OESX - Orion Energy Is Back To Losses But Shows Signs Of Change In The (Distant) Future

Summary

• OESX main business, lighting solutions, is commoditized, unprofitable and non-recurrent.
• The company saw a surge in profitability based on a one-time contract. As predicted, profits are down big, and the company ate $7 million in cash in 1H23.
• Because OESX business is inherently unprofitable, the company has to change course and open new avenues.
• There are some signals of this: the acquisition of an EV charging station company, announcement of a new CEO and of an agreement with an activist investor.
• However, investing based on these 'signals' with the company losing $15 million in cash a year is madness.

Orion Energy Systems ( OESX ) is a seller and distributor of turnkey lighting solutions and adaptations for businesses.

In a recent article from September 2022 , I criticized OESX's lack of recurring revenue, volatile business model, and its lack of control over SG&A expenses. I warned that recent performance was non recurrent and that the company was basically unprofitable in the long term.

In this review of 2Q23 (ended September 2022) data , I find that the company has returned to unprofitability, that is eating cash even faster, financing that with debt. It has also started an expensive acquisition, for a growth company that is not generating profits either.

Somehow, the stock price has climbed in the process, and an activist fund announced an agreement to participate in the company's board.

I still consider OESX a bad idea, given that its fundamental economics are negative, but recent changes in management and the search for new business was necessary.

Note: Unless otherwise stated, all information has been obtained from OESX's filings with the SEC .

Previous situation

For a more detailed explanation, please read my article on OESX from September 2022.

An unprofitable sales model

In my previous article I commented on OESX's non-recurring and volatile revenues, related to their project sales model. A reader provided an interesting name for this type of business, 'go get them sales', because once a client's project is ended, that client has very low customer value. The company has to generate those sales again.

An undesirable industry

OESX's business, lighting solutions, is an undifferentiated service that has a price cap and that sells to businesses. None of these characteristics is desirable. The only moat to be developed is by location, being the sole provider in a particular region.

Expensive SG&A makes the model unsustainable

Because the company has to find new contracts every year, it has to spend enormous amounts on SG&A. This has generated enormous losses at the operating level.

A single contract created a temporary profitable situation

A big contract amounted to 74%, 56% and 49% of revenues in FY20, 21 and 22. As this contract fades, OESX's revenues and profitability are returning to their long term lows.

Recent developments, the company is moving

Back to red numbers

For the two reported quarters of FY23 (started March 2022), OESX has posted revenues 50% lower than in the same period of FY22. With very fixed SG&A expenses, this generated $6.6 million in pre-tax losses, coincident with $7 million in negative FCF.

Spending cash on growth acquisitions

The company announced in October that it had acquired Voltrek , an EV charging company, for $5 million. The acquisition price is difficult to judge without financial information on Voltrek. Some form of diversification was necessary given that OESX's core business is unprofitable. It is still early to judge this. The company informed that Voltrek's revenues were around $5 million, meaning it is not going to replace the current lighting business soon.

Back to debt

The company has financed its losses with a credit facility paying SOFR plus an undisclosed premium, running at $5 million as of September 2022. If the Voltrek acquisition is paid with cash, and the company generates a similar loss in 3Q23, then it will end calendar 2022 with $5 million in debts against $2.5 million in cash, against no debts and $14 million in cash in March 2022.

CEO change

OESX announced in November that Michael Jenkins had become its new CEO . Mr. Jenkins was already the company's COO since 2021, signaling a staged change in management. Again, this could provide the changes needed for the company to gain profitability.

Activist involvement

Finally, OESX announced in January that it had reached a cooperation agreement with an activist investor with a 5.6% participation in the company. The fund will nominate one Director to the Board. Again, this signals change ahead.

Conclusions

Change was needed and is happening

OESX definitely needs to change its business model if it plans to survive without diluting its current and prospective shareholders. The recent quarterly developments call for fast action given that the company is eating into its cash reserves and accumulating debt. The change in CEO, the involvement of an activist fund and the acquisition of an EV charging company all point in that direction.

Capital is needed, who will pay it?

If I had to speculate, I would predict that OESX would put up a 'new horizons, new business lines' pitch, and then try to recapitalize to put that plan into action. The capitalization terms depend on the market reaction to the new plan. If the stock climbs in price, OESX may try to issue shares. Otherwise, it may issue preferred shares to one of its current shareholders, or debt.

Pain ahead for current shareholders

In any case, the company will still have to pass through a valley of tears of under profitability and cash losses before its new business plan is generating income. The outcome of such an attempt is obviously uncertain. What is certain is that the current business model will lead nowhere.

For an insider or someone with a deep understanding of OESX's plan, it may pay to speculate on the company's success. For outside investors, it is definitely too speculative, and worse than that, expensive, to invest in OESX under the current conditions.

For further details see: