UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended AprilJuly 3, 2022
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to______.
OPTEX SYSTEMS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware | 000-54114 | 90-0609531 | ||
(State or other jurisdiction | (Commission | (IRS Employer | ||
of incorporation) | File Number) | Identification No.) |
1420 Presidential Drive, Richardson, TX | 75081-2439 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (972) 764-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
None. |
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer ☐ | Accelerated Filer ☐ | Non-Accelerated Filer ☒ | Smaller Reporting Company ☒ |
☐ | Emerging growth company |
☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. |
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 13,August 12, 2022: shares of common stock.
EXPLANATORY NOTE
This Amendment No. 1 to the Quarterly Report on Form 10-Q of Optex Systems Holdings, Inc. for the quarterly period ended July 3, 2022 (the “Original 10-Q”) is identical to the Original 10-Q except for the correction of a reference to net income, which should have been to Adjusted EBITDA (a non-GAAP financial measure), in the seventh paragraph of the Liquidity and Capital Resources section of “Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
OPTEX SYSTEMS HOLDINGS, INC.
FORM 10-Q
For the period ended AprilJuly 3, 2022
INDEX
PART I— FINANCIAL INFORMATION | F-1 | |
Item 1. | Unaudited Condensed Consolidated Financial Statements | F-1 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. | Controls and Procedures | |
PART II— OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosures | |
Item 6. | Exhibits | |
SIGNATURE |
2 |
PartPART 1. Financial InformationFINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
OPTEX SYSTEMS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-1 |
Optex Systems Holdings, Inc.
Condensed Consolidated Balance Sheets
April 3, 2022 | October 3, 2021 | July 3, 2022 | October 3, 2021 | |||||||||||||
(Thousands, except share and per share data) | (Thousands, except share and per share data) | |||||||||||||||
April 3, 2022 | October 3, 2021 | July 3, 2022 | October 3, 2021 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Cash and Cash Equivalents | $ | 4,881 | $ | 3,900 | $ | 5,169 | $ | 3,900 | ||||||||
Accounts Receivable, Net | 1,924 | 3,183 | 1,918 | 3,183 | ||||||||||||
Inventory, Net | 8,381 | 7,583 | 8,559 | 7,583 | ||||||||||||
Prepaid Expenses | 290 | 262 | 324 | 262 | ||||||||||||
Current Assets | 15,476 | 14,928 | 15,970 | 14,928 | ||||||||||||
Property and Equipment, Net | 989 | 1,017 | 1,033 | 1,017 | ||||||||||||
Other Assets | ||||||||||||||||
Deferred Tax Asset | 1,341 | 1,288 | 948 | 1,288 | ||||||||||||
Right-of-use Asset | 3,405 | 3,599 | 3,339 | 3,599 | ||||||||||||
Security Deposits | 23 | 23 | 23 | 23 | ||||||||||||
Other Assets | 4,769 | 4,910 | 4,310 | 4,910 | ||||||||||||
Total Assets | $ | 21,234 | $ | 20,855 | $ | 21,313 | $ | 20,855 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts Payable | $ | 1,303 | $ | 551 | $ | 838 | $ | 551 | ||||||||
Operating Lease Liability | 581 | 528 | 599 | 528 | ||||||||||||
Accrued Expenses | 802 | 851 | 787 | 851 | ||||||||||||
Accrued Warranty Costs | 155 | 78 | 196 | 78 | ||||||||||||
Customer Deposits | 256 | - | ||||||||||||||
Current Liabilities | 2,841 | 2,008 | 2,676 | 2,008 | ||||||||||||
Operating Lease Liability, net of current portion | 2,951 | 3,133 | 2,875 | 3,133 | ||||||||||||
Total Liabilities | 5,792 | 5,141 | 5,551 | 5,141 | ||||||||||||
Commitments and Contingencies | - | - | - | - | ||||||||||||
Stockholders’ Equity | ||||||||||||||||
Common Stock – ($ | par, authorized, and shares issued, and and outstanding, respectively)8 | 9 | ||||||||||||||
Common Stock – ($ | par, authorized, and shares issued, and and outstanding, respectively)8 | 9 | ||||||||||||||
Treasury Stock (at cost, | and shares held, respectively)- | (69 | ) | - | (69 | ) | ||||||||||
Additional Paid in Capital | 25,534 | 25,752 | 25,426 | 25,752 | ||||||||||||
Accumulated Deficit | (10,100 | ) | (9,978 | ) | (9,672 | ) | (9,978 | ) | ||||||||
Stockholders’ Equity | 15,442 | 15,714 | 15,762 | 15,714 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 21,234 | $ | 20,855 | $ | 21,313 | $ | 20,855 |
The accompanying notes are an integral part of these condensed consolidated financial statements
F-2 |
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
April 3, 2022 | March 28, 2021 | April 3, 2022 | March 28, 2021 | July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||||||||||||||
(Thousands, except share and per share data) | (Thousands, except share and per share data) | |||||||||||||||||||||||||||||||
Three months ended | Six months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
April 3, 2022 | March 28, 2021 | April 3, 2022 | March 28, 2021 | July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||||||||||||||
Revenue | $ | 5,136 | $ | 4,246 | $ | 9,475 | $ | 8,717 | $ | 6,170 | $ | 4,433 | $ | 15,645 | $ | 13,149 | ||||||||||||||||
Cost of Sales | 4,420 | 3,868 | 7,936 | 7,504 | 4,902 | 3,687 | 12,838 | 11,190 | ||||||||||||||||||||||||
Gross Margin | 716 | 378 | 1,539 | 1,213 | 1,268 | 746 | 2,807 | 1,959 | ||||||||||||||||||||||||
General and Administrative Expense | 907 | 792 | 1,715 | 1,548 | 758 | 689 | 2,473 | 2,238 | ||||||||||||||||||||||||
Operating Loss | (191 | ) | (414 | ) | (176 | ) | (335 | ) | ||||||||||||||||||||||||
Operating Income (Loss) | 510 | 57 | 334 | (279 | ) | |||||||||||||||||||||||||||
Gain (Loss) on Change in Fair Value of Warrants | - | (169 | ) | - | 858 | |||||||||||||||||||||||||||
Gain on Change in Fair Value of Warrants | - | 1,167 | - | 2,025 | ||||||||||||||||||||||||||||
Interest Expense | - | (2 | ) | - | (5 | ) | - | (4 | ) | - | (9 | ) | ||||||||||||||||||||
Other Income (Loss) | - | (171 | ) | - | 853 | |||||||||||||||||||||||||||
Other Income | - | 1,163 | - | 2,016 | ||||||||||||||||||||||||||||
Income (Loss) Before Taxes | (191 | ) | (585 | ) | (176 | ) | 518 | |||||||||||||||||||||||||
Income Before Taxes | 510 | 1,220 | 334 | 1,737 | ||||||||||||||||||||||||||||
Income Tax (Benefit) Expense, net | $ | (40 | ) | $ | 17 | $ | (54 | ) | $ | 33 | $ | 82 | $ | (154 | ) | $ | 28 | $ | (122 | ) | ||||||||||||
Net Income (Loss) | $ | (151 | ) | $ | (602 | ) | $ | (122 | ) | $ | 485 | |||||||||||||||||||||
Net Income | $ | 428 | $ | 1,374 | $ | 306 | $ | 1,859 | ||||||||||||||||||||||||
Deemed dividends on participating securities | - | - | - | (162 | ) | - | (464 | ) | - | (622 | ) | |||||||||||||||||||||
Net income applicable to common shareholders | $ | (151 | ) | $ | (602 | ) | $ | (122 | ) | $ | 323 | $ | 428 | $ | 910 | $ | 306 | $ | 1,237 | |||||||||||||
Basic income (loss) per share | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | 0.04 | |||||||||||||||||||||
Basic income per share | $ | 0.05 | $ | 0.11 | $ | 0.04 | $ | 0.15 | ||||||||||||||||||||||||
Weighted Average Common Shares Outstanding - basic | 8,255,578 | 8,214,481 | 8,242,279 | 8,256,879 | 8,187,318 | 8,101,223 | 8,223,492 | 8,204,994 | ||||||||||||||||||||||||
Diluted income (loss) per share | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | 0.04 | |||||||||||||||||||||
Diluted income per share | $ | 0.05 | $ | 0.11 | $ | 0.04 | $ | 0.15 | ||||||||||||||||||||||||
Weighted Average Common Shares Outstanding – diluted | $ | 8,255,578 | $ | 8,214,481 | $ | 8,242,279 | $ | 8,369,763 | $ | 8,285,996 | $ | 8,138,106 | $ | 8,297,341 | $ | 8,292,544 |
The accompanying notes are an integral part of these condensed consolidated financial statements
F-3 |
Optex Systems Holdings, Inc.
