##### 



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, 2007
 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)1204 Pilgrim Road, Plymouth, Wisconsin
    
    53073(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (920) 892-9340
 o þ
  o o þ o
  o þ




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##### 



Orion Energy Systems, Inc.
 Quarterly Report On Form 10-Q
 For The Quarter Ended December 31, 2007
 Table Of Contents
 Page(s)PART I FINANCIAL INFORMATIONITEM 1.
    
    Financial
Statements(Unaudited)
    
    
    3Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2007 and December
31, 2007
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine
Months Ended December 31, 2006 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months
Ended December 31, 2006 and 2007
    
    
    5Notes to the Condensed Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    26ITEM 4.
    
    Controls and Procedures
    
    
    27PART II OTHER INFORMATION
    
    
    28ITEM 1.
    
    Legal Proceedings
    
    
    28ITEM 1A.
    
    Risk Factors
    
    
    28ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    36ITEM 4.
    
    Submission Of Matters To A Vote Of Security Holders
    
    
    36ITEM 5.
    
    Other Information
    
    
    37Signature
    
    
    39
  2




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##### 



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)
 March 31, 2007
    
    
    December 31, 2007AssetsCash and cash equivalents
    
    $
    285
    
    
    $
    83,295Accounts receivable, net of allowances of $89 and $106
    
    
    11,197
    
    
    
    14,415Inventories
    
    
    9,496
    
    
    
    17,318Deferred tax assets
    
    
    345
    
    
    
    664Prepaid expenses and other current assets
    
    
    1,296
    
    
    
    2,128Total current assets
    
    
    22,619
    
    
    
    117,820Property and equipment, net
    
    
    7,588
    
    
    
    8,676Patents and licenses, net
    
    
    243
    
    
    
    356Investment
    
    
    794
    
    
    
    794Deferred tax assets
    
    
    1,907
    
    
    
    1,023Other long-term assets
    
    
    432
    
    
    
    94Total assets
    
    $
    33,583
    
    
    $
    128,763Liabilities, Temporary Equity and Shareholders EquityAccounts payable
    
    $
    5,607
    
    
    $
    7,639Accrued expenses
    
    
    2,196
    
    
    
    4,419Current maturities of long-term debt
    
    
    736
    
    
    
    827Total current liabilities
    
    
    8,539
    
    
    
    12,885Long-term debt, less current maturities
    
    
    10,603
    
    
    
    4,457Other long-term liabilities
    
    
    133
    
    
    
    181Total liabilities
    
    
    19,275
    
    
    
    17,523Commitments and contingencies (See Note F)Temporary equity:Series C convertible redeemable preferred stock, $0.01 par
value: 1,818,182 shares issued and outstanding at March 31, 2007 and no
shares issued and outstanding at December 31, 2007.
    
    
    4,953
    
    
    
    Shareholders equity:Preferred stock, $0.01 par value: Shares authorized including
Series C convertible redeemable preferred stock: 20,000,000
shares at March 31, 2007 and 30,000,000 shares at December 31,
2007.Series B convertible preferred stock, $0.01
par value: 2,989,830 shares issued and
outstanding at March 31, 2007 and
no shares issued and outstanding at December 31, 2007
    
    
    5,959
    
    
    
    Common stock, no par value: Shares authorized: 80,000,000 and
200,000,000 as of March 31, 2007 and December 31, 2007; shares
issued: 12,107,573 and 27,282,338 as of March 31, 2007 and
December 31, 2007; shares outstanding: 12,038,499 and
26,906,332, as of March 31, 2007 and December 31, 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    9,438
    
    
    
    113,589Treasury stock: 69,074 and 376,006 common shares as of March 31,
2007 and December 31, 2007.
    
    
    (361
    )
    
    
    (1,739
    )Shareholder notes receivable
    
    
    (2,128
    )
    
    
    Accumulated deficit
    
    
    (3,553
    )
    
    
    (610
    )Total shareholders equity
    
    
    9,355
    
    
    
    111,240Total liabilities, temporary equity and shareholders equity
    
    $
    33,583
    
    
    $
    128,763
  3




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
 Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2006
    
    
    2007
    
    
    2006
    
    
    2007Product revenue
    
    $
    11,256
    
    
    $
    18,934
    
    
    $
    28,700
    
    
    $
    47,686Service revenue
    
    
    2,307
    
    
    
    4,377
    
    
    
    5,174
    
    
    
    10,751Total revenue
    
    
    13,563
    
    
    
    23,311
    
    
    
    33,874
    
    
    
    58,437Cost of product revenue
    
    
    7,419
    
    
    
