##### 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 September 30, 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)1204 Pilgrim Road, Plymouth, Wisconsin
    
    53073(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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Orion Energy Systems, Inc.
 Quarterly Report On Form 10-Q
 For The Quarter Ended September 30, 2008
 Table Of Contents
 Page(s)PART I FINANCIAL INFORMATIONITEM 1. Financial Statements (unaudited)
  
   
    3Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2008 and September 30, 2008
  
   
    3Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended September 30, 2007 and 2008
  
   
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended September 30, 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
  
   
    28PART II OTHER INFORMATIONITEM 1. Legal Proceedings
  
   
    28ITEM 1A. Risk Factors
  
   
    28ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
   
    29ITEM 3. Defaults Upon Senior Securities
  
   
    29ITEM 4. Submission Of Matters To A Vote Of Security Holders
  
   
    29ITEM 5. Other Information
  
   
    30ITEM 6. Exhibits
  
   
    31SIGNATURES
  
   
    32EX-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)March 31,
    
    
    September 30,2008
    
    
    2008AssetsCash and cash equivalents
    
    $
    78,312
    
    
    $
    46,407Short-term investments
    
    
    2,404
    
    
    
    19,583Accounts receivable, net of allowances of $79 and $100
    
    
    17,666
    
    
    
    16,371Inventories, net
    
    
    16,789
    
    
    
    18,885Deferred tax assets
    
    
    286
    
    
    
    602Prepaid expenses and other current assets
    
    
    1,439
    
    
    
    2,534Total current assets
    
    
    116,896
    
    
    
    104,382Property and equipment, net
    
    
    11,539
    
    
    
    17,629Patents and licenses, net
    
    
    388
    
    
    
    1,410Investment
    
    
    794
    
    
    
    Deferred tax assets
    
    
    1,000
    
    
    
    873Other long-term assets
    
    
    85
    
    
    
    376Total assets
    
    $
    130,702
    
    
    $
    124,670Liabilities and Shareholders EquityAccounts payable
    
    $
    7,521
    
    
    $
    7,478Accrued expenses
    
    
    4,242
    
    
    
    3,775Current maturities of long-term debt
    
    
    843
    
    
    
    861Total current liabilities
    
    
    12,606
    
    
    
    12,114Long-term debt, less current maturities
    
    
    4,473
    
    
    
    4,049Other long-term liabilities
    
    
    433
    
    
    
    419Total liabilities
    
    
    17,512
    
    
    
    16,582Commitments and contingencies (See Note F)Shareholders equity:Preferred stock, $0.01 par value: Shares authorized: 30,000,000 shares at March 31, 2008
and September 30, 2008Common stock, no par value: Shares authorized: 200,000,000 at March 31, 2008 and September
30, 2008; shares issued: 27,339,414 and 28,200,268 at March 31, 2008 and September 30,
2008; shares outstanding: 26,963,408 and 26,383,321 at March 31, 2008 and September 30,
2008
    
    
    
    
    
    
    Additional paid-in capital
    
    
    114,090
    
    
    
    116,875Treasury stock: 376,006 common shares at March 31, 2008 and 1,816,947 at September 30, 2008
    
    
    (1,739
    )
    
    
    (9,877
    )Accumulated other comprehensive loss
    
    
    (6
    )
    
    
    (242
    )Retained earnings
    
    
    845
    
    
    
    1,331Total shareholders equity
    
    
    113,190
    
    
    
    108,088Total liabilities and shareholders equity
    
    $
    130,702
    
    
    $
    124,670
  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 September 30,
    
    
    Six Months Ended September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Product revenue
    
    $
    14,247
    
    
    $
    17,280
    
    
    $
    28,752
    
    
    $
    30,169Service revenue
    
    
    4,158
    
    
    
    1,480
    
    
    
    6,374
    
    
    
    4,697Total revenue
    
    
    18,405
    
    
    
    18,760
    
    
    
    35,126
    
    
    
    34,866Cost of product revenue
    
    
    9,375
    
    
    
    11,467
    
    
    
    18,821
    
    
    
    20,080Cost of service revenue
    
    
    2,709
    
    
    
    958
    
    
    
    4,381
    
    
    
    3,254Total cost of revenue
    
    
    12,084
    
    
    
    12,425
    
    
    
    23,202
    
    
    
    23,334Gross profit
    
    
    6,321
    
    
    
    6,335
    
    
    
    11,924
    
    
    
    11,532Operating expenses:General and administrative
    
    
    1,907
    
    
    
    2,893
    
    
    
    3,478
    
    
    
    5,508Sales and marketing
    
    
    1,938
    
    
    
    2,771
    
    
    
    4,049
    
    
    
    5,423Research and development
    
    
    443
    
    
    
    373
    
    
    
    880
    
    
    
    791Total operating expenses
    
    
    4,288
    
    
    
    6,037
    
    
    
    8,407
    
    
    
    11,772Income (loss) from operations
    
    
    2,033
    
    
    
    298
    
    
    
    3,517
    
    
    
    (190
    )Other income (expense):Interest expense
    
    
    (329
    )
    
    
    (41
    )
    
    
    (624
    )
    
    
    (108
    )Dividend and interest income
    
    
    154
    
    
    
    550
    
    
    
    194
    
    
    
    1,167Total other income (expense)
    
    
    (175
    )
    
    
    509
    
    
    
    (430
    )
    
    
    1,059Income before income tax
    
    
    1,858
    
    
    
    807
    
    
    
    3,087
    
    
    
    869Income tax expense
    
    
    805
    
    
    
    354
    
    
    
    1,286
    
    
    
    382Net income
    
    
    1,053
    
    
    
    453
    
    
    
    1,801
    
    
    
    487Accretion of redeemable preferred stock
and preferred 
stock dividends
    
    
    (75
    )
    
    
    
    
    
    
    (150
    )
    
    
    Participation rights of preferred stock
in undistributed earnings
    
    
    (292
    )
    
    
    
    
    
    
    (511
    )
    
    
    Net income attributable to common
shareholders
    
    $
    686
    
    
    $
    453
    
    
    $
    1,140
    
    
    $
    487Basic net income per share attributable
to common shareholders
    
    $
    0.06
    
    
    $
    0.02
    
    
    $
    0.11
    
    
    $
    0.02Weighted-average common shares outstanding
    
    
    11,283,160
    
    
    
    26,959,790
    
    
    
    10,711,695
    
    
    
    26,998,857Diluted net income per share attributable
to common shareholders
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.02Weighted-average common shares and share
equivalents outstanding
    
    
    20,394,499
    
    
    
    29,018,991
    
    
    
    19,782,208
    
    
    
    29,613,684
  4




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ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (Unaudited)
 Six Months Ended September 30,2007
    
    
    2008Operating activitiesNet income
    
    $
    1,801
    
    
    $
    487Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    547
    
    
    
    856Stock-based compensation expense
    
    
    550
    
    
    
    846Deferred income tax benefit
    
    
    290
    
    
    
    193Other
    
    
    37
    
    
    
    62Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,345
    )
    
    
    1,295Inventories
    
    
    (6,182
    )
    
    
    (2,096
    )Prepaid expenses and other current assets
    
    
    (1,844
    )
    
    
    (1,504
    )Accounts payable
    
    
    7,571
    
    
    
    (43
    )Accrued expenses
    
    
    1,444
    
    
    
    (467
    )Net cash provided by (used in) operating activities
    
    
    1,869
    
    
    
    (371
    )Investing activitiesPurchase of property and equipment
    
    
    (1,008
    )
    
    
    (6,865
    )Purchase of short-term investments
    
    
    (3,900
    )
    
    
    (17,415
    )Additions to patents and licenses
    
    
    (123
    )
    
    
    (1,074
    )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
    
    
    (4,844
    )
    
    
    (24,855
    )Financing activitiesProceeds from issuance of long-term debt
    
    
    10,666
    
    
    
    Payment of long-term debt
    
    
    (356
    )
    
    
    (405
    )Repurchase of common stock into treasury
    
    
    
    
    
    
    (8,138
    )Proceeds from shareholder notes receivable, net
    
    
    750
    
    
    
    Net activity in revolving line of credit
    
    
    (1,342
    )
    
    
    Excess benefit for deferred taxes on stock-based compensation
    
    
    922
    
    
    
    505Deferred financing costs and offering costs
    
    
    (2,385
    )
    
    
    7Proceeds from issuance of common stock
    
    
    1,299
    
    
    
    1,352Net cash provided by (used in) financing activities
    
    
    9,554
    
    
    
    (6,679
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,579
    
    
    
    (31,905
    )Cash and cash equivalents at beginning of period
    
    
    285
    
    
    