CondensedConsolidated Statements of Cash Flows
(Unaudited)
April 3, 2022 | March 28, 2021 | |||||||
(Thousands) Six months ended | ||||||||
April 3, 2022 | March 28, 2021 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income (Loss) | $ | (122 | ) | $ | 485 | |||
Adjustments to Reconcile Net Income (Loss) to Net Cash provided by Operating Activities: | ||||||||
Depreciation and Amortization | 147 | 128 | ||||||
Gain on Change in Fair Value of Warrants | - | (858 | ) | |||||
Stock Compensation Expense | 92 | 114 | ||||||
Deferred Tax | (54 | ) | 33 | |||||
Accounts Receivable | 1,259 | 922 | ||||||
Inventory | (798 | ) | (202 | ) | ||||
Prepaid Expenses | (29 | ) | 71 | |||||
Leases | 65 | (29 | ) | |||||
Accounts Payable and Accrued Expenses | 703 | (561 | ) | |||||
Accrued Warranty Costs | 77 | (20 | ) | |||||
Customer Advance Deposits | - | (1 | ) | |||||
Total Adjustments | 1,462 | (403 | ) | |||||
Net Cash provided by Operating Activities | 1,340 | 82 | ||||||
Cash Flows used in Investing Activities | ||||||||
Purchases of Property and Equipment | (118 | ) | (128 | ) | ||||
Net Cash used in Investing Activities | (118 | ) | (128 | ) | ||||
Cash Flows used in Financing Activities | ||||||||
Cash Paid for Taxes Withheld on Net Settled Restricted Stock Unit Shares Issued | (19 | ) | (44 | ) | ||||
Stock Repurchase | (222 | ) | (730 | ) | ||||
Net Cash used in Financing Activities | (241 | ) | (774 | ) | ||||
Net Increase (Decrease) in Cash and Cash Equivalents | 981 | (820 | ) | |||||
Cash and Cash Equivalents at Beginning of Period | 3,900 | 4,700 | ||||||
Cash and Cash Equivalents at End of Period | $ | 4,881 | $ | 3,880 | ||||
Supplemental Cash Flow Information: | ||||||||
Non Cash Transactions: | ||||||||
Right-of-Use Asset | $ | - | $ | 3,688 | ||||
Operating Lease Liabilities | - | (3,688 | ) | |||||
Treasury Stock Retired | (291 | ) | - | |||||
Cash Transactions: | ||||||||
Cash Paid for Taxes | - | 48 | ||||||
Cash Paid for Interest | - | 5 |
The accompanying notes are an integral part of these condensed consolidated financial statements
(Unaudited)
Optex Systems Holdings, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Thousands, except share data)
July 3, 2022 | June 27, 2021 | |||||||
(Thousands) Nine months ended | ||||||||
July 3, 2022 | June 27, 2021 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income | $ | 306 | $ | 1,859 | ||||
Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities: | ||||||||
Depreciation and Amortization | 221 | 195 | ||||||
Gain on Change in Fair Value of Warrants | - | (2,025 | ) | |||||
Stock Compensation Expense | 127 | 171 | ||||||
Deferred Tax | 340 | (81 | ) | |||||
Accounts Receivable | 1,264 | 1,570 | ||||||
Inventory | (976 | ) | 146 | |||||
Prepaid Expenses | (62 | ) | (95 | ) | ||||
Leases | 73 | 23 | ||||||
Accounts Payable and Accrued Expenses | 223 | (631 | ) | |||||
Accrued Warranty Costs | 118 | (15 | ) | |||||
Customer Advance Deposits | 256 | (1 | ) | |||||
Total Adjustments | 1,584 | (743 | ) | |||||
Net Cash provided by Operating Activities | 1,890 | 1,116 | ||||||
Cash Flows used in Investing Activities | ||||||||
Purchases of Property and Equipment | (236 | ) | (214 | ) | ||||
Net Cash used in Investing Activities | (236 | ) | (214 | ) | ||||
Cash Flows used in Financing Activities | ||||||||
Cash Paid for Taxes Withheld on Net Settled Restricted Stock Unit Shares Issued | (19 | ) | (44 | ) | ||||
Stock Repurchase | (366 | ) | (800 | ) | ||||
Net Cash used in Financing Activities | (385 | ) | (844 | ) | ||||
Net Increase in Cash and Cash Equivalents | 1,269 | 58 | ||||||
Cash and Cash Equivalents at Beginning of Period | 3,900 | 4,700 | ||||||
Cash and Cash Equivalents at End of Period | $ | 5,169 | $ | 4,758 | ||||
Supplemental Cash Flow Information: | ||||||||
Non Cash Transactions: | ||||||||
Right-of-Use Asset | $ | 51 | $ | 3,688 | ||||
Operating Lease Liabilities | (51 | ) | (3,688 | ) | ||||
Treasury Stock Retired | 435 | 1,000 | ||||||
Cash Transactions: | ||||||||
Cash Paid for Taxes | - | 48 | ||||||
Cash Paid for Interest | - | 9 |
Issued | Shares | Stock | Stock | Capital | Earnings | Equity | ||||||||||||||||||||||
Three months ended April 3, 2022 | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Shares | Treasury | Common | Treasury | Paid in | Retained | Stockholders | ||||||||||||||||||||||
Issued | Shares | Stock | Stock | Capital | Earnings | Equity | ||||||||||||||||||||||
Balance at January 2, 2022 | 8,546,920 | 72,793 | $ | 9 | $ | (143 | ) | $ | 25,809 | $ | (9,949 | ) | $ | 15,726 | ||||||||||||||
Stock Compensation Expense | - | - | - | - | 35 | - | 35 | |||||||||||||||||||||
Taxes on Shares Issued for Vested Restricted Stock Units | - | - | - | - | (19 | ) | - | (19 | ) | |||||||||||||||||||
Common Stock Repurchase (1) | - | 78,733 | - | (148 | ) | - | - | (148 | ) | |||||||||||||||||||
Cancellation of Treasury Shares | (151,526 | ) | (151,526 | ) | (1 | ) | 291 | (291 | ) | - | (1 | ) | ||||||||||||||||
Net Loss | - | - | - | - | - | (151 | ) | (151 | ) | |||||||||||||||||||
Balance at April 3, 2022 | 8,395,394 | - | $ | 8 | $ | - | $ | 25,534 | $ | (10,100 | ) | $ | 15,442 |
Three months ended March 28, 2021 | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Shares | Treasury | Common | Treasury | Paid in | Retained | Stockholders | ||||||||||||||||||||||
Issued | Shares | Stock | Stock | Capital | Earnings | Equity | ||||||||||||||||||||||
Balance at December 27, 2020 | 8,795,869 | 314,325 | $ | 9 | $ | (615 | ) | $ | 26,333 | $ | (11,022 | ) | $ | 14,705 | ||||||||||||||
Stock Compensation Expense | - | - | - | - | 57 | - | 57 | |||||||||||||||||||||
Vested Restricted Stock Units Issued Net of Tax Withholding | 58,392 | - | - | - | (44 | ) | - | (44 | ) | |||||||||||||||||||
Common Stock Repurchase (2) | - | 166,342 | - | (315 | ) | - | - | (315 | ) | |||||||||||||||||||
Net Loss | - | - | - | - | - | (602 | ) | (602 | ) | |||||||||||||||||||
Balance at March 28, 2021 | 8,854,261 | 480,667 | $ | 9 | $ | (930 | ) | $ | 26,346 | $ | (11,624 | ) | $ | 13,801 |
Six months ended April 3, 2022 | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Shares | Treasury | Common | Treasury | Paid in | Retained | Stockholders | ||||||||||||||||||||||
Issued | Shares | Stock | Stock | Capital | Earnings | Equity | ||||||||||||||||||||||
Balance at October 3, 2021 | 8,523,704 | 35,555 | $ | 9 | $ | (69 | ) | $ | 25,752 | $ | (9,978 | ) | 15,714 | |||||||||||||||
Stock Compensation Expense | - | - | - | 92 | - | 92 | ||||||||||||||||||||||
Vested Restricted Stock Units Issued Net of Tax Withholding | 23,216 | - | - | (19 | ) | - | (19 | ) | ||||||||||||||||||||
Common Stock Repurchase (1) | - | 115,971 | - | (222 | ) | - | - | (222 | ) | |||||||||||||||||||
Cancellation of Treasury Shares | (151,526 | ) | (151,526 | ) | (1 | ) | 291 | (291 | ) | - | (1 | ) | ||||||||||||||||
Net Loss | - | - | - | - | (122 | ) | (122 | ) | ||||||||||||||||||||
Balance at April 3, 2022 | 8,395,394 | - | $ | 8 | $ | - | $ | 25,534 | $ | (10,100 | ) | $ | 15,442 |
Six months ended March 28, 2021 | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Shares | Treasury | Common | Treasury | Paid in | Retained | Stockholders | ||||||||||||||||||||||
Issued | Shares | Stock | Stock | Capital | Earnings | Equity | ||||||||||||||||||||||
Balance at September 27, 2020 | 8,795,869 | 105,733 | $ | 9 | $ | (200 | ) | $ | 26,276 | $ | (12,109 | ) | 13,976 | |||||||||||||||
Stock Compensation Expense | - | - | - | 114 | - | 114 | ||||||||||||||||||||||
Vested Restricted Stock Units Issued Net of Tax Withholding | 58,392 | - | - | (44 | ) | - | (44 | ) | ||||||||||||||||||||
Common Stock Repurchase (2) | - | 374,934 | - | (730 | ) | - | - | (730 | ) | |||||||||||||||||||
Net Income | - | - | - | - | 485 | 485 | ||||||||||||||||||||||
Net Income (Loss) | - | - | - | - | 485 | 485 | ||||||||||||||||||||||
Balance at March 28, 2021 | 8,854,261 | 480,667 | $ | 9 | $ | (930 | ) | $ | 26,346 | $ | (11,624 | ) | $ | 13,801 |