    12,224
    
    
    
    18,841
    
    
    
    31,044Cost of service revenue
    
    
    1,781
    
    
    
    2,833
    
    
    
    3,992
    
    
    
    7,214Total cost of revenue
    
    
    9,200
    
    
    
    15,057
    
    
    
    22,833
    
    
    
    38,258Gross profit
    
    
    4,363
    
    
    
    8,254
    
    
    
    11,041
    
    
    
    20,179Operating expenses:General and administrative
    
    
    1,614
    
    
    
    3,288
    
    
    
    4,219
    
    
    
    6,766Sales and marketing
    
    
    1,551
    
    
    
    2,260
    
    
    
    4,677
    
    
    
    6,309Research and development
    
    
    257
    
    
    
    454
    
    
    
    697
    
    
    
    1,334Total operating expenses
    
    
    3,422
    
    
    
    6,002
    
    
    
    9,593
    
    
    
    14,409Income from operations
    
    
    941
    
    
    
    2,252
    
    
    
    1,448
    
    
    
    5,770Other income (expense):Interest expense
    
    
    (261
    )
    
    
    (648
    )
    
    
    (774
    )
    
    
    (1,272
    )Dividend and interest income
    
    
    16
    
    
    
    286
    
    
    
    28
    
    
    
    480Total other expense
    
    
    (245
    )
    
    
    (362
    )
    
    
    (746
    )
    
    
    (792
    )Income before income tax
    
    
    696
    
    
    
    1,890
    
    
    
    702
    
    
    
    4,978Income tax expense
    
    
    136
    
    
    
    737
    
    
    
    137
    
    
    
    2,023Net income
    
    
    560
    
    
    
    1,153
    
    
    
    565
    
    
    
    2,955Accretion of redeemable preferred stock and
preferred stock dividends
    
    
    (79
    )
    
    
    (75
    )
    
    
    (125
    )
    
    
    (225
    )Participation rights of preferred stock in
undistributed earnings
    
    
    (168
    )
    
    
    (259
    )
    
    
    (135
    )
    
    
    (775
    )Net income attributable to common
shareholders
    
    $
    313
    
    
    $
    819
    
    
    $
    305
    
    
    $
    1,955Basic net income per share attributable to
common shareholders
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.17Weighted-average common shares outstanding
    
    
    9,071,133
    
    
    
    13,889,162
    
    
    
    9,025,740
    
    
    
    11,774,702Diluted net income per share attributable to
common shareholders
    
    $
    0.03
    
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.15Weighted-average common shares and share
equivalents outstanding
    
    
    16,875,857
    
    
    
    22,858,230
    
    
    
    16,012,564
    
    
    
    20,752,432
  4




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 Nine Months EndedDecember 31,2006
    
    
    2007Operating activitiesNet income
    
    $
    565
    
    
    $
    2,955Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    793
    
    
    
    1,089Stock-based compensation expense
    
    
    185
    
    
    
    929Deferred income tax benefit
    
    
    137
    
    
    
    565Loss on sale of assets
    
    
    268
    
    
    
    2Other
    
    
    12
    
    
    
    36Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,538
    )
    
    
    (3,130
    )Inventories
    
    
    (3,729
    )
    
    
    (7,822
    )Prepaid expenses and other current assets
    
    
    (406
    )
    
    
    (785
    )Accounts payable
    
    
    305
    
    
    
    2,032Accrued expenses
    
    
    477
    
    
    
    2,014Net cash used in operating activities
    
    
    (4,931
    )
    
    
    (2,115
    )Investing activitiesPurchase of property and equipment
    
    
    (614
    )
    
    
    (1,876
    )Additions to patents and licenses
    
    
    (42
    )
    
    
    (132
    )Proceeds from disposal of equipment
    
    
    263
    
    
    
    Net decrease (increase) in amount due from shareholder
    
    
    (102
    )
    
    
    187Net cash used in investing activities
    
    
    (495
    )
    
    
    (1,821
    )Financing activitiesProceeds from issuance of long-term debt
    
    
    40
    
    
    
    11,302Payment of long-term debt
    
    
    (900
    )
    
    
    (531
    )Net activity in revolving line of credit
    
    
    110
    
    
    
    (6,064
    )Excess benefit for deferred taxes on stock-based compensation
    
    
    
    
    
    
    1,230Proceeds from shareholder notes receivable, net
    
    
    23
    
    
    
    750Deferred financing and offering costs
    
    
    
    
    
    
    (256
    )Proceeds from issuance of preferred stock, net
    
    
    5,149
    
    
    