    78,312Cash and cash equivalents at end of period
    
    $
    6,864
    
    
    $
    46,407Supplemental cash flow information:Cash paid for interest
    
    $
    561
    
    
    $
    186Cash paid for income taxes
    
    
    10
    
    
    
    83Supplemental 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
    
    
    
    Preferred stock accretion
    
    
    150
    
    
    
    
  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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Cash and cash equivalents
  Short-term investments available for sale
  September 30, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    
    
    
    Cash and Cash
    
    
    Short TermCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    Equivalents
    
    
    InvestmentsMoney market funds
    
    $
    27,955
    
    
    $
    
    
    
    $
    
    
    
    $
    27,955
    
    
    $
    27,955
    
    
    $
    Commercial paper
    
    
    9,124
    
    
    
    24
    
    
    
    
    
    
    
    9,148
    
    
    
    6,183
    
    
    
    2,965Corporate obligations
    
    
    4,511
    
    
    
    
    
    
    
    (47
    )
    
    
    4,464
    
    
    
    2,249
    
    
    
    2,215Government agency obligations
    
    
    23,572
    
    
    
    
    
    
    
    (195
    )
    
    
    23,377
    
    
    
    8,974
    
    
    
    14,403Total
    
    $
    65,162
    
    
    $
    24
    
    
    $
    (242
    )
    
    $
    64,944
    
    
    $
    45,361
    
    
    $
    19,583
 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
    
    $
    1622010
    
    
    41Total gross receivable
    
    
    203Less: amount representing interest
    
    
    (9
    )Net contracts receivable
    
    $
    194
 Inventories
    March 31,
    
    
    September 30,2008
    
    
    2008Raw materials and components
    
    $
    9,948
    
    
    $
    9,977Work in process
    
    
    680
    
    
    
    1,399Finished goods
    
    
    6,161
    
    
    
    7,509$
    16,789
    
    
    $
    18,885
 Property and Equipment
  March 31,
    
    
    September 30,2008
    
    
    2008Land and land improvements
    
    $
    703
    
    
    $
    751Buildings
    
    
    4,803
    
    
    
    5,302Furniture, fixtures and office equipment
    
    
    2,256
    
    
    
    2,376Plant equipment
    
    
    4,543
    
    
    
    6,054
 8




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##### Table of Contents



March 31,
    
    
    September 30,2008
    
    
    2008Construction in progress
    
    
    2,918
    
    
    
    7,21915,223
    
    
    
    21,702Less: accumulated depreciation and amortization
    
    
    (3,684
    )
    
    
    (4,073
    )Net property and equipment
    
    $
    11,539
    
    
    $
    17,629
  March 31,
    
    
    September 30,2008
    
    
    2008Equipment
    
    $
    1,206
    
    
    $
    1,206Less: accumulated amortization
    
    
    (433
    )
    
    
    (501
    )Net equipment
    
    $
    773
    
    
    $
    705
  Patents and Licenses
  9




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Investment
  Other Long-Term Assets
  Accrued Expenses
    Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Beginning of period
    
    $
    177
    
    
    $
    63
    
    
    $
    45
    
    
    $
    69Provision to cost of revenue
    
    
    61
    
    
    
    17
    
    
    
    231
    
    
    
    20Charges
    
    
    (51
    )
    
    
    (34
    )
    
    
    (89
    )
    
    
    (43
    )End of period
    
    $
    187
    
    
    $
    46
    
    
    $
    187
    
    
    $
    46
 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
  10




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##### Table of Contents



March 31,
    
    
    September 30,2008
    
    
    2008Deferred revenue  current liability
    
    $
    134
    
    
    $
    147Deferred revenue  long term liability
    
    
    41
    
    
    
    26Total deferred revenue
    
    $
    175
    
    
    $
    173
 Income Taxes
 Accounting for Income Taxes Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No.
109.
  Six Months EndedSeptember 30, 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
    