| |
|
The accompanying notes are an integral part of these condensed consolidated financial statements
F-4 |
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Thousands, except share data)
Three months ended July 3, 2022 | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Shares | Treasury | Common | Treasury | Paid in | Accumulated | Stockholders | ||||||||||||||||||||||
Issued | Shares | Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance at April 3, 2022 | 8,395,394 | - | $ | 8 | $ | - | $ | 25,534 | $ | (10,100 | ) | $ | 15,442 | |||||||||||||||
Stock Compensation Expense | - | - | - | - | 36 | - | 36 | |||||||||||||||||||||
Common Stock Repurchase (1) | - | 72,443 | - | (144 | ) | - | - | (144 | ) | |||||||||||||||||||
Cancellation of Treasury Shares(2) | (72,443 | ) | (72,443 | ) | - | 144 | (144 | ) | - | - | ||||||||||||||||||
Net Income | - | - | - | - | - | 428 | 428 | |||||||||||||||||||||
Balance at July 3, 2022 | 8,322,951 | - | $ | 8 | $ | - | $ | 25,426 | $ | (9,672 | ) | $ | 15,762 |
Three months ended June 27, 2021 | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Shares | Treasury | Common | Treasury | Paid in | Accumulated | Stockholders | ||||||||||||||||||||||
Issued | Shares | Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance at March 28, 2021 | 8,854,261 | 480,667 | $ | 9 | $ | (930 | ) | $ | 26,346 | $ | (11,624 | ) | $ | 13,801 | ||||||||||||||
Stock Compensation Expense | - | - | - | - | 57 | - | 57 | |||||||||||||||||||||
Common Stock Repurchase(1) | - | 38,599 | - | - | (70 | ) | - | (70 | ) | |||||||||||||||||||
Cancellation of Treasury Shares(2) | (519,266 | ) | (519,266 | ) | (1 | ) | (1,000 | ) | (1,000 | ) | - | (1 | ) | |||||||||||||||
Net Income | - | - | - | - | - | 1,374 | 1,374 | |||||||||||||||||||||
Balance at June 27, 2021 | 8,334,995 | - | $ | 8 | $ | - | $ | 25,403 | $ | (10,250 | ) | $ | 15,161 |
Nine months ended July 3, 2022 | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Shares | Treasury | Common | Treasury | Paid in | Accumulated | Stockholders | ||||||||||||||||||||||
Issued | Shares | Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance at October 3, 2021 | 8,523,704 | 35,555 | $ | 9 | $ | (69 | ) | $ | 25,752 | $ | (9,978 | ) | $ | 15,714 | ||||||||||||||
Stock Compensation Expense | - | - | - | 127 | - | 127 | ||||||||||||||||||||||
Vested Restricted Stock Units Issued Net of Tax Withholding | 23,216 | - | - | (19 | ) | - | (19 | ) | ||||||||||||||||||||
Common Stock Repurchase (1) | - | 188,414 | - | (366 | ) | - | - | (366 | ) | |||||||||||||||||||
Cancellation of Treasury Shares(2) | (223,969 | ) | (223,969 | ) | (1 | ) | 435 | (434 | ) | - | - | |||||||||||||||||
Net Income | - | - | - | - | 306 | 306 | ||||||||||||||||||||||
Balance at July 3, 2022 | 8,322,951 | - | $ | 8 | $ | - | $ | 25,426 | $ | (9,672 | ) | $ | 15,762 |
Nine months ended June 27, 2021 | ||||||||||||||||||||||||||||
Common | Additional | Total | ||||||||||||||||||||||||||
Shares | Treasury | Common | Treasury | Paid in | Accumulated | Stockholders | ||||||||||||||||||||||
Issued | Shares | Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance at September 27, 2020 | 8,795,869 | 105,733 | $ | 9 | $ | (200 | ) | $ | 26,276 | $ | (12,109 | ) | $ | 13,976 | ||||||||||||||
Stock Compensation Expense | - | - | - | 171 | - | 171 | ||||||||||||||||||||||
Vested Restricted Stock Units Issued Net of Tax Withholding | 58,392 | - | - | (44 | ) | - | (44 | ) | ||||||||||||||||||||
Common Stock Repurchase (1) | - | 413,533 | - | (800 | ) | - | - | (800 | ) | |||||||||||||||||||
Cancellation of Treasury Shares(2) | (519,266 | ) | (519,266 | ) | (1 | ) | 1,000 | (1,000 | ) | - | (1 | ) | ||||||||||||||||
Net Income | - | - | - | - | 1,859 | 1,859 | ||||||||||||||||||||||
Balance at June 27, 2021 | 8,334,995 | - | $ | 8 | $ | - | $ | 25,403 | $ | (10,250 | ) | $ | 15,161 |
(1) | Common shares repurchased in the open market during the respective period. Shares are repurchased to treasury stock using the cost method. |
(2) | Treasury stock canceled during the respective period. |
The accompanying notes are an integral part of these condensed consolidated financial statements
F-5 |
Note 1 - Organization and Operations
Optex Systems Holdings, Inc. (the “Company”) manufactures optical sighting systems and assemblies for the U.S. Department of Defense, foreign military applications and commercial markets. Its products are installed on a variety of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. The Company also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that are delivered both directly to the military and to other defense prime contractors or commercial customers. The Company’s consolidated revenues for the sixnine months ended AprilJuly 3, 2022 were derived from the U.S. government (1313%%), fourthree major U.S. defense contractors (1525%%, 1215%%,6% and 68%%, respectively), one major commercial customer (2121%%) and all other customers (2718%%). Approximately 9394%% of the total Company revenue is generated from domestic customers and 76%% is derived from foreign customers, primarily in Canada. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967square feet. As of AprilJuly 3, 2022, Optex Systems Holdings operated with 83full-time equivalent employees.
We may be at risk as a result of the current COVID-19 pandemic. Risks that could affect our business include the duration and scope of the COVID-19 pandemic and the impact on the demand for our products; impacts on our supply chain; actions by governments, businesses and individuals taken in response to the pandemic; the length of time of the pandemic and the possibility of its reoccurrence; the timing required to develop and implement effective treatments; the success of global vaccination efforts; the eventual impact of the pandemic and actions taken in response to the pandemic on global and regional economies; and the pace of recovery whenas the pandemic subsides.
Beginning in April 2020 through October 3, 2021, we experienced a significant reduction in new orders and ending customer backlog in our Optex Richardson segment, resulting in an overall decrease in backlog of 40% between September 29, 2019 and October 3, 2021.2021. We attribute the lower orders to a combination of factors including a COVID-19 driven slow-down of contract awards for both U.S. military sales and foreign military sales (FMS), combined with significant shifting in defense spending budget allocations in US military sales and FMS away from Army ground system vehicles toward other military agency applications. In addition, the pandemic has caused several program delays throughout the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supply chain issues.
While the Applied Optics Center segment experienced a significant decline in orders during the second half of fiscal year 2020, the segment saw a sizable increase in new orders during the fiscal year ended October 3, 2021 as a result of increased military spending in Army infantry optical equipment, a larger customer base and higher customer demand for commercial optical assemblies. As of October 3, 2021, the Applied Optics Center segment backlog had increased by 153% as compared to the level on September 29, 2019.2019. As a result of this significant shift in orders and backlog between segments, we anticipate corresponding shifts in revenue during the 2022 fiscal year, with revenue from the Optex Richardson segment decreasing, and revenue from the Applied Optics Center segment increasing.
Note 2 - Accounting Policies
Basis of Presentation
Principles of Consolidation: The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Optex Systems Holdings’ Form 10-K for the year ended October 3, 2021 and other reports filed with the SEC.
The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of Optex Systems Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required for interim financial reporting purposes has been omitted.
F-6 |
Inventory: As of AprilJuly 3, 2022 and October 3, 2021, inventory included:
Schedule of Inventory
July 3, 2022 | October 3, 2021 | |||||||
(Thousands) | ||||||||
July 3, 2022 | October 3, 2021 | |||||||
Raw Material | $ | 5,172 | $ | 4,926 | ||||
Work in Process | 3,505 | 2,664 | ||||||
Finished Goods | 536 | 629 | ||||||
Gross Inventory | $ | 9,213 | $ | 8,219 | ||||
Less: Inventory Reserves | (654 | ) | (636 | ) | ||||
Net Inventory | $ | 8,559 | $ | 7,583 |
April 3, 2022 | October 3, 2021 | |||||||
(Thousands) | ||||||||
April 3, 2022 | October 3, 2021 | |||||||
Raw Material | $ | 4,759 | $ | 4,926 | ||||
Work in Process | 3,688 | 2,664 | ||||||
Finished Goods | 567 | 629 | ||||||
Gross Inventory | $ | 9,014 | $ | 8,219 | ||||
Less: Inventory Reserves | (633 | ) | (636 | ) | ||||
Net Inventory | $ | 8,381 | $ | 7,583 |
Concentration of Credit Risk: Optex Systems Holdings’ accounts receivables as of AprilJuly 3, 2022 consistconsisted of U.S. government agencies (1311%%), five major U.S. defense contractors (2918%%, 1516%%, 1215%%, 119%% and 76%%, respectively), one commercial customer (717%%) and all other customers (68%%). The Company does not believe that this concentration results in undue credit risk because of the financial strength of the customers and the Company’s long history with these customers.
Accrued Warranties: Optex Systems Holdings accrues product warranty liabilities based on the historical return rate against period shipments as they occur and reviews and adjusts these accruals quarterly for any significant changes in estimated costs or return rates. The accrued warranty liability includes estimated costs to repair or replace returned warranty backlog units currently in-house plus estimated costs for future warranty returns that may be incurred against warranty covered products previously shipped as of the period end date. As of AprilJuly 3, 2022, and October 3, 2021, the Company had warranty reserve balances of $155196 and $78 thousand, respectively.
Schedule of Warranty Reserves
Three months ended | Nine months ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Beginning balance | $ | 155 | $ | 63 | $ | 78 | $ | 83 | ||||||||
Incurred costs for warranties satisfied during the period | (1 | ) | (4 | ) | (3 | ) | (71 | ) | ||||||||
Warranty Expenses: | ||||||||||||||||
Warranties reserved for new product shipped during the period(1) | 52 | 9 | 131 | 18 | ||||||||||||
Change in estimate for pre-existing warranty liabilities(2) | (10 | ) | - | (10 | ) | 38 | ||||||||||
Warranty Expense | 42 | 9 | 122 | 56 | ||||||||||||
Ending balance | $ | 196 | $ | 68 | $ | 196 | $ | 68 |
Three months ended | Six Months ended | |||||||||||||||
April 3, 2022 | March 28, 2021 | April 3, 2022 | March 28, 2021 | |||||||||||||
Beginning balance | $ | 122 | $ | 49 | $ | 78 | $ | 83 | ||||||||
Incurred costs for warranties satisfied during the period | - | (25 | ) | (2 | ) | (68 | ) | |||||||||
Warranty Expenses: | ||||||||||||||||
Warranties reserved for new product shipped during the period(1) | 33 | 5 | 79 | 9 | ||||||||||||
Change in estimate for pre-existing warranty liabilities(2) | - | 34 | - | 39 | ||||||||||||
Warranty Expense | 33 | 39 | 79 | 48 | ||||||||||||
Ending balance | $ | 155 | $ | 63 | $ | 155 | $ | 63 |
(1) | Warranty expenses accrued to cost of sales (based on current period shipments and historical warranty return rate.) |
(2) | Changes in estimated warranty liabilities recognized in cost of sales associated with: the period end customer returned warranty backlog, or the actual costs of repaired/replaced warranty units which were shipped to the customer during the current period. |
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.
Fair Value of Financial Instruments: Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of the financial statement presentation date.
F-7 |
The carrying value of cash and cash equivalents, accounts receivable and accounts payable, are carried at, or approximate, fair value as of the reporting date because of their short-term nature. The credit facility is reported at fair value as it bears market rates of interest. Fair values for the Company’s warrant liabilities and derivatives are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.
The accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement. Fair value estimates are reviewed at the origination date and again at each applicable measurement date and interim or annual financial reporting dates, as applicable for the financial instrument, and are based upon certain market assumptions and pertinent information available to management at those times.
The methods and significant inputs and assumptions utilized in estimating the fair value of the warrant liabilities, as well as the respective hierarchy designations are discussed further in Note 6 “Warrant Liabilities”. The warrant liability measurement is considered a Level 3 measurement based on the availability of market data and inputs and the significance of any unobservable inputs as of the measurement date.
Revenue Recognition: The majority of the Company’s contracts and customer orders originate with fixed determinable unit prices for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the specific due date for the transfer of control and title of each of those deliverables to the customer at pre-established payment terms, which are generally within thirty to sixty days from the transfer of title and control. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. In addition, the Company has one ongoing service contract, which began in October 2017, relates to optimized weapon system support (OWSS) and includes ongoing program maintenance, repairs and spare inventory support for the customer’s existing fleet units in service through February 2025. Revenue recognition for this program has been recorded by the Company, and compensated by the customer, at fixed monthly increments over time, consistent with the defined contract maintenance period. During the three and sixnine months ended AprilJuly 3, 2022 and March 28,June 27, 2021, there was $120 thousand and $240352 thousand in 2022 and $120 thousand and $240359 thousand in 2021 in service contract revenue recognized over time.
During the three- and six-monthnine-month periods ended AprilJuly 3, 2022, there were 0 revenues recognized from customer deposit liabilities (deferred contract revenue). During the three- and March 28,nine-month periods ended June 27, 2021, there was $30 thousand and $30 thousand in 2022 and $0 and $1 thousand in 2021 of revenue recognized from customer deposit liabilities (deferred contract revenue). As of AprilJuly 3, 2022, customer deposit liabilities were $256 thousand. As of July 3, 2022, there arewere no customer deposit liabilities. As of April 3, 2022, there are 0 deferred sales commissions or other significant deferred contract costs.
Income Tax/Deferred Tax: As of AprilJuly 3, 2022, and October 3, 2021, Optex Systems, Inc. hashad a deferred tax asset valuation allowance of ($0.80.8)) million against deferred tax assets of $2.11.7 million for a net deferred tax asset of $0.9 million. As of October 3, 2021, Optex Systems, Inc. had a deferred tax asset valuation allowance of ($0.8) million against deferred tax assets of $2.1 million for a net deferred tax asset of $1.3 million. During the nine-month period ending July 3, 2022, the Company recovered $0.3 million.million in cash for taxes related to a net operating loss carryback from the prior year ended October 3, 2022. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2011 through 2016, which may not be fully recognized due to an IRS Section 382 limitation related to a change in control.
A significant number of our warrants outstanding through August 26, 2021 were participating securities, which shared dividend distributions and the allocation of any undistributed earnings (deemed dividends) with our common shareholders. Since the warrants expired in accordance with their terms on August 26, 2021, during the three and sixnine months ended AprilJuly 3, 2022, there were no declared dividends and no allocated undistributed earnings attributable to the participating warrants, respectively. During the three and sixnine months ended March 28,June 27, 2021, there were declared dividends and $0 and $thousand, respectively, in allocated undistributed earnings attributable to the participating warrants.
F-8 |
The Company has potentially dilutive securities outstanding, which include unvested restricted stock units, stock options and, for the three and sixnine months ended March 28,June 27, 2021, warrants. In computing the dilutive effect of warrants, the numerator is adjusted to add back any deemed dividends on participating securities (warrants) and the denominator is increased to assume the conversion of the number of additional incremental common shares. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Unvested restricted stock units, stock options and warrants that are anti-dilutive are excluded from the calculation of diluted earnings per common share.
For the three months ended AprilJuly 3, 2022, unvested restricted stock units and shares of unvested restricted stock (which convert to an aggregate of incremental shares) were excluded fromincluded in the diluted earnings per share calculation due to the antidilutive effect of the net loss during the period.calculation. For the three months ended March 28,June 27, 2021, unvested restricted stock units and shares of unvested restricted stock (which convert to an aggregate of incremental shares) were excluded fromincluded in the diluted earnings per share calculation due to the net loss during the period.calculation.
For the sixnine months ended AprilJuly 3, 2022, unvested restricted stock units and shares of unvested restricted stock (which convert to an aggregate of incremental shares) were excluded fromincluded in the diluted earnings per share calculation due to the antidilutive effect of the net loss.calculation. For the sixnine months ended March 28,June 27, 2021, unvested restricted stock units and restricted shares (which convert to an aggregate of incremental shares) were included in the diluted earnings per share calculation.
Note 3 - Segment Reporting
The Company’s reportable segments are strategic businesses offering similar products to similar markets and customers; however, the companies are operated and managed separately due to differences in manufacturing technology, equipment, geographic location, and specific product mix. Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was retained. Both the Applied Optics Center and Optex Systems – Richardson operate as reportable segments under the Optex Systems, Inc. corporate umbrella.
The Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies for the Optex Systems-Richardson (“Optex Systems”) segment. Intersegment sales and transfers are accounted for at annually agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general and administrative costs, but exclude profits that would apply to third party external customers.
Optex Systems (OPX) – Richardson,, Texas
The Optex Systems segment revenue is comprised of approximately 8487%% domestic military customers and 1613%% foreign military customers. For the sixnine months ended AprilJuly 3, 2022, Optex Systems – Richardson represented 4242%% of the Company’s total consolidated revenue and consisted of the U.S. government (1313%%), two major U.S. defense contractors, (718%%) and (68%%), and all other customers (163%%).
Optex Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of AprilJuly 3, 2022, the Richardson facility operated with 4745 full time equivalent employees in a single shift operation. Optex Systems, Richardson serves as the home office for both the Optex Systems and Applied Optics Center segments.
Applied Optics Center (AOC) – Dallas,, Texas
The Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represent approximately 3721%% and military sales to prime and subcontracted customers represent approximately 6379%% of the external segment revenue. Approximately 9393%% of the AOC revenue is derived from external customers and approximately 77%% is related to intersegment sales to Optex Systems in support of military contracts. For the sixnine months ended AprilJuly 3, 2022, AOC represented 5858%% of the Company’s total consolidated revenue and consisted of threetwo major defense contractors (1215%%,8% and 67%%), one commercial customer (2121%%), and all other customers (1115%%).
The Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of AprilJuly 3, 2022, AOC operated with 3638 full time equivalent employees in a single shift operation.
The financial tables below present information on the reportable segments’ profit or loss for each period, as well as segment assets as of each period end. The Company does not allocate interest expense, income taxes or unusual items to segments.
Schedule of Segment Reporting Information
Reportable Segment Financial Information (thousands) | ||||||||||||||||
As of and for the three months ended April 3, 2022 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 2,078 | $ | 3,058 | $ | - | $ | 5,136 | ||||||||
Intersegment revenues | - | 255 | (255 | ) | - | |||||||||||
Total revenue | $ | 2,078 | $ | 3,313 | $ | (255 | ) | $ | 5,136 | |||||||
Interest expense | $ | - | $ | - | $ | - | $ | - | ||||||||
Depreciation and amortization | $ | 10 | $ | 65 | $ | - | $ | 75 | ||||||||
Income (loss) before taxes | $ | (243 | ) | $ | 87 | $ | (35 | ) | $ | (191 | ) | |||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (298 | ) | $ | 298 | $ | - | $ | - | |||||||
Stock compensation expense | $ | - | $ | - | $ | 35 | $ | 35 | ||||||||
Warranty expense | $ | - | $ | 33 | $ | - | $ | 33 | ||||||||
Segment assets | $ | 14,457 | $ | 6,777 | $ | - | $ | 21,234 | ||||||||
Expenditures for segment assets | $ | (19 | ) | $ | 47 | $ | - | $ | 28 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
As of and for the three months ended March 28, 2021 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 2,805 | $ | 1,441 | $ | - | $ | 4,246 | ||||||||
Intersegment revenues | - | 530 | (530 | ) | - | |||||||||||
Total revenue | $ | 2,805 | $ | 1,971 | $ | (530 | ) | $ | 4,246 | |||||||
Interest expense | $ | - | $ | - | $ | 2 | $ | 2 | ||||||||
Depreciation and amortization | $ | 10 | $ | 55 | $ | - | $ | 65 | ||||||||
Income (loss) before taxes | $ | (733 | ) | $ | 376 | $ | (228 | ) | $ | (585 | ) | |||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (153 | ) | $ | 153 | $ | - | $ | - | |||||||
Loss on change in fair value of warrants | $ | - | $ | - | $ | 169 | $ | 169 | ||||||||
Stock compensation expense | $ | - | $ | - | $ | 57 | $ | 57 | ||||||||
Warranty expense | $ | - | $ | 39 | $ | - | $ | 39 | ||||||||
Segment assets | $ | 14,820 | $ | 6,307 | $ | - | $ | 21,127 | ||||||||
Expenditures for segment assets | $ | - | $ | 47 | $ | - | $ | 47 |
F-9 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
As of and for the three months ended July 3, 2022 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 2,653 | $ | 3,517 | $ | - | $ | 6,170 | ||||||||
Intersegment revenues | - | 258 | (258 | ) | - | |||||||||||
Total revenue | $ | 2,653 | $ | 3,775 | $ | (258 | ) | $ | 6,170 | |||||||
Interest expense | $ | - | $ | - | $ | - | $ | - | ||||||||
Depreciation and amortization | $ | 8 | $ | 66 | $ | - | $ | 74 | ||||||||
Income (loss) before taxes | $ | 185 | $ | 361 | $ | (36 | ) | $ | 510 | |||||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (268 | ) | $ | 268 | $ | - | $ | - | |||||||
Stock compensation expense | $ | - | $ | - | $ | 36 | $ | 36 | ||||||||
Warranty expense | $ | - | $ | 42 | $ | - | $ | 42 | ||||||||
Segment assets | $ | 14,676 | $ | 6,637 | $ | - | $ | 21,313 | ||||||||
Expenditures for segment assets | $ | 49 | $ | 69 | $ | - | $ | 118 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
As of and for the three months ended June 27, 2021 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 3,126 | $ | 1,307 | $ | - | $ | 4,433 | ||||||||
Intersegment revenues | - | 41 | (41 | ) | - | |||||||||||
Total revenue | $ | 3,126 | $ | 1,348 | $ | (41 | ) | $ | 4,433 | |||||||
Interest expense | $ | - | $ | - | $ | 4 | $ | 4 | ||||||||
Depreciation and amortization | $ | 10 | $ | 57 | $ | - | $ | 67 | ||||||||
Income (loss) before taxes | $ | 328 | $ | (214 | ) | $ | 1,106 | $ | 1,220 | |||||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (177 | ) | $ | 177 | $ | - | $ | - | |||||||
Gain on change in fair value of warrants | $ | - | $ | - | $ | (1,167 | ) | $ | (1,167 | ) | ||||||
Stock compensation expense | $ | - | $ | - | $ | 57 | $ | 57 | ||||||||
Warranty expense | $ | - | $ | 9 | $ | - | $ | 9 | ||||||||
Segment assets | $ | 14,690 | $ | 6,498 | $ | - | $ | 21,188 | ||||||||
Expenditures for segment assets | $ | (3 | ) | $ | 89 | $ | - | $ | 86 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
As of and for the six months ended April 3, 2022 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 3,934 | $ | 5,541 | $ | - | $ | 9,475 | ||||||||
Intersegment revenues | - | 435 | (435 | ) | - | |||||||||||
Total revenue | $ | 3,934 | $ | 5,976 | $ | (435 | ) | $ | 9,475 | |||||||
Interest expense | $ | - | $ | - | $ | - | $ | - | ||||||||
Depreciation and amortization | $ | 20 | $ | 127 | $ | - | $ | 147 | ||||||||
Income (loss) before taxes | $ | (460 | ) | $ | 376 | $ | (92 | ) | $ | (176 | ) | |||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (534 | ) | $ | 534 | $ | - | $ | - | |||||||
Stock compensation expense | $ | - | $ | - | $ | 92 | $ | 92 | ||||||||
Warranty expense | $ | - | $ | 79 | $ | - | $ | 79 | ||||||||
Segment assets | $ | 14,457 | $ | 6,777 | $ | - | $ | 21,234 | ||||||||
Expenditures for segment assets | $ | 6 | $ | 112 | $ | - | $ | 118 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
As of and for the six months ended March 28, 2021 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 5,833 | $ | 2,884 | $ | - | $ | 8,717 | ||||||||
Intersegment revenues | - | 896 | (896 | ) | - | |||||||||||
Total revenue | $ | 5,833 | $ | 3,780 | $ | (896 | ) | $ | 8,717 | |||||||
Interest expense | $ | - | $ | - | $ | 5 | $ | 5 | ||||||||
Depreciation and amortization | $ | 21 | $ | 107 | $ | - | $ | 128 | ||||||||
Income (loss) before taxes | $ | 24 | $ | (245 | ) | $ | 739 | $ | 518 | |||||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (353 | ) | $ | 353 | $ | - | $ | - | |||||||
Gain on change in fair value of warrants | $ | - | $ | - | $ | (858 | ) | $ | (858 | ) | ||||||
Stock compensation expense | $ | - | $ | - | $ | 114 | $ | 114 | ||||||||
Warranty expense | $ | - | $ | 48 | $ | - | $ | 48 | ||||||||
Segment assets | $ | 14,820 | $ | 6,307 | $ | - | $ | 21,127 | ||||||||
Expenditures for segment assets | $ | 20 | $ | 108 | $ | - | $ | 128 |
F-10 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
As of and for the nine months ended July 3, 2022 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 6,588 | $ | 9,057 | $ | - | $ | 15,645 | ||||||||
Intersegment revenues | - | 693 | (693 | ) | - | |||||||||||
Total revenue | $ | 6,588 | $ | 9,750 | $ | (693 | ) | $ | 15,645 | |||||||
Interest expense | $ | - | $ | - | $ | - | $ | - | ||||||||
Depreciation and amortization | $ | 28 | $ | 193 | $ | - | $ | 221 | ||||||||
Income (loss) before taxes | $ | (276 | ) | $ | 737 | $ | (127 | ) | $ | 334 | ||||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (802 | ) | $ | 802 | $ | - | $ | - | |||||||
Stock compensation expense | $ | - | $ | - | $ | 127 | $ | 127 | ||||||||
Warranty expense | $ | - | $ | 122 | $ | - | $ | 122 | ||||||||
Segment assets | $ | 14,676 | $ | 6,637 | $ | - | $ | 21,313 | ||||||||
Expenditures for segment assets | $ | 55 | $ | 181 | $ | - | $ | 236 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
As of and for the nine months ended June 27, 2021 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 8,958 | $ | 4,191 | $ | - | $ | 13,149 | ||||||||
Intersegment revenues | - | 937 | (937 | ) | - | |||||||||||
Total revenue | $ | 8,958 | $ | 5,128 | $ | (937 | ) | $ | 13,149 | |||||||
Interest expense | $ | - | $ | - | $ | 9 | $ | 9 | ||||||||
Depreciation and amortization | $ | 31 | $ | 164 | $ | - | $ | 195 | ||||||||
Income (loss) before taxes | $ | 351 | $ | (459 | ) | $ | 1,845 | $ | 1,737 | |||||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (530 | ) | $ | 530 | $ | - | $ | - | |||||||
Gain on change in fair value of warrants | $ | - | $ | - | $ | (2,025 | ) | $ | (2,025 | ) | ||||||
Stock compensation expense | $ | - | $ | - | $ | 171 | $ | 171 | ||||||||
Warranty expense | $ | - | $ | 56 | $ | - | $ | 56 | ||||||||
Segment assets | $ | 14,690 | $ | 6,498 | $ | - | $ | 21,188 | ||||||||
Expenditures for segment assets | $ | 17 | $ | 197 | $ | - | $ | 214 |
F-11 |
Note 4 - Commitments and Contingencies
Non-cancellable Operating Leases
Optex Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc., Richardson location and the Applied Optics Center Dallas address location. The Company also leases certain office equipment under non-cancellable operating leases.
The leased facility under Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100square feet of space at the premises. The previous lease term for this location expired March 31, 2021and the monthly base rent was $24.6 thousand through March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months, commencing on April 1, 2021 and ending on May 31, 2028. The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each year thereafter.thereafter. The initial term included 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately $11.3 thousand for additional Common Area Maintenance fees and taxes (“CAM”), to be adjusted annually based on actual expenses incurred by the landlord.
The leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet of space at the premises. The previous lease term for this location expired on October 31, 2021 and the monthly base rent was $21.9 thousand through the end of the lease. On January 11, 2021 the Company executed a first amendment extending the terms of the lease for eighty-six (86) months, commencing on November 1, 2021 and ending on December 31, 2028. The initial base rent is set at $23.6 thousand as of January 1, 2022 and escalates 2.75% on January 1 each year thereafter. The initial term includes 2 months of rent abatement for November and December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing rental rate” or the then current base rental rate. Our obligations to make payments under the lease are secured by a $125,000 standby letter of credit.credit. The monthly rent includes approximately $7.9 thousand for additional CAM, to be adjusted annually based on actual expenses incurred by the landlord.
Execution of the new lease amendments for the Dallas and Richardson facilities on January 11, 2021 resulted in the balance sheet recognition of a right-of-use asset of $3.7 million and corresponding operating lease liabilities of approximately $3.7 million during the twelve months ended October 3, 2021.
The Company had one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease cost for the equipment was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November 18, 2021 for an additional 48 months at a cost of $1.2 thousand per month. Equipment forThe start of the new lease has not yet been deliveredwas delayed until April 2022 due to parttemporary equipment shortages. The lease effectivity date has been delayed byrenewal resulted in the supplier pendingrecognition of an additional right of use asset and a lease liability of $51 thousand, respectively during the receipt of the equipment by Optex.three months ended July 3, 2022.
As of AprilJuly 3, 2022, the remaining minimum lease and estimated CAM payments under the non-cancelable facility space leases are as follows:
Schedule of Non-cancellable Operating Leases Minimum Payments
Fiscal Year | Facility Lease Payments | Facility Lease Payments | Total Lease Payments | Total Variable CAM Estimate | ||||||||||||||||||||||||||||||||
Non-cancellable Operating Leases (Thousands) | (Thousands) | |||||||||||||||||||||||||||||||||||
Optex Richardson | Applied Optics Center | Consolidated | Optex Richardson | Applied Optics Center | Office Equipment | Consolidated | ||||||||||||||||||||||||||||||
Fiscal Year | Facility Lease Payments | Facility Lease Payments | Total Lease Payments | Total Variable CAM Estimate | Facility Lease Payments | Facility Lease Payments | Lease Payments | Total Lease Payments | Total Variable CAM Estimate | |||||||||||||||||||||||||||
2022 Base year lease | 156 | 141 | 297 | 116 | $ | 78 | $ | 71 | $ | 4 | $ | 153 | $ | 58 | ||||||||||||||||||||||
2023 Base year lease | 317 | 288 | 605 | 235 | 317 | 288 | 15 | 620 | 235 | |||||||||||||||||||||||||||
2024 Base year lease | 327 | 296 | 623 | 240 | 327 | 296 | 15 | 638 | 240 | |||||||||||||||||||||||||||
2025 Base year lease | 336 | 305 | 641 | 245 | 336 | 305 | 15 | 656 | 245 | |||||||||||||||||||||||||||
2026 Base year lease | 346 | 313 | 659 | 249 | 346 | 313 | 3 | 662 | 249 | |||||||||||||||||||||||||||
2027 Base year lease | 357 | 322 | 679 | 254 | 357 | 322 | - | 679 | 254 | |||||||||||||||||||||||||||
2028 Base year lease | 242 | 330 | 572 | 184 | 242 | 330 | - | 572 | 184 | |||||||||||||||||||||||||||
2029 Base year lease | - | 83 | 83 | 27 | - | 83 | - | 83 | 27 | |||||||||||||||||||||||||||
Total base lease payments | 2,081 | $ | 2,078 | 4,159 | $ | 1,550 | $ | 2,003 | $ | 2,008 | $ | 52 | $ | 4,063 | $ | 1,492 | ||||||||||||||||||||
Imputed interest on lease payments (1) | (301 | ) | (326 | ) | (627 | ) | (279 | ) | (305 | ) | (5 | ) | (589 | ) | ||||||||||||||||||||||
Total Operating Lease Liability(2) | $ | 1,780 | $ | 1,752 | $ | 3,532 | $ | 1,724 | $ | 1,703 | $ | 47 | $ | 3,474 | ||||||||||||||||||||||
Right-of-use Asset(3) | $ | 1,707 | $ | 1,698 | $ | 3,405 | $ | 1,647 | $ | 1,645 | $ | 47 | $ | 3,339 |
Total expense under both facility lease agreements for the three months ended
Total expense under both facility lease agreements for the
Note 5 - Debt Financing
Credit Facility — PNC Bank (formerly BBVA, USA)
On April
The Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The Loan Agreement also requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1. The credit facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the credit facility are subject to acceleration upon the occurrence of an event of default as defined in the Loan Agreement.
The outstanding balance on the Facility was 0 as of
Note 6 - Warrant Liabilities
On August 26, 2016, Optex Systems Holdings, Inc. issued warrants to new shareholders and the underwriter, in connection with a public share offering. The warrants entitled the holder to purchase one share of our common stock at an exercise price equal to $per share at any time on or after August 26, 2016 and on or prior to the close of business on August 26, 2021 (the “Termination Date”). The Company determined that these warrants were free standing financial instruments that were legally detachable and separately exercisable from the common stock included in the public share offering. Management also determined that the warrants were puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480 “Distinguishing Liabilities from Equity”. The Company had no plans to consummate a fundamental transaction and did not believe a fundamental transaction was likely to occur during the remaining term of the warrants. In accordance with the accounting guidance, the outstanding warrants were recognized as a warrant liability on the balance sheet, and were measured at their inception date fair value and subsequently re-measured at each reporting period with changes recorded as a component of other income in the condensed consolidated statements of operations. The warrants expired on the Termination Date in accordance with their terms; therefore, no warrants were outstanding as of
The fair value of the warrant liabilities presented below were measured using a Black Scholes Merton (BSM) valuation model. Significant inputs into the respective model at the reporting period measurement dates are as follows: Schedule of Warrant Liabilities Assumptions Used
The warrants outstanding and fair values at each of the respective valuation dates are summarized below: Summary of Warrants Outstanding and Fair Values
During the three and
The warrant liabilities were considered Level 3 liabilities on the fair value hierarchy as the determination of fair value included various assumptions about future activities and the Company’s stock prices and historical volatility as inputs.
Stock Options issued to Employees, Officers and Directors
The Optex Systems Holdings 2009 Stock Option Plan provides for the issuance of up to
Restricted Stock and Restricted Stock Units issued to Officers and Employees
The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units, with the latter granted under the Company’s 2016 Restricted Stock Unit Plan: Schedule of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted
On January 2, 2019, the Company granted and restricted stock units with a January 2, 2019 grant date to Danny Schoening and Karen Hawkins, respectively, vesting as of January 1 each year subsequent to the grant date over a three-year period at a rate of % in year one, and % each year thereafter. The stock price at grant date was $ per share. Effective December 1, 2021, the vesting terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Events – D. Schoening Employment Agreement,” which disclosure is incorporated by reference herein. The Company amortizes the grant date fair value of $ thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019. As of January 2, 2022, there was no unrecognized compensation cost relating to this award. The Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021. The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,” that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.
As of the December 1, 2021 modification date related to the third and final vesting date of the
On February 17, 2020, the Company granted restricted stock units to Bill Bates, General Manager of the Applied Optics Center. The restricted stock units vest as of January 1 each year subsequent to the grant date over a period at a rate of % in year one, and % each year thereafter. The stock price at grant date was $ per share. The Company will amortize the grant date fair value of $ thousand to stock compensation expense on a straight-line basis across the vesting period beginning on February 17, 2020.
On January 2, 2021, the Company issued common shares to directors and officers, net of tax withholding of $ thousand, in settlement of restricted stock units which vested on January 1, 2021.
On January 4, 2022, the Company issued common shares to directors and officers, net of tax withholding of $ thousand, in settlement of restricted stock units which vested on January 1, 2022.
On April 30, 2020, the Optex Systems Holdings, Inc. Board of Directors held a meeting and voted to increase the annual board compensation for the three independent directors from $to $with The total market value for the shares is $thousand based on the stock price of $as of April 30, 2020. The Company
Stock Based Compensation Expense
Equity compensation is amortized based on a straight-line basis across the vesting or service period as applicable. The recorded compensation costs for options and restricted shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized in the table below: Schedule of Unrecognized Compensation Costs
Note 8 - Stockholders’ Equity
Dividends
As of the three and
Common stock
On June 8, 2020 the Company announced authorization of a $1 million stock repurchase program. As of September 27, 2020 there were shares held in treasury purchased under the June 2020 stock repurchase program. The Company purchased a total of shares against the program through April 2021, which were subsequently cancelled in June 2021.
On September 22, 2021 the Company announced authorization of an additional $1million stock repurchase program. The shares authorized to be repurchased under the repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. As of
During the
As of October 3, 2021, and
As of October 3, 2021, and
Note 9 - Subsequent Events
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to supplement and complement our audited condensed consolidated financial statements and notes thereto for the fiscal year ended October 3, 2021 and our unaudited condensed consolidated financial statements and notes thereto for the quarter ended
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. The operating results for the periods presented were not significantly affected by inflation.
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q, in particular the MD&A, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Quarterly Report on Form 10-Q and other reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”), in our press releases, presentations to securities analysts or investors, or in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements.
These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding growth strategy; product and development programs; financial performance (including revenue and net income); backlog; orders; the impact of the COVID-19 pandemic; the impact of the Russian invasion of Ukraine; supply chain challenges; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the defense industry.
We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Some of these risks and uncertainties are identified in “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K and you are urged to review those sections. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.
We do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.
Background
Optex Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies, primarily for Department of Defense applications. Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems, Inc. (Delaware) also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems, Inc. (Delaware) products consist primarily of build-to-customer print products that are delivered both directly to the armed services and to other defense prime contractors. Less than 1% of today’s revenue is related to the resale of products substantially manufactured by others. In this case, the product would likely be a simple replacement part of a larger system previously produced by Optex Systems, Inc. (Delaware).
We are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE, Harris Corp. and others. We are also a military supplier to foreign governments such as Israel, Australia and NAMSA and South American countries and as a subcontractor for several large U.S. defense companies serving foreign governments.
By way of background, the Federal Acquisition Regulation is the principal set of regulations that govern the acquisition process of government agencies and contracts with the U.S. government. In general, parts of the Federal Acquisition Regulation are incorporated into government solicitations and contracts by reference as terms and conditions effecting contract awards and pricing solicitations.
Many of our contracts are prime or subcontracted directly with the Federal government and, as such, are subject to Federal Acquisition Regulation Subpart 49.5, “Contract Termination Clauses” and more specifically Federal Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the Government (Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for default”. These clauses are standard clauses on our prime military contracts and generally apply to us as subcontractors. It has been our experience that the termination for convenience is rarely invoked, except where it is mutually beneficial for both parties. We are currently not aware of any pending terminations for convenience or for default on our existing contracts.
In the event a termination for convenience were to occur, Federal Acquisition Regulation clause 52.249-2 provides for full recovery of all contractual costs and profits reasonably occurred up to and as a result of the terminated contract. In the event a termination for default were to occur, we could be liable for any excess cost incurred by the government to acquire supplies from another supplier similar to those terminated from us. We would not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Company as defined by Federal Acquisition Regulation clause 52.249-8.
In addition, some of our contracts allow for government contract financing in the form of contract progress payments pursuant to Federal Acquisition Regulation 52.232-16, “Progress Payments”. As a small business, and subject to certain limitations, this clause provides for government payment of up to 90% of incurred program costs prior to product delivery. To the extent our contracts allow for progress payments, we intend to utilize this benefit, thereby minimizing the working capital impact on Optex Systems Holdings for materials and labor required to complete the contracts.
We may be at risk as a result of the current COVID-19 pandemic. Risks that could affect our business include the duration and scope of the COVID-19 pandemic and the impact on the demand for our products; actions by governments, businesses and individuals taken in response to the pandemic; the length of time of the pandemic and the possibility of its reoccurrence; the timing required to develop and implement effective treatments; the success of global vaccination efforts; the eventual impact of the pandemic and actions taken in response to the pandemic on global and regional economies; and the pace of recovery when the pandemic subsides.
Beginning in April 2020 through October 3, 2021, we experienced a significant reduction in new orders and ending customer backlog in our Optex Richardson segment, resulting in an overall decrease in backlog of 40% between September 29, 2019 and October 3, 2021. We attribute the lower orders to a combination of factors including a COVID-19 driven slow-down of contract awards for both U.S. military sales and foreign military sales (FMS), combined with significant shifting in defense spending budget allocations in US military sales and FMS away from Army ground system vehicles toward other military agency applications. In addition, the pandemic has caused several program delays throughout the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supply chain issues. While the Applied Optics Center segment experienced a significant decline in orders during the second half of fiscal year 2020, the segment saw a sizable increase in new orders during the fiscal year ended October 3, 2021 as a result of increased military spending in Army infantry optical equipment, a larger customer base and higher customer demand for commercial optical assemblies. As of October 3, 2021, the Applied Optics Center segment backlog had increased by 153% as compared to the level on September 29, 2019. As a result of this significant shift in orders and backlog between segments, we anticipate corresponding shifts in revenue during the 2022 fiscal year, with revenue from the Optex Richardson segment decreasing, and revenue from the Applied Optics Center segment increasing.
