recommendations to our senior management regarding the technologies' viability, develop commercialization tactics, and if determined commercially viable, ultimately add the technology into our menu of products, applications and services offered through our distribution channels. We are currently researching three test solar photovoltaic electricity generating projects. These projects are expected to help us answer technological, installation and commercial feasability questions before determining how this technology may fit into our overall business plan.
Revenue and Expense Components
Revenue. We sell our energy management products and services directly to commercial and industrial customers, and indirectly to end users through wholesale sales to electrical contractors and value-added resellers. We currently generate the substantial majority of our revenue from sales of HIF lighting systems and related services to commercial and industrial customers. While our services include comprehensive site assessment, site field verification, utility incentive and government subsidy management, engineering design, project management, installation and recycling in connection with our retrofit installations, we separately recognize service revenue only for our installation and recycling services. Except for our installation and recycling services, all other services are completed prior to product shipment and revenue from such services is included in product revenue because evidence of fair value for these services does not exist. In the first half of fiscal 2010, we maintained our efforts in selling through our contractor and value-added reseller channels with marketing through mass mailings, participating in national trade organizations and providing training to channel partners on our sales methodologies. These wholesale channels accounted for approximately 38% of our total revenue volume in the first half of fiscal 2010 which was comparable to the 40% of total revenues contributed in fiscal 2009.
In October 2008, we introduced to the market a financing program called the Orion Virtual Power Plant ("OVPP") for our customer's 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 three 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 six months ended September 30, 2009, we recognized $0.2 million of revenue from completed OVPP contracts. As of September 30, 2009, we had signed 67 customers to OVPP contracts representing future gross revenue streams of $6.2 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.
We recognize revenue on product only sales at the time of shipment. For projects consisting of multiple elements of revenue, such as a combination of product sales and services, we separate the project into separate units of accounting based on their relative fair values for revenue recognition purposes. Additionally, the deferral of revenue on a delivered element may be required if such revenue is contingent upon the delivery of the remaining undelivered elements. We recognize revenue at the time of product shipment on product sales and on services completed prior to product shipment. We recognize revenue associated with services provided after product shipment, based on their fair value, when the services are completed and customer acceptance has been received. When other significant obligations or acceptance terms remain after products are delivered, revenue is recognized only after such obligations are fulfilled or acceptance by the customer has occurred.
Our dependence on individual key customers can vary from period to period as a result of the significant size of some of our retrofit and multi-facility roll-out projects. Our top 10 customers accounted for approximately 32% and 38% of our total revenue for the first half of fiscal 2010 and fiscal 2009, respectively. No single customer accounted for more than 10% of our total revenue for either our first half of fiscal 2010 or fiscal 2009. To the extent that large retrofit and roll-out projects become a greater component of our total revenue, we may experience more customer concentration in given periods. The loss of, or substantial reduction in sales volume to, any of our significant customers could have a material adverse effect on our total revenue in any given period and may result in significant annual and quarterly revenue variations. Our level of total revenue for any given period is dependent upon a number of factors, including (i) the demand for our products and systems, including our OVPP program and any new products, applications and services that we may introduce through our new OTV division; (ii) the number and timing of large retrofit and multi-facility retrofit, or "roll-out," projects; (iii) the level of our wholesale sales; (iv) our ability to realize revenue from our services and our OVPP program, including whether we decide to either retain or resell the expected future cash flows under our OVPP program and the relative timing of the resultant revenue recognition; (v) market conditions; (vi) our execution of our sales process; (vii) our ability to compete in a highly competitive market and our ability to