    
    6Unrecognized tax benefits as of September 30, 2008
    
    $
    393
   11




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##### Table of Contents



Year Ended
    
    
    Six Months EndedMarch 31, 2008
    
    
    September 30, 2008Statutory federal tax rate
    
    
    34.00
    %
    
    
    34.00
    %State taxes, net
    
    
    4.20
    %
    
    
    5.47
    %Incentive stock options
    
    
    2.70
    %
    
    
    4.16
    %Federal tax credit
    
    
    (1.50
    )%
    
    
    0.00
    %State tax credit
    
    
    (1.00
    )%
    
    
    0.00
    %Other, net
    
    
    (0.30
    )%
    
    
    0.35
    %Effective income tax rate
    
    
    38.10
    %
    
    
    43.98
    %
   Stock Option Plans
  Three months ended September 30,
    
    Six months ended September 30,2007
    
    2008
    
    2007
    
    2008Weighted average expected term
    
    2.6 years
    
    6.0 years
    
    2.4 years
    
    5.7 yearsRisk-free interest rate
    
    
    4.57
    %
    
    
    3.35
    %
    
    
    4.74
    %
    
    
    3.24
    %Expected volatility
    
    
    60
    %
    
    
    60
    %
    
    
    60
    %
    
    
    60
    %Expected forfeiture rate
    
    
    6
    %
    
    
    2
    %
    
    
    6
    %
    
    
    2
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Net Income per Common Share
  Participating Securities and the Two-Class Method under FASB Statement No.
128
  12




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##### Table of Contents



(in thousands except share amounts)
    
    Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Numerator:Net income
    
    $
    1,053
    
    
    $
    453
    
    
    $
    1,801
    
    
    $
    487Accretion of redeemable preferred stock and preferred stock dividends
    
    
    (75
    )
    
    
    
    
    
    
    (150
    )
    
    
    Participation rights of preferred stock in undistributed earnings
    
    
    (292
    )
    
    
    
    
    
    
    (511
    )
    
    
    Numerator for basic net income per common share
    
    
    686
    
    
    
    453
    
    
    
    1,140
    
    
    
    487Adjustment for interest, net of income tax effect
    
    
    59
    
    
    
    
    
    
    
    59
    
    
    
    Preferred stock dividends and participation rights of preferred stock
    
    
    367
    
    
    
    
    
    
    
    661
    
    
    
    Numerator for diluted net income per common share
    
    $
    1,112
    
    
    $
    453
    
    
    $
    1,860
    
    
    $
    487Denominator:Weighted-average common shares outstanding
    
    
    11,283,160
    
    
    
    26,959,790
    
    
    
    10,711,695
    
    
    
    26,998,857Weighted-average effect of preferred stock, restricted stock,
convertible notes and assumed conversion of stock options and
warrants
    
    
    9,111,339
    
    
    
    2,059,201
    
    
    
    9,070,513
    
    
    
    2,614,827Weighted-average common shares and common share equivalents
outstanding
    
    
    20,394,499
    
    
    
    29,018,991
    
    
    
    19,782,208
    
    
    
    29,613,684
 Concentration of Credit Risk and Other Risks and Uncertainties
     Segment Information
 Disclosures about Segments of an Enterprise and Related Information
  Recent Accounting Pronouncements
  The Fair Value Option for Financial Assets and
Financial Liabilities
 13




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##### Table of Contents



Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  An Amendment to ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities  an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
 Determination of Useful
Life of Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles. The Meaning of
Presented Fairly in Conformity with Generally Accepted Accounting Principles
 Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133. Accounting for Derivative
Instruments and Hedging Activities
 NOTE C  RELATED PARTY TRANSACTIONS
  14




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##### Table of Contents



NOTE D  LONG-TERM DEBT
  March 31,
    
    
    September 30,2008
    
    
    2008Term note
    
    $
    1,440
    
    
    $
    1,339First mortgage note payable
    
    
    1,045
    
    
    
    1,021Debenture payable
    
    
    922
    
    
    
    904Lease obligations
    
    
    536
    
    
    
    392Other long-term debt
    
    
    1,373
    
    
    
    1,254Total long-term debt
    
    
    5,316
    
    
    
    4,910Less current maturities
    
    
    (843
    )
    
    
    (861
    )Long-term debt, less current maturities
    
    $
    4,473
    
    
    $
    4,049
 Revolving Credit Agreement
    15




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##### Table of Contents



NOTE E  INCOME TAXES
   NOTE F  COMMITMENTS AND CONTINGENCIES
 Operating Leases and Purchase Commitments
  Litigation
    16




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##### Table of Contents



NOTE G  SHAREHOLDERS EQUITY
 Share Repurchase Program
  NOTE H  STOCK OPTIONS AND WARRANTS
    Three months ended September 30,
    
    
    Six months ended September 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Cost of product revenue
    
    $
    23
    
    
    $
    65
    
    
    $
    44
    
    
    $
    130General and administrative
    
    
    315
    
    
    
