Audit Orion - We recently began preparing for the audit of...

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We recently began preparing for the audit of Orion Energy Systems. This included a detailed review of the company’s most recent 10-K, 10-Q, and recent 8-K filings. We focused heavily on the current risk factor sections, management discussion and analysis (MD&A) sections, and the most recent financial statements. Our main goal was to analyze these documents to discover possible risks within Orion. After a lengthy review, we found five main risk items that we wanted to share. These five topics include the current debt structure, the poor financial history, the recent acquisition of Harris, litigation and legal matters, and the emergence into the innovative LED market. The following paragraphs examine these risk factors in detail and describe the level of risk our team associates with them. One of the major risk factors that we noticed for Orion Energy Systems is their current debt structure. First and foremost, Orion has a history of poor performance and net losses. This includes a $32.1M loss in fiscal year 2015, a $6.2M loss in fiscal year 2014, and a $10.4M loss in fiscal year 2013. These recent financial struggles demonstrate Orion’s inability to achieve and sustain profitability. Due to these consistent losses, Orion has signed a revolving credit agreement with Wells Fargo Bank, which provides them with an anticipated twelve month safety net of cash financing. This means that after twelve months, the company could significantly struggle if a turnaround of operations is not achieved. If they do not begin experiencing net income, Orion’s cash flows will not allow them to stay in business. In addition to the debt agreement with Wells Fargo, Orion has a prior debt commitment with J.P. Morgan. The prior debt structure was made of a $15M revolving debt agreement, which provided up to $5M of instant funds for completed customer contracts. However, this debt agreement was terminated on November 6 th , 2014. The debt agreement was terminated due to Orion’s failure to comply with the financial covenants of the agreement. Orion satisfied all
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outstanding payments on this debt. However, the failure to comply with JP Morgan demonstrates Orion’s inability to maintain debt agreements. We see Orion’s past and present debt agreements as a high risk item because if the company’s strategy to turn things around fails, they will struggle to keep a consistent cash flow. Orion needs a steady influx of cash to pay off the significant debt it took with Wells Fargo Bank, N.A. The revolving credit agreement requires Orion to pay a minimum annual interest fee of $130,000, regardless of usage of the credit agreement. This is in addition to the required payments of the principle on the loan. We struggle to see how the company will manage to consistently pay off these debt agreements, with their recent poor performance. If this high risk item becomes a reality, it will be shown on the balance sheet. On the balance sheet, the debt agreement will become a current liability, as Wells Fargo could demand payment if certain covenants are not met. In addition, the interest expense related to the loan will impact the income
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