    Proceeds from initial public offering, net of issuance costs
    
    
    
    
    
    
    78,627Proceeds from exercise of stock options and warrants
    
    
    79
    
    
    
    1,888Net cash provided by financing activities
    
    
    4,501
    
    
    
    86,946Net increase (decrease) in cash and cash equivalents
    
    
    (925
    )
    
    
    83,010Cash and cash equivalents at beginning of period
    
    
    1,089
    
    
    
    285Cash and cash equivalents at end of period
    
    $
    164
    
    
    $
    83,295
  5




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##### 



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




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    March 31,
    
    
    December 31,2007
    
    
    2007Raw materials and components
    
    $
    5,496
    
    
    $
    10,038Work in process
    
    
    358
    
    
    
    653Finished goods
    
    
    3,642
    
    
    
    6,627$
    9,496
    
    
    $
    17,318
 Property and Equipment
  March 31,
    
    
    December 31,2007
    
    
    2007Land and land improvements
    
    $
    557
    
    
    $
    560Buildings
    
    
    4,423
    
    
    
    4,611Furniture, fixtures and office equipment
    
    
    1,441
    
    
    
    1,887Plant equipment
    
    
    3,747
    
    
    
    4,132Construction in progress
    
    
    130
    
    
    
    86010,298
    
    
    
    12,050Less: accumulated depreciation and amortization
    
    
    2,710
    
    
    
    3,374Net property and equipment
    
    $
    7,588
    
    
    $
    8,676
  March 31,
    
    
    December 31,2007
    
    
    2007Equipment
    
    $
    1,451
    
    
    $
    1,206Less: accumulated amortization
    
    
    531
    
    
    
    399Net equipment
    
    $
    920
    
    
    $
    807
  Land improvements
    
    10  15 yearsBuildings
    
    10  39 yearsFurniture, fixtures and office equipment
    
    3  10 yearsPlant equipment
    
    3  10 years
  7




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Accrued Expenses
    Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2006
    
    
    2007Beginning of period
    
    $
    332
    
    
    $
    45Provision to cost of revenue
    
    
    235
    
    
    
    233Charges
    
    
    (465
    )
    
    
    (184
    )End of period
    
    $
    102
    
    
    $
    94
 Incentive Compensation
   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.


8



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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Revenue Arrangements with Multiple Deliverables
      Determining whether an Arrangement Contains a Lease Accounting for Leases Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities  a Replacement of FASB Statement No. 125
 Income Taxes
 Accounting for Income Taxes
 9




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Year ended
    
    Nine months endedMarch 31, 2007
    
    December 31, 2007Statutory federal tax rate
    
    
    34.00
    %
    
    
    34.00
    %State taxes, net
    
    
    7.90
    %
    
    
    5.23
    %Incentive Stock Options
    
    
    3.90
    %
    
    
    2.55
    %Federal Tax Credit
    
    
    (13.30
    )%
    
    
    (1.76
    )%State Tax Credit
    
    
    (16.50
    )%
    
    
    (0.40
    )%Other, net
    
    
    3.50
    %
    
    
    0.99
    %Effective Income Tax Rate
    
    
    19.50
    %
    
    
    40.61
    %
  Adoption of FIN 48
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109
   Stock Option Plans
 Share-Based Payment Accounting for Stock
Issued to Employees Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB 25 Accounting for Stock-Based Compensation as amended
by SFAS 148 Accounting for Stock-Based Compensation  Transition and Disclosure
 10




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   For the Three Months Ended
    
    For the Nine Months EndedDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,2006
    
    2007
    
    2006
    
    2007Expected term
    
    6.7 years
    
    
    
    N/A
    
    
    6.6 years
    
    
    2.4 yearsRisk-free interest rate
    
    
    4.59
    %
    
    
    N/A
    
    
    
    4.66
    %
    
    
    4.76
    %Expected volatility
    
    
    60
    %
    
    
    N/A
    
    
    
    60
    %
    
    
    60
    %Expected forfeiture rate
    
    
    6
    %
    
    
    N/A
    
    
    
    6
    %
    
    
    6
    %Expected dividend yield
    
    
    0
    %
    
    
    N/A
    
    
    
    0
    %
    
    
    0
    %
 Net Income per Common Share
  Participating Securities and the Two-Class
Method under FASB Statement No. 128
  11




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2006
    
    
    2007
    
    
    2006
    
    
    2007Numerator:Net income
    
    $
    560
    
    
    $
    1,153
    
    
    $
    565
    
    
    $
    2,955Accretion of
redeemable
preferred stock and
preferred stock
dividends
    
    
    (79
    )
    