    171
    
    
    
    380
    
    
    
    425Sales and marketing
    
    
    57
    
    
    
    145
    
    
    
    110
    
    
    
    271Research and development
    
    
    8
    
    
    
    7
    
    
    
    16
    
    
    
    20Total
    
    $
    403
    
    
    $
    388
    
    
    $
    550
    
    
    $
    846
   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
    
    
    (580
    )
    
    
    580
    
    
    
    8.37Cancelled or expired
    
    
    221
    
    
    
    (221
    )
    
    
    1.52Exercised
    
    
    
    
    
    
    (781
    )
    
    
    5.71Balance at September 30, 2008
    
    
    1,123
    
    
    
    4,295
    
    
    
    3.09
    
    
    
    6.6
    
    
    $
    13,049Exercisable at September 30, 2008
    
    
    
    
    
    
    2,010
    
    
    
    1.72
    
    
    
    4.6
    
    
    $
    7,811
 17




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##### Table of Contents



Non-vested at March 31, 2008
    
    
    2,307Granted
    
    
    580Vested
    
    
    (383
    )Forfeited
    
    
    (219
    )Non-vested at September 30, 2008
    
    
    2,285
   WeightedAverageNumber of
    
    
    ExerciseShares
    
    
    PriceBalance at March 31, 2008
    
    
    578,788
    
    
    $
    2.31Issued
    
    
    
    
    
    
    Exercised
    
    
    (71,580
    )
    
    
    2.33Cancelled
    
    
    
    
    
    
    Balance at September 30, 2008
    
    
    507,208
    
    
    $
    2.31
  September 30,Exercise Price
    
    2008
    
    
    Expiration$2.25
    
    
    38,980
    
    
    Fiscal 2014$2.30
    
    
    430,968
    
    
    Fiscal 2010$2.50
    
    
    37,260
    
    
    Fiscal 2011Total
    
    
    507,208
 
 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
  18




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##### Table of Contents



Overview
     Revenue and Expense Components
 Revenue.
   19




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##### Table of Contents



Backlog.
 20




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##### Table of Contents



Cost of Revenue.
 Gross Margin.
 Operating Expenses.
     21




---



##### Table of Contents



Share-Based Payment
 Interest Expense.
 Dividend and Interest Income.
 Income Taxes.
  22




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##### Table of Contents



Results of Operations
  Three Months ended September 30,
    
    
    Six Months ended September 30,2007
    
    
    2008
    
    
    
    
    
    
    2007
    
    
    2008% of
    
    
    
    
    
    
    % of
    
    
    %
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    %Amount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Change
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    ChangeProduct revenue
    
    $
    14,247
    
    
    
    77.4
    %
    
    $
    17,280
    
    
    
    92.1
    %
    
    
    21.3
    %
    
    $
    28,752
    
    
    
    81.9
    %
    
    $
    30,169
    
    
    
    86.5
    %
    
    
    4.9
    %Service revenue
    
    
    4,158
    
    
    
    22.6
    %
    
    
    1,480
    
    
    
    7.9
    %
    
    
    (64.4
    )%
    
    
    6,374
    
    
    
    18.1
    %
    
    
    4,697
    
    
    
    13.5
    %
    
    
    (26.3
    )%Total revenue
    
    
    18,405
    
    
    
    100.0
    %
    
    
    18,760
    
    
    
    100.0
    %
    
    
    1.9
    %
    
    
    35,126
    
    
    
    100.0
    %
    
    
    34,866
    
    
    
    100.0
    %
    
    
    (0.7
    )%Cost of product revenue
    
    
    9,375
    
    
    
    50.9
    %
    
    
    11,467
    
    
    
    61.1
    %
    
    
    22.3
    %
    
    
    18,821
    
    
    
    53.6
    %
    
    
    20,080
    
    
    
    57.6
    %
    
    
    6.7
    %Cost of service revenue
    
    
    2,709
    
    
    
    14.7
    %
    
    
    958
    
    
    
    5.1
    %
    
    
    (64.6
    )%
    
    
    4,381
    
    
    
    12.5
    %
    
    
    3,254
    
    
    
    9.3
    %
    
    
    (25.7
    )%Total cost of revenue
    
    
    12,084
    
    
    
    65.7
    %
    
    
    12,425
    
    
    
    66.2
    %
    
    
    2.8
    %
    
    
    23,202
    
    
    