respond successfully to market competition; (viii) the selling price of our products and services; (ix) changes in capital investment levels by our customers and prospects; and (x) customer sales cycles. As a result, our total revenue may be subject to quarterly variations and our total revenue for any particular fiscal quarter may not be indicative of future results.
Bookings. We define bookings as the total contractual value of all firm purchase orders received for our products and services and the gross revenue stream for all OVPP contracts upon the execution of the contract. For the three months ended September 30, 2008 and 2009, our bookings were $20.2 million and $20.3 million, which for the September 30, 2009 quarter included $2.4 million of future gross revenue streams associated with OVPP contracts. For the six months ended September 30, 2008 and 2009, our bookings were $33.6 million and $35.8 million, which for the September 30, 2009 first half included $4.7 million of future gross revenue streams associated with OVPP 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 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 September 30, 2009, we had a backlog of firm purchase orders of approximately $4.0 million. 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 customer's 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.
Cost of Revenue. Our total cost of revenue consists of costs for: (i) raw materials, including sheet, coiled and specialty reflective aluminum;
(ii) electrical components, including ballasts, power supplies and lamps;
(iii) wages and related personnel expenses, including stock-based compensation charges, for our fabricating, coating, assembly, logistics and project installation service organizations; (iv) manufacturing facilities, including depreciation on our manufacturing facilities and equipment, taxes, insurance and utilities; (v) warranty expenses; (vi) installation and integration; and
(vii) shipping and handling. Our cost of aluminum can be subject to commodity price fluctuations, which we attempt to mitigate with forward fixed-price, minimum quantity purchase commitments with our suppliers. We also purchase many of our electrical components through forward purchase contracts. We buy most of our specialty reflective aluminum from a single supplier, and most of our ballast and lamp components from a single supplier, although we believe we could obtain sufficient quantities of these raw materials and components on a price and quality competitive basis from other suppliers if necessary. Purchases from our current primary supplier of ballast and lamp components constituted 16% of our total cost of revenue for the first six months of fiscal 2010 and were 22% of total cost of revenue for the first six months of fiscal 2009. Our production labor force is non-union and, as a result, our production labor costs have been relatively stable. We have been expanding our network of qualified third-party installers to realize efficiencies in the installation process. Toward the end of fiscal 2008, we began to vertically integrate some of our processes performed at outside suppliers to help us better manage delivery lead time, control process quality and inventory supply. We installed a coating line and acquired production fabrication equipment. In fiscal 2009, we installed a power cord assembly line. Each of these production lines provide us with additional capacity and we expect that these additions will help to reduce overall unit costs upon the equipment becoming more fully utilized. In the first half of fiscal 2010, we reduced headcounts and improved production product flow through reengineering of our assembly stations. Gross Margin. Our gross profit has been, and will continue to be, affected by the relative levels of our total revenue and our total cost of revenue, and as a result, our gross profit may be subject to quarterly variation. Our gross profit as a percentage of total revenue, or gross margin, is affected by a number of factors, including: (i) our mix of large retrofit and multi-facility roll-out projects with national accounts; (ii) the level of our wholesale sales (which generally have historically resulted in higher relative gross margins, but lower relative net margins, than our sales to direct customers); (iii) our realization rate on our billable services; (iv) our project pricing; (v) our level of warranty claims; (vi) our level of utilization of our manufacturing facilities and production equipment and related absorption of our manufacturing overhead costs; (vii) our level of efficiencies in our manufacturing operations; and
(viii) our level of efficiencies from our subcontracted installation service providers. Operating Expenses. Our operating expenses consist of: (i) general and administrative expenses; (ii) sales and marketing expenses; and (iii) research and development expenses. Personnel related costs are our largest operating expense. While we have recently focused on reducing our personnel costs and headcount in certain functional areas, we do nonetheless believe that future opportunities within our business remain strong. As a result, we may choose to selectively add to our sales staff based upon opportunities in regional markets. Our general and administrative expenses consist primarily of costs for:
(i) salaries and related personnel expenses, including stock-based compensation charges related to our executive, finance, human resource, information technology and operations organizations; (ii) public company costs, including investor relations and audit; (iii) occupancy expenses; (iv) professional services fees; (v) technology related costs and amortization; (vi) bad debt and asset impairment charges; and (vii) corporate-related travel.

Our sales and marketing expenses consist primarily of costs for: (i) salaries and related personnel expenses, including stock-based compensation charges related to our sales and marketing organization; (ii) internal and external sales commissions and bonuses; (iii) travel, lodging and other out-of-pocket expenses associated with our selling efforts; (iv) marketing programs; (v) pre-sales costs; and (vi) other related overhead.
Our research and development expenses consist primarily of costs for:
(i) salaries and related personnel expenses, including stock-based compensation charges, related to our engineering organization; (ii) payments to consultants;
(iii) the design and development of new energy management products and enhancements to our existing energy management system; (iv) quality assurance and testing; and (v) other related overhead. We expense research and development costs as incurred. In fiscal 2009, we incurred increased general and administrative expenses in connection with our becoming a public company, including increased accounting, audit, investor relations, legal and support services and Sarbanes-Oxley compliance fees and expenses. Our operating expenses continued to increase in the first half of fiscal 2010 as a result of the completion of our new technology center and the related building occupancy costs. We expense all pre-sale costs incurred in connection with our sales process prior to obtaining a purchase order. These pre-sale costs may reduce our net income in a given period prior to recognizing any corresponding revenue. We also intend to continue to invest in our research and development of new and enhanced energy management products and services. We recognize compensation expense for the fair value of our stock option awards granted over their related vesting period. We recognized $0.7 million in the first six months of fiscal 2010 and $1.6 million of stock-based compensation expense in fiscal 2009. As a result of prior option grants, we expect to recognize an additional $4.6 million of stock-based compensation over a weighted average period of approximately seven years, including $0.7 million in the last six months 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. Interest Expense. Our interest expense is comprised primarily of interest expense on outstanding borrowings under long-term debt obligations described under "- Liquidity and Capital Resources - Indebtedness" below, including the amortization of previously incurred financing costs. We amortize deferred financing costs to interest expense over the life of the related debt instrument, ranging from six to fifteen years. Dividend and Interest Income. Our dividend income consists of dividends paid on preferred shares that we acquired in July 2006. The terms of these preferred shares provided for annual dividend payments to us of $0.1 million. The preferred shares were sold back to the issuer in June 2008 and all dividends accrued were paid upon sale. We also report interest income earned on our cash and cash equivalents and short term investments. For the first half of fiscal 2010, our interest income declined as a result of the decrease in our cash and cash equivalents and declining market rates. Income Taxes. As of September 30, 2009, we had net operating loss carryforwards of approximately $9.2 million for federal tax purposes and $6.8 million for state tax purposes. Included in these loss carryforwards were $5.3 million for federal and $3.8 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 total approximately $0.5 million as of March 31, 2009. We believe it is more likely than not that we will realize the benefits of most of these assets and have recorded for an allowance of $45,000 due to our state apportioned income and the potential expiration of the state tax credits due to the carryforwards period. These federal and state net operating losses and credit carryforwards are available, subject to the discussion in the following paragraph, to offset future taxable income and, if not utilized, will begin to expire in varying amounts between 2020 and 2029. Generally, a change of more than 50% in the ownership of a company's stock, by value, over a three year period constitutes an ownership change for federal income tax purposes. An ownership change may limit a company's ability to use its net operating loss carryforwards attributable to the period prior to such change. In fiscal 2007 and prior to our IPO, past issuances and transfers of stock caused an ownership change for certain tax purposes. When certain ownership changes occur, tax laws require that a calculation be made to establish a limitation on the use of net operating loss carryforwards created in periods prior to such ownership change. For