    
    (75
    )
    
    
    (125
    )
    
    
    (225
    )Participation
rights of preferred
stock in
undistributed
earnings
    
    
    (168
    )
    
    
    (259
    )
    
    
    (135
    )
    
    
    (775
    )Numerator for
basic net
income per
common share
    
    
    313
    
    
    
    819
    
    
    
    305
    
    
    
    1,955Adjustment
for interest,
net of income
tax effect
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    149Preferred
stock
dividends and
participation
rights of
preferred
stock
    
    
    247
    
    
    
    334
    
    
    
    260
    
    
    
    1,000Numerator for
diluted net
income per
common share
    
    $
    560
    
    
    $
    1,242
    
    
    $
    565
    
    
    $
    3,104Denominator:Weighted-average common
shares
outstanding
    
    
    9,071,133
    
    
    
    13,889,162
    
    
    
    9,025,740
    
    
    
    11,774,702Weighted-average effect of
preferred
stock,
restricted
stock and
assumed
conversion of
stock options
and warrants
    
    
    7,804,724
    
    
    
    8,969,068
    
    
    
    6,986,284
    
    
    
    8,977,730Weighted-average common
share and
common share
equivalents
outstanding
    
    
    16,875,857
    
    
    
    22,858,230
    
    
    
    16,012,564
    
    
    
    20,752,432
 Concentration of Credit Risk and Other Risks and Uncertainties
     12




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Segment Information
 Disclosures about Segments of an Enterprise and Related Information
  NOTE C  RELATED PARTY TRANSACTIONS
    NOTE D  LONG-TERM DEBT
 Revolving Credit Agreement
  Block
Grant
  NOTE E  INCOME TAXES
   13




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##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  NOTE F  COMMITMENTS AND CONTINGENCIES
   NOTE G  TEMPORARY EQUITY AND SHAREHOLDERS EQUITY
  NOTE H  STOCK OPTIONS AND WARRANTS
   Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2006
    
    
    2007
    
    
    2006
    
    
    2007Cost of product revenue
    
    $
    5
    
    
    $
    24
    
    
    $
    11
    
    
    $
    68General and administrative
    
    
    27
    
    
    
    185
    
    
    
    85
    
    
    
    565Sales and marketing
    
    
    26
    
    
    
    157
    
    
    
    76
    
    
    
    267Research and development
    
    
    4
    
    
    
    13
    
    
    
    13
    
    
    
    29$
    62
    
    
    $
    379
    
    
    $
    185
    
    
    $
    929
  14




---



##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Options OutstandingWeightedWeighted
    
    AverageShares
    
    
    
    
    
    Average
    
    Remaining
    
    AggregateAvailable for
    
    Number
    
    Exercise
    
    Contractual
    
    IntrinsicGrant
    
    of Shares
    
    Price
    
    Term (in years)
    
    valueBalance at March 31, 2007
    
    
    670,700
    
    
    
    4,714,547
    
    
    $
    1.56Authorized
    
    
    1,500,000
    
    
    
    
    
    
    
    Granted
    
    
    (479,432
    )
    
    
    479,432
    
    
    
    4.25Cancelled or expired
    
    
    51,000
    
    
    
    (51,000
    )
    
    
    2.05Exercised
    
    
    
    
    
    
    (664,957
    )
    
    
    1.24Balance at December 31, 2007
    
    
    1,742,268
    
    
    
    4,478,022
    
    
    
    1.89
    
    
    
    6.6
    
    
    $
    75,827,000Exercisable at December 31,
2007
    
    
    
    
    
    
    2,056,190
    
    
    
    1.12
    
    
    
    4.3
    
    
    $
    36,416,000
   Non-vested at March 31, 2007
    
    
    2,147,034Granted
    
    
    479,432Vested
    
    
    (172,434
    )Forfeited
    
    
    (32,200
    )Non-vested at December 31, 2007
    
    
    2,421,832
   WeightedNumber of
    
    
    AverageShares
    
    
    Exercise PriceBalance at March 31, 2007
    
    
    1,109,390
    
    
    $
    2.24Issued
    
    
    
    
    
    
    Cancelled or Expired
    
    
    (3,836
    )
    
    
    1.50Exercised
    
    
    (491,902
    )
    
    
    2.16Balance at December 31, 2007
    
    
    613,652
    
    
    $
    2.31
 15




---



##### 



ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Exercise price
    
    December 31, 2007
    
    March 31, 2007
    
    Expiration$1.50
    
    
    
    
    
    
    79,236
    
    
    Fiscal 2008$2.25
    
    
    38,980
    
    
    