    66.1
    %
    
    
    23,334
    
    
    
    66.9
    %
    
    
    0.6
    %Gross profit
    
    
    6,321
    
    
    
    34.3
    %
    
    
    6,335
    
    
    
    33.8
    %
    
    
    0.2
    %
    
    
    11,924
    
    
    
    33.9
    %
    
    
    11,532
    
    
    
    33.1
    %
    
    
    (3.3
    )%General and administrative expenses
    
    
    1,907
    
    
    
    10.4
    %
    
    
    2,893
    
    
    
    15.4
    %
    
    
    51.7
    %
    
    
    3,478
    
    
    
    9.9
    %
    
    
    5,508
    
    
    
    15.8
    %
    
    
    58.4
    %Sales and marketing expenses
    
    
    1,938
    
    
    
    10.5
    %
    
    
    2,771
    
    
    
    14.8
    %
    
    
    43.0
    %
    
    
    4,049
    
    
    
    11.5
    %
    
    
    5,423
    
    
    
    15.6
    %
    
    
    33.9
    %Research and development expenses
    
    
    443
    
    
    
    2.4
    %
    
    
    373
    
    
    
    2.0
    %
    
    
    (15.8
    )%
    
    
    880
    
    
    
    2.5
    %
    
    
    791
    
    
    
    2.3
    %
    
    
    (10.1
    )%Income (loss) from operations
    
    
    2,033
    
    
    
    11.0
    %
    
    
    298
    
    
    
    1.6
    %
    
    
    (85.3
    )%
    
    
    3,517
    
    
    
    10.0
    %
    
    
    (190
    )
    
    
    (0.5
    )%
    
    
    (105.4
    )%Interest expense
    
    
    329
    
    
    
    (1.8
    )%
    
    
    41
    
    
    
    (0.2
    )%
    
    
    (87.5
    )%
    
    
    624
    
    
    
    (1.8
    )%
    
    
    108
    
    
    
    (0.3
    )%
    
    
    (82.7
    )%Dividend and interest income
    
    
    154
    
    
    
    0.8
    %
    
    
    550
    
    
    
    2.9
    %
    
    
    257.1
    %
    
    
    194
    
    
    
    0.6
    %
    
    
    1,167
    
    
    
    3.3
    %
    
    
    501.5
    %Income before income tax
    
    
    1,858
    
    
    
    10.1
    %
    
    
    807
    
    
    
    4.3
    %
    
    
    (56.6
    )%
    
    
    3,087
    
    
    
    8.8
    %
    
    
    869
    
    
    
    2.5
    %
    
    
    (71.8
    )%Income tax expense
    
    
    805
    
    
    
    4.4
    %
    
    
    354
    
    
    
    1.9
    %
    
    
    (56.0
    )%
    
    
    1,286
    
    
    
    3.7
    %
    
    
    382
    
    
    
    1.1
    %
    
    
    (70.3
    )%Net income
    
    
    1,053
    
    
    
    5.7
    %
    
    
    453
    
    
    
    2.4
    %
    
    
    (57.0
    )%
    
    
    1,801
    
    
    
    5.1
    %
    
    
    487
    
    
    
    1.4
    %
    
    
    (73.0
    )%Accretion of redeemable preferred stock and
preferred stock dividends
    
    
    (75
    )
    
    
    (0.4
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (100.0
    )%
    
    
    (150
    )
    
    
    (0.4
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (100.0
    )%Participation rights of preferred stock in
undistributed earnings
    
    
    (292
    )
    
    
    (1.6
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (100.0
    )%
    
    
    (511
    )
    
    
    (1.5
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (100.0
    )%Net income attributable to common shareholders
    
    $
    686
    
    
    
    3.7
    %
    
    $
    453
    
    
    
    2.4
    %
    
    
    (34.0
    )%
    
    $
    1,140
    
    
    
    3.2
    %
    
    $
    487
    
    
    
    1.4
    %
    
    
    (57.3
    )%
 Revenue.
 Cost of Revenue and Gross Margin.
 Operating Expenses
 General and Administrative.
 23




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##### Table of Contents



Sales and Marketing.
  Research and Development.
 Interest Expense.
 Dividend and Interest Income.
 Income Taxes.
 Liquidity and Capital Resources
 Overview
   24




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##### Table of Contents



Cash Flows
  Six Months EndedSeptember 30,2007
    
    
    2008Operating activities
    
    $
    1,869
    
    
    $
    (371
    )Investing activities
    
    
    (4,844
    )
    