Recent Events
Product Opportunities As disclosed in the Company’s annual report on Form 10-K for the year ended October 3, 2021, the Company has been offering mil-spec quality high efficiency anti-reflective coatings for infrared applications. We anticipate continuing revenue growth and new opportunities relating to this offering in the near term. Strategic Alternatives As disclosed in the Company’s current report on Form 8-K on September 10, 2021, in September 2021, the Company’s Board of Directors formed a Strategic Alternatives Committee. The Committee’s purpose is to explore and evaluate strategic alternatives for the Company, including a possible strategic investment, merger or sale of the Company. This Committee continues to assess strategic alternatives from time to time. Recent Stock Repurchases On September 22, 2021, the Company announced authorization of a $1 million stock repurchase program. The shares authorized to be repurchased under this repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. During the nine months ended July 3, 2022, 188,414 common shares were repurchased under the September 2021 repurchase program at an aggregate cost of $366 thousand. As of July 3, 2022, all shares repurchased under the September 2021 stock repurchase program have been cancelled and there were no shares held in Treasury. K. Hawkins Salary Increase and Employment Agreement On March 28, 2022, the Board of Directors Compensation Committee approved a salary increase of 4% for Karen Hawkins, CFO to be effective on April 1, 2022. As a result of the increase, the salary has been changed from $205,425 to $213,642. On July 1, 2022, Ms. Hawkins’ employment agreement was automatically extended in accordance with its terms for an additional eighteen months. The current term of the extended agreement expires on December 31, 2023, subject to further auto-renewal. Line of Credit Renewal On April 12, 2022, the Company and its subsidiary, Optex Systems, Inc. (“Optex”, and with the Company, the “Borrowers”), entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, successor to BBVA USA (the “Lender”), pursuant to which the Borrowers’ existing revolving line of credit facility was decreased from $2.25 million to $1.125 million, and the maturity date was extended from April 15, 2022 to April 15, 2023. Obligations outstanding under the credit facility accrue interest at a rate equal to the Lender’s prime rate minus 0.25%. D. Schoening Employment Agreement
The Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021. The term of the agreement commenced as of December 1, 2021 and the current term ends on November 30, 2022. Mr. Schoening’s base salary is $296,031 per annum. Mr. Schoening will be eligible for a performance bonus based upon a rolling three-year operating plan adopted by the Company’s Board of Directors (the “Board”). The bonus will be based on operating metrics decided annually by our Board and tied to such three-year plan. The target bonus equates to 30% of Mr. Schoening’s base salary. Our Board will have discretion in good faith to alter the performance bonus upward or downward by 20%.
The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,” that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which No “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.
The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by the Company for cause (including conviction of a felony, commission of fraudulent acts, willful misconduct by Mr. Schoening, continued failure to perform duties after written notice, violation of securities laws and breach of the employment agreement), (iii) termination by the Company without cause and (iv) termination by Mr. Schoening for good reason (including breach by the Company of its obligations under the agreement, the requirement for Mr. Schoening to move more than 100 miles away for his employment without consent, and merger or consolidation that results in more than 66% of the combined voting power of the Company’s then outstanding securities or those of its successor changing ownership or a sale of all or substantially all of its assets, without the surviving entity assuming the obligations under the agreement). For a termination by the Company for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening will be paid salary and for a termination due to his death or permanent disability, also any bonus earned through the date of termination. For a termination by the Company without cause or by Mr. Schoening with good reason, Mr. Schoening will also be paid
Results of Operations
Non-GAAP Adjusted EBITDA
We use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the performance of our business as “net income” includes the significant impact of noncash valuation gains and losses on warrant liabilities, noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest expenses and federal income taxes. We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because it permits period-over-period comparisons of our ongoing core operations before the excluded items, which we do not consider relevant to our operations. Adjusted EBITDA is a financial measure not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).
Adjusted EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative measure.
The table below summarizes our three-and
Our net income
Our net income decreased by ($
During the three and
For the three months ended
For the
During the year ended October 3, 2021, we realized a significant increase in customer orders and backlog for the Applied Optics Center segment. For the first
Consolidated gross margin for the three months ended
Consolidated gross margin for the
Our operating
Our operating
Backlog
During the
The following table depicts the new customer orders for the
Backlog as of
Backlog as of
Optex Systems Richardson backlog as of
Applied Optics Center backlog as of
During the fourth quarter of the fiscal year ended October 3, 2021, we booked significant new orders in both commercial optical assemblies and laser filter units including a significant new defense contract customer.
Please refer to “—Background” above or “Liquidity and Capital Resources” below for more information on recent developments and trends with respect to our orders and backlog, which information is incorporated herein by reference.
The Company continues to aggressively pursue international and commercial opportunities in addition to maintaining its current footprint with U.S. vehicle manufactures, with existing as well as new product lines. We are also reviewing potential products, outside our traditional product lines, which could be manufactured using our current production facilities in order to capitalize on our existing excess capacity.
Three Months Ended
Optex Systems Richardson revenue decreased by
Applied Optics Center revenue increased by
Gross Margin. The gross margin during the three-month period ended
G&A Expenses. During the three months ended
Operating
Other (Expense) Income. During the three months ended
Net
Nine months Ended
Revenues. For the
Optex Systems Richardson revenue decreased by
Applied Optics Center revenue increased by
Gross Margin. The gross margin during the
G&A Expenses. During the
Operating
Other (Expense) Income. During the
Net
Liquidity and Capital Resources
As of
Backlog as of
The Company has historically funded its operations through cash from operations, convertible notes, common and preferred stock offerings and bank debt. The Company’s ability to generate positive cash flows depends on a variety of factors, including the continued development and successful marketing of the Company’s products.
At
On April 12, 2022, the Company and its subsidiary, Optex Systems, Inc. (“Optex”, and with the Company, the “Borrowers”), entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, successor to BBVA USA (the “Lender”), pursuant to which the Borrowers’ existing revolving line of credit facility was decreased from $2.25 million to $1.125 million, and the maturity date was extended from April 15, 2022 to April 15, 2023. Obligations outstanding under the credit facility will accrue interest at a rate equal to the Lender’s prime rate minus 0.25%.
The Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The Loan Agreement also requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1. The credit facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the credit facility are subject to acceleration upon the occurrence of an event of default as defined in the Loan Agreement. If adequate funds are not available on acceptable terms, or at all, we may be unable to finance our operations, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures.
As of
On September 22, 2021, the Company announced authorization of a $1 million stock repurchase program. The shares authorized to be repurchased under this repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. During the three and
On August 26, 2021, 3,936,391 outstanding warrants expired worthless, resulting in the elimination of the balance sheet warrant liability.
As of October 3, 2021, and
On January 11, 2021, the Company executed amendments for each of its leased facilities extending the terms for eighty-six (86) months, commencing at the end of the current lease agreements. The Richardson lease amendment commenced on April 1, 2021 for an eighty-six (86) month term ending on May 31, 2028. The Dallas lease amendment commenced on November 1, 2021 for an eighty-six (86) month term ending on December 31, 2028. Each of the leases include two full months of rent abatement at the beginning of the commencement term. The new lease agreements resulted in the balance sheet recognition of a right-of-use asset of $3.7 million and corresponding operating lease liabilities of approximately $3.7 million as of the
Cash Flows for the Period from October 3, 2021 through
Cash and Cash Equivalents: As of
Net Cash Provided by Operating Activities. Net cash provided by operating activities during the
Net Cash Used in Investing Activities. In the
Net Cash Used in Financing Activities. Net cash used in financing activities was
Critical Accounting Estimates
A critical accounting estimate is an estimate that:
Our significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies are described in “Critical Policies and Accounting Pronouncements” and Note 2 (Accounting Policies) to consolidated financial statements in our Annual Report on Form 10-K for the year ended October 3, 2021.
Our critical accounting estimates include warranty costs, contract losses and the deferred tax asset valuation. Future warranty costs are based on the estimated cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of warranty covered sales. Our warranty covered sales primarily include the Applied Optics Center optical assemblies. While our warranty period is 12 months, our reserve balances assume a general 90-day return period for optical assemblies previously delivered plus any returned backlog in-house that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of
As of
As of
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by our Quarterly Report on Form 10-Q for the quarter ended
Changes in Internal Control Over Financial Reporting
During the three months ended
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not aware of any material litigation pending or threatened against us.
Item 1A. Risk Factors
Our results of operations could be adversely affected by economic and political conditions globally and the effects of these conditions on our customers’ businesses and levels of business activity. Economic and political events this year have altered the landscape in which we and other U.S. companies operate in a variety of ways. In response to inflationary pressures, the U.S. Federal Reserve has raised interest rates, resulting in an increase in the cost of borrowing for our customers, our suppliers, and other companies relying on debt financing. World events, such as the Russian invasion of Ukraine and the resulting economic sanctions, have impacted the global economy, including by exacerbating inflationary and other pressures linked to COVID-related supply chain disruptions. Prolonged inflationary conditions, high and/or increased interest rates, and additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, or other situations, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices and supply chain constraints. At this time, the extent and duration of these economic and political events and their effects on the economy and the Company are impossible to predict. There have been no other material changes in risk factors since the risk factors set forth in the Form 10-K filed for the year ended October 3, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The table below sets forth information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of its common shares during the three months ended
(Thousands, except number of shares and price data per share)
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
Not applicable. Item 6. Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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