    221,480
    
    
    Fiscal 2014$2.30
    
    
    529,912
    
    
    
    763,914
    
    
    Fiscal 2010$2.50
    
    
    37,260
    
    
    
    37,260
    
    
    Fiscal 2011$2.60
    
    
    7,500
    
    
    
    7,500
    
    
    Fiscal 2012Total
    
    
    613,652
    
    
    
    1,109,390
 NOTE I  SUBSEQUENT EVENTS
  16




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Cautionary Note Regarding Forward-Looking Statements
 This discussion contains forward-looking statements that are based on our current expectations,
estimates and projections about our business and operations. The cautionary statements made in
this Quarterly Report on Form 10-Q should be read as applying to all related forward-looking
statements wherever they appear in this Quarterly Report on Form 10-Q . Our actual results may
differ materially from those currently anticipated and expressed in such forward-looking statements
as a result of a number of factors, including (i) our ability to compete in a highly competitive
market and our ability to respond successfully to market competition; (ii) the market acceptance of
our products and services; (iii) price fluctuations, shortages or interruptions of component
supplies and raw materials used to manufacture our products; (iv) loss of one or more key customers
or suppliers; (v) a reduction in the price of electricity; (vii) increased competition from
government subsidiaries and utility incentive programs; (viii) dependence on customers capital
budgets for sales of our products and services; (ix) our ability to effectively manage our
anticipated growth; and (x) potential warranty claims, as well as those factors we discuss in our
Registration Statement on Form S-1 (Reg. No. 333-145569), as amended, initially filed with the
Securities and Exchange Commission on August 20, 2007, and under Item 1A in this Quarterly Report
on Form 10-Q .
 You should read the following discussion together with the financial statements and the notes
thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Registration Statement
on Form S-1 .
 Overview
     Revenue and Expense Components
 Revenue.
 17




---



##### 



Cost of Revenue.
 Gross
Margin.
 18




---



##### 



Operating Expenses.
     Share-Based
Payment Accounting for
Stock Issued to Employees
  19




---



##### 



Interest Expense.
 Dividend and Interest Income.
 Income Taxes.
 Accretion of Preferred Stock and Preferred Stock Dividends.
 Results of Operations
  Three Months Ended December 31,
    
    
    
    
    
    Nine Months Ended December 312006
    
    2007
    
    
    
    
    
    2006
    
    2007% of
    
    
    
    
    
    % of
    
    %
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    %Amount
    
    Revenue
    
    Amount
    
    Revenue
    
    Change
    
    Amount
    
    Revenue
    
    Amount
    
    Revenue
    
    ChangeProduct revenue
    
    $
    11,256
    
    
    
    83.0
    %
    
    $
    18,934
    
    
    
    81.2
    %
    
    
    68.2
    %
    
    $
    28,700
    
    
    
    84.7
    %
    
    $
    47,686
    
    
    
    81.6
    %
    
    
    66.2
    %Service revenue
    
    
    2,307
    
    
    
    17.0
    %
    
    
    4,377
    
    
    
    18.8
    %
    
    
    89.7
    %
    
    
    5,174
    
    
    
    15.3
    %
    
    
    10,751
    
    
    
    18.4
    %
    
    
    107.8
    %Total revenue
    
    
    13,563
    
    
    
    100.0
    %
    
    
    23,311
    
    
    
    100.0
    %
    
    
    71.9
    %
    
    
    33,874
    
    
    
    100.0
    %
    
    
    58,437
    
    
    
    100.0
    %
    
    
    72.5
    %Cost of product revenue
    
    
    7,419
    
    
    
    54.7
    %
    
    
    12,224
    
    
    
    52.4
    %
    
    
    64.8
    %
    
    
    18,841
    
    
    
    55.6
    %
    
    
    31,044
    
    
    
    53.1
    %
    
    
    64.8
    %Cost of service revenue
    
    
    1,781
    
    
    
    13.1
    %
    
    
    2,833
    
    
    
    12.2
    %
    
    
    59.1
    %
    
    
    3,992
    
    
    
    11.8
    %
    
    
    7,214
    
    
    
    12.3
    %
    
    
    80.7
    %Total cost of revenue
    
    
    9,200
    
    
    
    67.8
    %
    
    
    15,057
    
    
    
    64.6
    %
    
    
    63.7
    %
    
    
    22,833
    
    
    
    67.4
    %
    
    
    38,258
    
    
    
    65.5
    %
    
    
    67.6
    %Gross profit
    
    
    4,363
    
    
    
    32.2
    %
    
    
    8,254
    
    
    
