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Orion Energy Systems Inc. Reports Operating Results (10-Q)

February 09, 2010 | About:

10qk

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Orion Energy Systems Inc. (OESX) filed Quarterly Report for the period ended 2009-12-31.

Orion Energy Systems Inc. has a market cap of $116.9 million; its shares were traded at around $5.36 with and P/S ratio of 1.6. OESX is in the portfolios of Chuck Royce of ROYCE & ASSOCIATES, John Rogers of ARIEL CAPITAL MANAGEMENT LLC, Chuck Royce of ROYCE & ASSOCIATES.

Highlight of Business Operations:

In October 2008, we introduced to the market a financing program called the Orion Virtual Power Plant (OVPP) for our customers purchase of our energy management systems without an up-front capital outlay. The OVPP is structured as an operating lease in which we receive monthly rental payments over the life of the contract, typically 12 months, with an annual renewable agreement with a maximum term between two and five years. This program creates a revenue stream, but may lessen near-term revenues as the payments are recognized as revenue on a monthly basis over the life of the contract versus upfront upon product shipment or project completion. However, we do retain the option to sell the payment stream to a third party finance company, as we have done under the terms of our former financing program, in which case the revenue would be recognized at the net present value of the total future payments from the finance company upon completion of the project. The OVPP program was established to assist customers who are interested in purchasing our energy management systems but who have capital expenditure budget limitations. For the first nine months of fiscal 2010, we recognized $0.5 million of revenue from completed OVPP contracts. As of December 31, 2009, we had signed 82 customers to OVPP contracts representing future gross revenue streams of $7.9 million. In the future, we expect an increase in the volume of OVPP contracts as our customers take advantage of our value proposition without incurring an up-front capital cost.

Bookings. We define bookings as the total contractual value of all firm purchase orders received for our products and services and the gross revenue streams for all OVPP contracts upon the execution of the contract. We define bookings for PPA agreements as the discounted value of revenues from energy generation over the life of the agreement along with the discounted value of revenues for renewable energy credits (REC) for as long as the REC programs are currently defined to be in existence with the governing body. For the three months ended December 31, 2008 and 2009, our bookings were $23.3 million and $21.4 million, which included $0.8 million and $3.4 million of future gross revenue streams associated with OVPP and PPA contracts, respectively. For the first nine months of fiscal 2009 and fiscal 2010, our bookings were $57.1 million and $57.2 million, which for the first nine months of fiscal 2009 and fiscal 2010 included $0.8 million and $8.1 million of future gross revenue streams associated with OVPP and PPA contracts.

Backlog. We define backlog as the total contractual value of all firm orders received for our lighting products and services. Such orders must be evidenced by a signed proposal acceptance or purchase order from the customer. Our backlog does not include OVPP and PPA contracts or national account contracts that have been negotiated, but for which we have not yet received a purchase order for the specific location. As of December 31, 2009, we had a backlog of firm purchase orders of approximately $5.1 million compared to a backlog of firm purchase orders of approximately $3.2 million as of December 31, 2008. We generally expect this level of firm purchase order backlog to be converted into revenue within the following quarter. Principally as a result of the continued lengthening of our customers purchasing decisions because of current economic conditions and related factors, the continued shortening of our installation cycles and the number of projects sold through national and OVPP contracts, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of actual revenue recognized in future periods.

We recognize compensation expense for the fair value of our stock option awards granted over their related vesting period. We recognized $1.1 million in the first nine months of fiscal 2010 and $1.2 million of stock-based compensation expense in the same period in fiscal 2009. As a result of prior option grants, we expect to recognize an additional $4.1 million of stock-based compensation over a weighted average period of approximately seven years, including $0.3 million in the fourth quarter of fiscal 2010. These charges have been, and will continue to be, allocated to cost of product revenue, general and administrative expenses, sales and marketing expenses and research and development expenses based on the departments in which the personnel receiving such awards have primary responsibility. A substantial majority of these charges have been, and likely will continue to be, allocated to general and administrative expenses and sales and marketing expenses.

Income Taxes. As of December 31, 2009, we had net operating loss carryforwards of approximately $11.4 million for federal tax purposes and $7.3 million for state tax purposes. Included in these loss carryforwards were $5.5 million for federal and $3.2 million for state tax purposes of compensation expenses that were associated with the exercise of nonqualified stock options. The benefit from our net operating losses created from these compensation expenses has not yet been recognized in our financial statements and will be accounted for in our shareholders equity as a credit to additional paid-in capital as the deduction reduces our income taxes payable. We also had federal and state credit carryforwards that each totaled approximately $0.5 million as of March 31, 2009. These federal and state net operating losses and credit carryforwards will begin to expire in varying amounts between 2020 and 2029. Anytime a company is reporting a net deferred tax asset, management needs to consider the likelihood of the assets being realized. If, after management weighs the effects of both positive and negative evidence, it is determined that there is less than a 50% chance that the deferred tax asset will be realized, the company is required to establish a valuation allowance. As of December 31, 2009, a valuation allowance of $0.2 million was established due to the potential of a portion of our state net operating loss carryforwards and state tax credit carryforwards not being realizable.

Cost of Revenue and Gross Margin. Our cost of product revenue decreased from $13.6 million for the fiscal 2009 third quarter to $10.6 million for the fiscal 2010 third quarter, a decrease of $3.0 million, or 22%. Our cost of product revenue decreased from $33.7 million for the first nine months of fiscal 2009 to $27.7 million for the first nine months of fiscal 2010, a decrease of $6.0 million, or 18%. Our cost of service revenue increased from $1.3 million for the fiscal 2009 third quarter to $1.6 million for the fiscal 2010 third quarter, an increase of $0.3 million, or 23%. Our cost of service revenue decreased from $4.6 million for the first nine months of fiscal 2009 to $3.5 million for the first nine months of fiscal 2010, a decrease of $1.1 million, or 24%. Total gross margin increased from 33.2% for the fiscal 2009 third quarter to 36.8% for the fiscal 2010 third quarter and decreased from 33.1% for the first nine months of fiscal 2009 to 33.0% for the first nine months of fiscal 2010. During the fiscal 2010 third quarter, we maintained improvemen

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