    
    (24,855
    )Financing activities
    
    
    9,554
    
    
    
    (6,679
    )Increase (decrease) in cash and cash equivalents
    
    $
    6,579
    
    
    $
    (31,905
    )
 Cash Flows Related to Operating Activities.
   Cash Flows Related to Investing Activities.
  Cash Flows Related to Financing Activities.
  Working Capital
 25




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##### Table of Contents



Indebtedness
     26




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##### Table of Contents



Capital Spending
  Contractual Obligations and Commitments
  Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Cash interest payments on debt
    
    Total
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsBank debt obligations
    
    $
    4,910
    
    
    $
    861
    
    
    $
    1,312
    
    
    $
    1,052
    
    
    $
    1,685Cash interest payments on debt
    
    
    1,401
    
    
    
    272
    
    
    
    418
    
    
    
    286
    
    
    
    425Operating lease obligations
    
    
    2,303
    
    
    
    853
    
    
    
    1,372
    
    
    
    78
    
    
    
    Purchase order and cap-ex commitments (1)
    
    
    5,232
    
    
    
    5,232
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    13,846
    
    
    $
    7,218
    
    
    $
    3,102
    
    
    $
    1,416
    
    
    $
    2,110
 
 (1)
    
    Reflects non-cancellable purchase order commitment in the amount of $0.6 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 $4.6 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
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  27




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
     
 ITEM 1A. RISK FACTORS
 Except as noted below, during the three months ended September 30, 2008 there were no material
changes to the risk factors set forth and discussed in Part I, Item 1A. Risk Factors in our 2008
Annual Report filed on Form 10-K for the year ended March 31, 2008 as filed with the SEC on June
27, 2008.
 28




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##### Table of Contents



Adverse conditions in the global economy and disruption of financial markets have negatively
impacted, and could continue to negatively impact, our customers, suppliers, and our business.
  The acceptance of our Orion Virtual Power Plant product could expose us to additional customer
credit risk and impact our financial results.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (a) Unregistered Sales of Equity Securities
  (b) Use of Proceeds
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (I)
    
    The election of two Class I directors named below to serve until the 2011 Annual
Meeting of Shareholders. There was no solicitation in opposition to the nominees listed
in the proxy statement, and the nominees were elected.
 VotesNominee
    
    For
    
    WithheldThomas A. Quadracci
    
    
    23,094,106
    
    
    
    358,716Michael J. Potts
    
    
    23,079,680
    
    
    
    373,142
 29




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##### Table of Contents



(II)
    
    The election of one Class II director named below to serve until the 2009 Annual
Meeting of Shareholders. There was no solicitation in opposition to the nominee listed
in the proxy statement, and the nominee was elected.
 VotesNominee
    
    For
    
    WithheldRussell M. Flaum
    
    
    23,058,940
    
    
    
    393,882
 
 ITEM 5. OTHER INFORMATION
 Statistical Data
  Cumulative FromDecember 1, 2001Through September 30, 2008(in thousands, unaudited)HIF lighting systems sold(1)
    
    
    1,310Total units sold (including HIF lighting systems)
    
    
    1,684Customer kilowatt demand reduction(2)
    
    
    387Customer kilowatt hours saved(2)(3)
    
    
    5,915,123Customer electricity costs saved(4)
    
    $
    455,465Indirect carbon dioxide emission reductions from customers energy savings (tons)(5)
    
    
    4,031Square footage retrofitted(6)
    
    
    670,099
 
 (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 2006, which is the most current full year for which this information is
available, was $0.089 per kilowatt hour according to the United States Energy Information
Administration. (Still valid)(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. Using the prior eGrid
data as reported in our 10-K, cumulative indirect carbon emission reductions 30




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##### Table of Contents



from customers energy savings from December 1, 2001 through September 30, 2008 would have
equaled 5,766,653 tons.(6)
    
    Based on 1.684 million total units sold, which contain a total of approximately 8.4 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. 
 ITEM 6. EXHIBITS
 (a)
    
    Exhibits
 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




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##### Table of Contents



SIGNATURE
  ORION ENERGY SYSTEMS, INC.
RegistrantBy
    /s/ Scott R. JensenScott R. JensenChief Financial Officer 32




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##### Table of Contents



Exhibit Index to Form 10-Q for the Period Ended September 30, 2008
 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.
 33