    35.4
    %
    
    
    89.2
    %
    
    
    11,041
    
    
    
    32.6
    %
    
    
    20,179
    
    
    
    34.5
    %
    
    
    82.8
    %General and administrative expenses
    
    
    1,614
    
    
    
    11.9
    %
    
    
    3,288
    
    
    
    14.1
    %
    
    
    103.7
    %
    
    
    4,219
    
    
    
    12.5
    %
    
    
    6,766
    
    
    
    11.6
    %
    
    
    60.4
    %Sales and marketing expenses
    
    
    1,551
    
    
    
    11.4
    %
    
    
    2,260
    
    
    
    9.7
    %
    
    
    45.7
    %
    
    
    4,677
    
    
    
    13.8
    %
    
    
    6,309
    
    
    
    10.8
    %
    
    
    34.9
    %Research and development expenses
    
    
    257
    
    
    
    2.0
    %
    
    
    454
    
    
    
    1.9
    %
    
    
    76.7
    %
    
    
    697
    
    
    
    2.0
    %
    
    
    1,334
    
    
    
    2.3
    %
    
    
    91.4
    %Income from operations
    
    
    941
    
    
    
    6.9
    %
    
    
    2,252
    
    
    
    9.7
    %
    
    
    139.3
    %
    
    
    1,448
    
    
    
    4.3
    %
    
    
    5,770
    
    
    
    9.8
    %
    
    
    298.4
    %Interest expense
    
    
    261
    
    
    
    1.9
    %
    
    
    648
    
    
    
    2.8
    %
    
    
    148.3
    %
    
    
    774
    
    
    
    2.3
    %
    
    
    1,272
    
    
    
    2.2
    %
    
    
    64.3
    %Dividend and interest income
    
    
    16
    
    
    
    .1
    %
    
    
    286
    
    
    
    1.2
    %
    
    NM
    
    
    28
    
    
    
    .1
    %
    
    
    480
    
    
    
    .8
    %
    
    NMIncome before income tax
    
    
    696
    
    
    
    5.1
    %
    
    
    1,890
    
    
    
    8.1
    %
    
    
    171.6
    %
    
    
    702
    
    
    
    2.1
    %
    
    
    4,978
    
    
    
    8.4
    %
    
    
    609
    %
 20




---



##### 



Three Months Ended December 31,
    
    
    
    
    
    Nine Months Ended December 312006
    
    2007
    
    
    
    
    
    2006
    
    2007% of
    
    
    
    
    
    % of
    
    %
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    %Amount
    
    Revenue
    
    Amount
    
    Revenue
    
    Change
    
    Amount
    
    Revenue
    
    Amount
    
    Revenue
    
    ChangeIncome tax expense
    
    $
    136
    
    
    
    1.0
    %
    
    $
    737
    
    
    
    3.2
    %
    
    
    441.9
    %
    
    $
    137
    
    
    
    .4
    %
    
    $
    2,023
    
    
    
    3.5
    %
    
    NMNet income
    
    
    560
    
    
    
    4.1
    %
    
    
    1,153
    
    
    
    4.9
    %
    
    
    105.9
    %
    
    
    565
    
    
    
    1.7
    %
    
    
    2,955
    
    
    
    5.1
    %
    
    
    422.8
    %Accretion of redeemable preferred stock and
preferred stock dividends
    
    
    (79
    )
    
    
    (.6
    )%
    
    
    (75
    )
    
    
    (.3
    )%
    
    
    5.1
    %
    
    
    (125
    )
    
    
    (.4
    )%
    
    
    (225
    )
    
    
    (.4
    )%
    
    
    (80
    )%Conversion of preferred stock
participation rights of preferred stock in
undistributed earnings
    
    
    (168
    )
    
    
    (1.2
    )%
    
    
    (259
    )
    
    
    (1.1
    )%
    
    
    (54.2
    )%
    
    
    (135
    )
    
    
    (.4
    )%
    
    
    (775
    )
    
    
    (1.4
    )%
    
    
    (474.1
    )%Net income attributable to common shareholders
    
    $
    313
    
    
    
    2.3
    %
    
    $
    819
    
    
    
    3.5
    %
    
    
    161.7
    %
    
    $
    305
    
    
    
    .9
    %
    
    $
    1,955
    
    
    
    3.3
    %
    
    
    540.9
    %
 
 NM =
    
    Not meaningful Revenue.
   Cost of Revenue.
 Gross Margin.
 General and Administrative Expenses.
 21