fiscal year 2008, utilization of our federal loss carryforwards was limited to $3.0 million. There was no limitation that occurred for fiscal 2009. For fiscal 2010, we do not anticipate a limitation on the use of our net operating loss carryforwards.
Results of Operations
The following table sets forth the line items of our consolidated statements of operations on an absolute dollar basis and as a relative percentage of our total revenue for each applicable period, together with the relative percentage change in such line item between applicable comparable periods set forth below (dollars in thousands):

                                            Three Months Ended September 30,                                               Six Months Ended September 30,
                                   2008                          2009                                           2008                           2009
                                           % of                          % of             %                             % of                           % of             %
                           Amount        Revenue         Amount        Revenue          Change          Amount        Revenue          Amount        Revenue          Change
Product revenue           $ 17,280           92.1 %     $ 13,763           94.1 %         (20.4 )%     $ 30,169           86.5 %      $ 24,440           89.7 %         (19.0 )%
Service revenue              1,480            7.9 %          856            5.9 %         (42.2 )%        4,697           13.5 %         2,807           10.3 %         (40.2 )%

Total revenue               18,760          100.0 %       14,619          100.0 %         (22.1 )%       34,866          100.0 %        27,247          100.0 %         (21.9 )%
Cost of product
revenue                     11,467           61.1 %        9,222           63.1 %         (19.6 )%       20,080           57.6 %        17,094           62.8 %         (14.9 )%
Cost of service
revenue                        958            5.1 %          632            4.3 %         (34.0 )%        3,254            9.3 %         1,887            6.9 %         (42.0 )%

Total cost of revenue       12,425           66.2 %        9,854           67.4 %         (20.7 )%       23,334           66.9 %        18,981           69.7 %         (18.7 )%

Gross profit                 6,335           33.8 %        4,765           32.6 %         (24.8 )%       11,532           33.1 %         8,266           30.3 %         (28.3 )%
General and
administrative
expenses                     2,893           15.4 %        3,143           21.5 %           8.6 %         5,508           15.8 %         6,307           23.1 %          14.5 %
Sales and marketing
expenses                     2,771           14.8 %        2,962           20.2 %           6.9 %         5,423           15.6 %         6,113           22.4 %          12.7 %
Research and
development expenses           373            2.0 %          491            3.4 %          31.9 %           791            2.3 %           910            3.3 %          15.0 %

Income (loss) from
operations                     298            1.6 %       (1,831 )        (12.5 )%       (714.4 )%         (190 )         (0.5 )%       (5,064 )        (18.5 )%         NM
Interest expense                41            0.2 %           74            0.5 %          80.5 %           108            0.3 %           130            0.5 %          20.4 %
Dividend and interest
income                         550            2.9 %           76            0.5 %         (86.2 )%        1,167            3.3 %           198            0.7 %         (83.0 )%

Income (loss) before
income tax                     807            4.3 %       (1,829 )        (12.5 )%       (326.6 )%          869            2.5 %        (4,996 )        (18.3 )%       (674.9 )%
Income tax expense
(benefit)                      354            1.9 %         (430 )         (2.9 )%        221.5 %           382            1.1 %          (824 )         (3.0 )%        315.7 %

Net income (loss)         $    453            2.4 %     $ (1,399 )         (9.6 )%       (408.8 )%     $    487            1.4 %      $ (4,172 )        (15.3 )%       (956.7 )%

NM = Not Meaningful

Revenue. Product revenue decreased from $17.3 million for the fiscal 2009 second quarter ended September 30, 2008 to $13.8 million for the fiscal 2010 second quarter ended September 30, 2009, a decrease of $3.5 million, or 20%. Product revenue decreased from $30.2 million for the first half ended September 30, 2008 to $24.4 million for the first half ended September 30, 2009, a decrease of . . .