %
    
    $
    1,154
    
    
    
    5.2
    %
    
    
    40.9
    %
    
    $
    1,955
    
    
    
    3.2
    %
    
    $
    1,641
    
    
    
    2.8
    %
    
    
    (16.2
    )%
 Revenue.
 Cost of Revenue and Gross Margin.
 Operating Expenses
 General and Administrative.
 22




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##### Table of Contents



Sales and Marketing.
  Research and Development.
 Interest Expense.
 Dividend and Interest Income.
 Income Taxes.
 23




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##### Table of Contents



Liquidity and Capital Resources
 Overview
   Cash Flows
  Nine Months EndedDecember 31,2007
    
    
    2008Operating activities
    
    $
    (2,115
    )
    
    $
    (468
    )Investing activities
    
    
    (1,821
    )
    
    
    (33,491
    )Financing activities
    
    
    86,946
    
    
    
    (20,178
    )Increase (decrease) in cash and cash equivalents
    
    $
    83,010
    
    
    $
    (54,137
    )
 Cash Flows Related to Operating Activities.
   Cash Flows Related to Investing Activities.
 24




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##### Table of Contents



Cash Flows Related to Financing Activities.
  Working Capital
   Indebtedness
     25




---



##### Table of Contents



Capital Spending
  Contractual Obligations and Commitments
  Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsBank debt obligations
    
    $
    4,681
    
    
    $
    868
    
    
    $
    1,290
    
    
    $
    1,136
    
    
    $
    1,387Cash interest payments on debt
    
    
    1,198
    
    
    
    241
    
    
    
    366
    
    
    
    236
    
    
    
    355Operating lease obligations
    
    
    3,166
    
    
    
    1,075
    
    
    
    1,337
    
    
    
    743
    
    
    
    11Purchase order and cap-ex commitments (1)
    
    
    5,457
    
    
    
    4,282
    
    
    
    1,175
    
    
    
    
    
    
    
    Total
    
    $
    14,502
    
    
    $
    6,466
    
    
    $
    4,168
    
    
    $
    2,115
    
    
    $
    1,753
 
 (1)
    
    Reflects non-cancellable purchase order commitment in the amount of $3.8 million for certain
inventory items entered into in order to secure better pricing and ensure materials on hand
and capital expenditure commitments in the amount of $1.7 million for construction of the new
technology center at our Manitowoc facility, improvements to information technology systems
and manufacturing equipment and tooling. Off-Balance Sheet Arrangements
  Inflation
  Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
  26




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
     27




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (b) Use of Proceeds
  
 ITEM 5. OTHER INFORMATION
 Statistical Data
  Cumulative FromDecember 1, 2001Through December 31, 2008(in thousands, unaudited)HIF lighting systems sold(1)
    
    
    1,419Total units sold (including HIF lighting systems)
    
    
    1,825Customer kilowatt demand reduction(2)
    
    
    423Customer kilowatt hours saved(2)(3)
    
    
    6,683,363Customer electricity costs saved(4)
    
    $
    514,619Indirect carbon dioxide emission reductions from customers energy savings (tons)(5)
    
    
    4,389Square footage retrofitted(6)
    
    
    725,679
 
 (1)
    
    HIF lighting systems includes all HIF units sold under the brand name Compact Modular and
its predecessor, Illuminator.(2)
    
    A substantial majority of our HIF lighting systems, which generally operate at approximately
224 watts per six-lamp fixture, are installed in replacement of HID fixtures, which generally
operate at approximately 465 watts per fixture in commercial and industrial applications. We
calculate that each six-lamp HIF lighting system we install in replacement of an HID fixture
generally reduces electricity consumption by approximately 241 watts (the difference between
465 watts and 224 watts). In retrofit projects where we replace fixtures other than HID
fixtures, or where we replace fixtures with products other than our HIF lighting systems
(which other products generally consist of products with lamps similar to those used in our
HIF systems, but with varying frames, ballasts or power packs), we generally achieve similar
wattage reductions (based on an analysis of the operating wattages of each of our fixtures
compared to the operating wattage of the fixtures they typically replace). We calculate the
amount of kilowatt demand reduction by multiplying (i) 0.241 kilowatts per six-lamp equivalent
unit we install by (ii) the number of units we have installed in the period presented,
including products other than our HIF lighting systems (or a total of approximately 1.68
million units).(3)
    
    We calculate the number of kilowatt hours saved on a cumulative basis by assuming the
reduction of 0.241 kilowatts of electricity consumption per six-lamp equivalent unit we
install and assuming that each such unit has averaged 7,500 annual operating hours since its
installation.(4)
    
    We calculate our customers electricity costs saved by multiplying the cumulative total
customer kilowatt hours saved indicated in the table by $0.077 per kilowatt hour. The national
average rate for 2007, which is the most current full year for which this information is
available, was $0.091 per kilowatt hour according to the United States Energy Information
Administration. 28




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##### Table of Contents



(5)
    
    We calculate this figure by multiplying (i) the estimated amount of carbon dioxide emissions
that result from the generation of one kilowatt hour of electricity (determined using the
Emissions and Generation Resource Integration Database, or EGrid, prepared by the United
States Environmental Protection Agency), by (ii) the number of customer kilowatt hours saved
as indicated in the table. The calculation of indirect carbon dioxide emissions reductions
reflects the most recent Environmental Protection Agency eGrid data.(5)
    
    Based on 1.825 million total units sold, which contain a total of approximately 9.1 million
lamps. Each lamp illuminates approximately 75 square feet. The majority of our installed
fixtures contain six lamps and typically illuminate approximately 450 square feet. Executive Employment Agreement
   
 ITEM 6. EXHIBITS
 (a) Exhibits
 10.1
    
    Executive Employment and Severance Agreement, dated February 4, 2009, by and between
Orion Energy Systems, Inc. and Patricia A. Verfuerth.31.1
    
    Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule
13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.31.2
    
    Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule
13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.32.1
    
    Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule
13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule
13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 29




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##### Table of Contents



SIGNATURE
  ORION ENERGY SYSTEMS, INC.
RegistrantBy /s/ Scott R. JensenScott R. JensenChief Financial Officer 30




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##### Table of Contents



Exhibit Index to Form 10-Q for the Period Ended December 31, 2008
 10.1
    
    Executive Employment and Severance Agreement, dated February 4, 2009, by and between Orion
Energy Systems, Inc. and Patricia A. Verfuerth.
 31.1
    
    Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule
13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
 31.2
    
    Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule
13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
 32.1
    
    Certification of Chief Executive Officer of Orion Energy Systems, Inc. pursuant to Rule
13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 32.2
    
    Certification of Chief Financial Officer of Orion Energy Systems, Inc. pursuant to Rule
13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 31