---



##### 



Sales and Marketing Expenses.
 Research and Development Expenses.
 Interest Expense.
 Dividend and Interest Income.
 Income Taxes.
 Accretion of Preferred Stock and Preferred Stock Dividends.
 Liquidity and Capital Resources
 Overview
  Cash Flows
  Nine Months EndedDecember 31,2006
    
    
    2007(Unaudited)Cash flows used in operating activities
    
    $
    (4,931
    )
    
    $
    (2,115
    )Cash flows used in investing activities
    
    
    (495
    )
    
    
    (1,821
    )Cash flows provided by financing activities
    
    
    4,501
    
    
    
    86,946Increase (decrease) in cash and cash equivalents
    
    $
    (925
    )
    
    $
    83,010
 22




---



##### 



Cash Flows Related to Operating Activities.
  Cash Flows Related to Investing Activities.
 Cash
Flows Related to Financing Activities.
 Working Capital
   23




---



##### 



Indebtedness
  Contractual Obligations and Commitments
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(in thousands)Debt and capital
leases, including
interest(1)
    
    $
    7,016
    
    
    $
    1,148
    
    
    $
    1,961
    
    
    $
    1,420
    
    
    $
    2,487Operating leases
    
    
    2,805
    
    
    
    995
    
    
    
    1,043
    
    
    
    767
    
    
    
    Non-cancellable
purchase
commitments(2)
    
    
    3,928
    
    
    
    3,928
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    13,749
    
    
    $
    6,071
    
    
    $
    3,004
    
    
    $
    2,187
    
    
    $
    2,487
 
 (1)
    
    Debt and capital leases includes fixed contractual interest payments by period
of $321,000 (less than 1 year); $521,000
(1-3 years); $361,000 (3-5) years); and $549,000 (more than 5 years)(2)
    
    Reflects non-cancellable purchase commitments for certain
inventory items and capital expenditure commitments entered into in
order to secure better pricing and ensure materials on hand and
includes $1.0 million related to construction of a new technology
center and expansion of our administrative offices at our Manitowoc
facility. Does not include an additional $7.5 million in obligations
related to construction of a new technology center and expansion of
our administrative offices at our Manitowoc facility which
obligations were incurred subsequent to December 31, 2007. Capital Spending
  24




---



##### 



Off-Balance Sheet Arrangements
  Internal Control Over Financial Reporting
     Inflation
  25




---



##### 



Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
 SFAS No. 157, Fair Value Measurements. Fair Value Measurements
 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The Fair Value
Option for Financial Assets and Financial Liabilities
 EITF No.07-3, Accounting for Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities. Accounting for Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities
 SFAS No. 141(R), , and SFAS No. 160, (SFAS No.
160). Business Combinations Accounting and Reporting of Noncontrolling interest in Consolidated Financial Statements, an
amendment of ARB No. 51
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign Exchange Risk.
 Interest Rate Risk.
 26




---



##### 



Commodity Price Risk.
 
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    27




---



##### 



PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 An investment in our common stock involves a high degree of risk. You should carefully read and
consider each of the risks and uncertainties described below together with the other information
contained in this Quarterly Report on Form 10-Q , including our financial statements and the notes
thereto and Managements Discussion and Analysis of Financial Condition and Results of
Operations. If any of these events actually occurs, then our business, financial condition,
results of operations, and future growth prospects may be materially and adversely affected.
 We have a limited operating history, have previously incurred net losses, and only recently
achieved profitability that we may not be able to sustain.
   We operate in a highly competitive industry and if we are unable to compete successfully our
revenue and profitability will be adversely affected.
   28




---



##### 



Our success is largely dependent upon the skills, experience and efforts of our senior management,
and the loss of their services could have a material adverse effect on our ability to expand our
business or to maintain profitable operations.
  Some of the intellectual property we use in our business is owned by our chief executive officer.
   The success of our business depends on the market acceptance of our energy management products and
services.
  29




---



##### 



Sales of our products and services are dependent upon our customers capital budgets.
  Our products use components and raw materials that may be subject to price fluctuations, shortages
or interruptions of supply.
  We depend on a limited number of key suppliers.
  We experienced component quality problems related to certain suppliers in the past, and our current
suppliers may not deliver satisfactory components in the future.
  We depend upon a limited number of customers in any given period to generate a substantial portion
of our revenue.
  30




---



##### 



Product liability claims could adversely affect our business, results of operations and financial
condition.
  We depend on our ability to develop new products and services.
  We may pursue acquisitions and investments in new product lines, businesses or technologies that
involve numerous risks, which could disrupt our business or adversely affect our financial
condition and results of operations.
  Our inability to protect our intellectual property, or our involvement in damaging and disruptive
intellectual property litigation, could adversely affect our business, results of operations and
financial condition or result in the loss of use of the product or service.
   31




---



##### 



If the price of electricity decreases, there may be less demand for our products and services.
  We may face additional competition if government subsidies and utility incentives for renewable
energy increase or if such sources of energy are mandated.
  If our information technology systems fail, or if we experience an interruption in their operation,
then our business, results of operations and financial condition could be materially adversely
affected.
  32




---



##### 




    
    earthquake, fire, flood and other natural disasters;
    
    employee or other theft;
    
    attacks by computer viruses or hackers;
    
    power outages; and
    
    computer systems, Internet, telecommunications or data network failure.
  We own and operate an industrial property that we purchased in 2004 and, if any environmental
contamination is discovered, we could be responsible for remediation of the property.
  The cost of compliance with environmental laws and regulations and any related environmental
liabilities could adversely affect our results of operations or financial condition.
  Our retrofitting process frequently involves responsibility for the removal and disposal of
components containing hazardous materials.
  If we are unable to manage our anticipated revenue growth effectively, our operations, and
profitability could be adversely affected.
  33




---



##### 



If we are unable to obtain additional capital as needed in the future, our ability to grow our
revenue could be limited and we may be unable to pursue our current and future business strategies.
  We expect our quarterly revenue and operating results to fluctuate. If we fail to meet the
expectations of market analysts or investors, the market price of our common stock could decline
substantially, and we could become subject to securities litigation.
  Our ability to use our net operating loss carryforwards will be subject to limitation.
  Our common stock has only recently been publicly traded and we expect that the price of our common
stock will fluctuate substantially:
  
    
    fluctuations in our financial performance;
    
    economic and stock market conditions generally and specifically as they may impact us,
participants in our industry or comparable companies;
    
    changes in financial estimates and recommendations by securities analysts following our
common stock or comparable companies;
 34




---



##### 




    
    earnings and other announcements by, and changes in market evaluations of, us,
participants in our industry or comparable companies;
    
    changes in business or regulatory conditions affecting us, participants in our industry
or comparable companies;
    
    changes in accounting standards, policies, guidance, interpretations or principles;
    
    announcements or implementation by our competitors or us of acquisitions, technological
innovations or new products, or other strategic actions by our competitors; or
    
    trading volume of our common stock or the sale of stock by our management team, directors
or principal shareholders.
  Our failure to maintain adequate internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002 or to prevent or detect material misstatements in our
annual or interim consolidated financial statements in the future could result in inaccurate
financial reporting, sanctions or securities litigation, or could otherwise harm our business.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (a) Sales of Unregistered Securities
  (b) Use of Proceeds
  35




---



##### 



(c) Purchases of Equity Securities by the Issuer and Affiliated Partners
 .
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  36




---



##### 



ITEM 5. OTHER INFORMATION
  Cumulative FromDecember 1, 2001Through December 31, 2007(in thousands, unaudited)HIF lighting systems sold(1)
    
    
    1,048Total units sold (including HIF lighting systems)
    
    
    1,351Customer kilowatt demand reduction(2)
    
    
    304Customer kilowatt hours saved(2)(3)
    
    
    3,957,682Customer electricity costs saved(4)
    
    $
    304,742Indirect carbon dioxide emission reductions from customers energy savings (tons)(5)
    
    
    3,859Square footage retrofitted(6)
    
    
    541,866
 
 (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 1.35 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 2005,
which is the most current full year for which this information is
available, was $0.0814 per kilowatt hour according to the United
States Energy Information Administration.(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.(6)
    
    Based on 1.35 million total units sold, which contain a total of
approximately 7.0 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. 37




---



##### 



ITEM 6. EXHIBITS
 (a)
    
    Exhibits
 31.1
    
    Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer, Pursuant to 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, Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 38




---



##### 



SIGNATURE
  ORION ENERGY SYSTEMS, INC.
RegistrantBy
    /s/ Daniel J. WaibelDaniel J. WaibelChief Financial Officer 39




---



##### 



Exhibit Index to Form 10-Q for the Period Ended December 31, 2007
 31.1
    
    Certification of Chief
Executive Officer
Pursuant to Rule
13a-14(a) of the
Exchange Act, as
Adopted Pursuant to
Section 302 of the
Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief
Financial Officer
Pursuant to Rule
13a-14(a) of the
Exchange Act, as
Adopted Pursuant to
Section 302 of the
Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief
Executive Officer,
Pursuant to 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,
Pursuant to 18 U.S.C.
Section 1350, As
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002.
 40